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Battling to stay in the ring

by Nadine Fares

Lebanon’s $530 million retail jewelry sector has been putting in a strong performance over the last decade, with a reputation as one of the leading markets in jewelry manufacturing in the region. However, less optimistic observers will point to the fact that Lebanon has lost ground to other countries, notably in the Gulf, and, despite the potential for further growth, more could be done to promote the sector.

According to a report by the World Gold Council (WGC), before the outbreak of the civil war, Lebanon was the leading jewelry hub of the Middle East with a reputation equal to that of South Africa, London, Russia and Zurich. It had an emphasis on craftsmanship and creativity as well as an ability to combine the Middle East culture with modern methods. But the sector lost its luster during the war as most of Lebanon’s homegrown talent fled the country. Those who remained struggled to keep the industry afloat as Dubai, Kuwait and Saudi Arabia grew in stature. Ironically, the people who drove the development of the sector in these countries were mainly Lebanese.

“Although Lebanon continues to suffer from severe economic strains, we enjoy the fact that jewelry is still a major tourist attraction, especially to visitors from Arab countries, the US, Europe and Cyprus,” said Carole Hakim, marketing manager for Antoine Hakim Jewelers. “We have a worldwide reputation for our know-how in jewelry.” Leading jeweler George Mouzannar concurs: “There is no doubt that, as Lebanese, we are more into the creative side of jewelry making. Our designs can be found among the top international brands. This makes us proud, but of course there’s always room for improvement in any kind of business, and the jewelry industry is no exception.”

Exporting

According to ministry of trade and economy statistics, jewelry is Lebanon’s number one export industry, constituting 30% of the overall industrial sector in Lebanon. The latest data shows that jewelry export figures have increased by 9% since 2002 to around $465 million in 2003 – over 75% of which constitutes exports to Switzerland. First quarter of 2004 exports have reached $147.5 million.

But according to Vasken Hadidian, president of the Lebanese Jewelry Syndicate, the official figures hide the true story. “The government doesn’t differentiate between raw materials and finished products,” he explained. “Seventy percent of the figures constitute raw materials and not finished goods. The reason why Switzerland is seen as a major importer is because we sell them scrap gold, which is a form of money transfer rather than a commodity.” He added that Lebanon imports around 25 to 30 tons of jewelry yearly, only 30% of which remains in the country. The rest is designed, worked on, and then re-exported to Gulf areas, mainly Dubai and Kuwait. In fact, according to Hadidian, the majority of local jewelry is actually exported to the Gulf, with Switzerland mostly importing watches made specifically for the Swiss market. “We export to Switzerland under our international brand name, Romulus and Remus, with small quantities re-branded,” he added. There is room for improvement to make the sector more self-sufficient. Although Lebanon exports high-end jewelry (unlike the lower quality products exported by the Far East markets), it still lacks what it takes to make a genuine manufacturing sector. “We import finished products like chains, when most countries, like Italy, have all the equipment required to create everything they need,” said Mouzannar. “It is a pity that we still have not yet reached that level.”

Who’s buying?

According to Hadidian, local consumption is worth around $50 to $70 million. Statistics provided by the ministry of economy and trade reveal that jewelry imports to Lebanon reached around $302 million in 2003. “Subtract from that amount what we consume locally and the rest is reproduced and exported,” explained Hadidian.

“Only 2% to 5% of the local population, namely the upper class, spends on high-end jewelry,” he added, “the rest prefer to invest in gold in its cheapest form.” Hadidian admitted that local sales had been hit by the frosty economic climate. “Our biggest customers were middle class consumers. We are loosing them. Even the upper class is not spending as much as they used to in the past. Instead of buying an item for $10,000 they now go for something that’s around a $1,000,” said Hakim.

Competition

Jewelry, as a luxury product, is much more sensitive to the economic cycle. Naturally, jewelers also have a tougher time keeping their heads above water when the downswing comes, as they need continuous capital to continue and grow. Although their profit margin is around 20% to 30%, unlike other industries, the largest share of revenue goes to labor.

The competition is growing in the world and in the region, and Lebanon is feeling the squeeze. Today, Dubai offers the Dubai Metals and Commodities Center, a hub for gold, diamonds and commodities trade, which aims at attracting key players throughout the industry sectors – including relevant support industries such as finance, logistics and insurance – by offering free zone services. This has not escaped the attention of Lebanese jewelry makers. “They are offering great incentives, so why wouldn’t Lebanese jewelers focus their expansion on these countries? It’s enough that they are offering 100% business ownership and no taxes for up to 50 years. How can we even dream of such a perfect deal in Lebanon?” asked Mouzannar.

For the record, the local industry employs around 20,000, including business retailers and manufacturers. “No one can really know how many people actually work in this sector, because some have factories others have smaller workshops, and others work on a freelance basis. Labor is expensive compared to other countries like India and the East Asia,” explained Hadidian. Mouzannar added, like most industries in Lebanon, social security remains a big problem. “The government is not motivating people to invest in expanding their businesses in order to employ more people and spread out. It’s better for us to outsource finished products, as it’s less expensive. Having three employees is like paying for four and there are no facilities or incentives encouraging enough for us to develop our business,” said Mouzannar. Hadidian hopes the government is aware of regional developments and reacts appropriately. “So far, no one is showing interest in this matter. We are supposed to be the hub for the Middle East, but while we’re doing nothing, others in the region are doing a great job,” he said.

“We are still far behind in terms of international movements that will hinder our advancement and development,” he said, adding that Lebanon has yet sign the Kimberly process agreement. The agreement, which involves 48 governments and the diamond industry, is in an attempt to create a certification system that would label legitimate stones, thereby blocking the sale of conflict diamonds and protecting the integrity of the $7.8 billion annual trade. Statistics show that about 4% of that trade is in conflict diamonds, the profits of which are said to finance terrorism.

Hadidian admitted that since Lebanon hasn’t signed the agreement yet, “we are jeopardizing our reputation and hindering exports to other countries, as well as local development – like licenses for setting up diamond refineries and so forth. All of these should be taken into consideration before making any further decisions.”

Solutions

“We definitely stand out in quality and availability; yet our position needs to be enforced by building stronger strategies with the help of the Lebanese government,” said Chafic Idriss, marketing manager at Nsouli Jewelry. “We need an institution that can teach jewel manufacturing as well as a gem and metallurgy lab.”

At the international level, steps have been taken to help revive the sector. A few years ago, as part of their move towards liberating the international jewelry market, the WGC approached the Lebanese government with a proposal to reduce customs duties to 4%, a rate similar to that of the UAE. They also recommended the establishment of an alternative jewelry hub in the Middle East, more specifically for the Levant and Egypt. Key jewelers from Egypt and the Gulf have urged Lebanese officials to encourage the jewelry sector. As a result, Lebanon has halved customs duties on imported finished gold jewelry to 5% in November 2000. At the same time, customs duties on all consumables and chemicals used in jewelry manufacturing were abolished. The government also stopped tariffs on precious stones. “Thanks to the government and the Jewelry Syndicate, VAT was decreased from 10% to just 1.2%,” said Mouzannar. This may have been the only positive step taken by the government thus far to keep jewelers from losing their businesses, said Hadidian, but he was quick to point out that many in the sector don’t feel that they have benefited from any changes in real terms. “The real problems that the industry faces lies in the hands of government officials. We are suffering while others are booming. One thing is for sure we cannot sit and wait for the government to do anything – one has to take matters in his own hands,” said Hadidian. “Industry professionals, who would like to go seek their future in Dubai, for example, should do so, as they will see no growth in Lebanon. They are providing so much for people in our business there, so why not?”

According to Hadidian, the only thing that could give Lebanon a genuine competitive edge is turning the country into a free zone market for jewelers, abolishing all taxes. “That is the only chance I see for us to compete.”

Fashion

While the Lebanese haute couture business has reached international catwalks and made it onto the backs of Hollywood’s most glamorous stars, Lebanon’s $150 million ready-to-wear garment sector, once a regional power, is decidedly threadbare. In 2003, Lebanon imported $247 million worth of garments but exported only $43 million worth. For the record, according to the Lebanese Industrialists Association, in 2003, Lebanon produced 25 million items of clothing; but the country actually has the capacity to triple this amount and, given the right initiative, create jobs for 30,000 workers, five times the current workforce. Still, Fouad Hodroj, president of the Lebanese garment manufacturers, is nonetheless upbeat and believes that Lebanon is going through a transitional phase, one that will see a brighter future. “International business trends change over time, the same way fashion changes seasonally,” he explained. “We must follow the trend now and Lebanese manufacturers should be working towards revamping their business strategies, investing in other creative aspects.” In the past, Lebanese designers have been known in the region for the quality and accuracy of their sewing, while a new generation of designers, including Elie Saab, Robert Abi Nader, Zuhair Mrad and Abed Mahfouz took a giant step into the world of glamorous clothing, selling to other Arab countries and achieving international recognition. “We are good at designing and creating beautiful clothes,” said Hodroj. “This is what we should invest in. Ten years from now, I see us designing and creating while sending sketches to the Far East or Egypt for manufacturing. This is what most Europeans do. It’s the way people are doing business abroad, and it’s time we follow that model,” Hodroj said. “Today, we are in no position to compete against ready-made garments imported from the Far East, as their prices are far less than ours. We can compete against European imports however, as our prices are almost the same. Therefore, we should be investing in quality rather than mass quantities, and more so, on the creative aspect. This is how international clothes industries are working – we should be doing the same.”

According to Daniel Tchakedjian, store manager of the ABC mall in Ashrafieh, it’s all in the quality. “The Lebanese fashion collections we have in our stores don’t sell as well as their Chinese and other counterparts,” he said. “I disagree when people say that it’s a matter of mentality and that people prefer to buy international products. They’d rather buy quality for the money they are paying and, unfortunately, the quality of local products is very low, especially when compared to its price tag.”

Maria Mansour, a local shopper, says that she prefers paying around LL100,000 on a shirt for her husband from Massimo Dutti, rather than from a local manufacturer. “I think [locally made clothing] is too expensive for what it is,” she explained.

Tchakedjian said that Lebanese are very sophisticated and are very smart shoppers. They will not buy anything that has no quality. Those looking for cheaper brands go for imported goods from the Far East. So what went wrong? Hodroj explained that the history behind the industry is important as it shows why the sector is in its current condition. The ready-to-wear garment sector began in Lebanon after the country’s independence in 1948. “This industry was booming in Lebanon. We found ourselves in this line of work more than others in the region, since Lebanese were naturally more open to other cultures, especially western ones.”

During that period, according to Hodroj, ready-to-wear garments accounted for 40% of the total industrial sector, and the garment industry enjoyed a long period of success that lasted until the outbreak of the civil war. “Before the war, there were no laws, no customs fees, no high electricity bills and no social securities to be paid, among other things,” said Hodroj. “But as production costs increased dramatically over the years, profit margins also had to increase, as producers had a great deal of expenses to pay. So, many in the industry suffered.”

To make matters worse, the industry lost nearly half its 25% market share after the government’s trade deals facilitated the import of Syrian and Egyptian products. “The government has not done enough to protect the local industry. What’s more, we cannot export our products to Egypt and Syria – does that make sense?” he asked.

Until the early 90’s, there were around 1,240 factories in Lebanon. That number has more than halved to 500 factories of varying size, employing 11,000 workers today. Those left are the ones who have invested in modernizing their factories with the latest equipment, and directed their business towards designing and producing quality products that have a chance to compete against European goods.

“Lebanese haute couture has been displayed along side Yves Saint Laurent, Armani and Christian Dior, among others. Hopefully, our ready-made clothes could do equally well in the future,” said Hodroj.

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Nadine Fares


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