Kings of the road

Dealers are downsizing and diversifying as sales remain uncertain

by Paul Cochrane

Car dealers are trying to keep upbeat. Weaker consumer purchasing power, and the overall economic malaise in the country are making it hard to do so, even if on paper it looks as if there is still growth in the sector due to consistently solid sales volumes.

According to the Automobile Importers Association (AIA), the number of newly registered car sales reached 28,811 in the first nine months of the year, up from a total of 26,601 cars sold during the same period of 2013. Such sales have surprised some, yet on a comparative basis the sector is down by 7 percent on 2012, and down by 12 percent on 2011.

However, compared to a decade ago, when sales were 19,100 for the whole year, in 2004, the sector is keeping its volume edge reached in 2008 of 35,400 units, with a similar figure expected to be achieved this year. 

The difference to six years ago is that medium to larger cars do not account for the bulk of sales. Over the past few years, smaller cars — what the sector calls the A and B segments (sizes go from A, a compact, to large vehicles, G) — have dominated sales, with some 90 percent in that bracket, selling for as low as $9,000 (not on the road), according to the AIA.

“Small cars are still the bestsellers, allowing the industry to have some small percentage increase, but definitely the year was very tough, even more so than last year, which was tough,” says Farid Homsi, general manager of IMPEX, the distributor for Chevrolet, Cadillac and Isuzu.

It is an outlook repeated by dealers, particularly in the mid segments that do not have compact models and the same low prices as the volume sellers — the Korean brands, Kia and Hyundai.

“Overall, the trend in the sector is continuing compared to last year. People are still shifting to new cars from the old car market, and all distributors are being aggressive in offering services, warranties and good financing, which has driven sales. In terms of new car sales, I feel the mid-size range is suffering as a total segment, moving towards low cost Korean models of up to $20,000, while the upper sector, at over $100,000, is not as affected,” says Cesar Aoun, general manager of Mercedes at T. Gargour & Fils, which also sells Smart, Jeep, and Chrysler.

Luxury models however only account for 3.5 percent of the total new cars registered. That said, Maserati has had a good year, as has Land Rover, Bentley and Lamborghini, although Porsche sales are marginally down. Mercedes and BMW — long time local market favorites — have also done well, driven by new models. “Mercedes grew 18 percent this year, compared to 2013,” said Aoun.

Such relative exceptions aside, it is the middle segment that has really lost ground. “The segments below $55,000 are flourishing and having record highs. The sector over $120,000 is also doing well, as there are still people with huge wealth, but it is the middle to high middle class that is suffering, which before had not generally bought cars [below] $35,000,” says Marwan Naffi, general manager at Gabriel Abou Adal & Partners, distributor of Volvo.

[pullquote]To some, such easy financing and the rise of sales of small cars have artificially driven the market[/pullquote]

Artificial growth?

Low cost bank loans propelled the huge boost in sales since the mid-2000s, encouraging consumers to opt for a new car instead of a used vehicle. As AIA President Antoine Boukather notes, such low interest rates, some at zero percent, were never offered in the market in the past (see Q&A).

To some, such easy financing and the rise of sales of small cars have artificially driven the market, enabling dealerships to show to the outside world, to manufacturers in particular, that the Lebanese car sector is still buoyant in the face of domestic and regional instability.

“The market is growing artificially on small cars sold to mostly new time owners, which used to be used car owners, so while the market has dropped cumulatively between new and used by 25 percent, the figures provided by the AIA show the market is growing by a few percentage points. But as a matter of fact, the market is dropping, moving towards the A and B segments that weren’t there a few years back,” says Fayez Rasamny, general manager of RYMCO, dealer of Nissan and Infiniti. “Accordingly, all dealers are facing problems with manufacturers as the A and B sales are up. To negotiate with manufacturers, they say the market is increasing, whereas in sales dollars it is dropping.”

On the other hand, to those with A and B segment models the market was in need of such a stimulation and the current trend for smaller vehicles reflects market, and global, automotive realities. “It was another good year. When I say good, we are not having negative results. It means no decrease in the market, which is good for me. In a country like ours, with the negative surroundings and political conditions here, we are doing very well,” says Nabil Bazerji, managing director of G.A Bazerji & Sons, distributor of Suzuki, Lancia and Maserati.

[pullquote]“It was another good year. When I say good, we are not having negative results. It means no decrease in the market, which is good for me”[/pullquote]

To Boukather, who is also CEO and manager of ANB Holding, dealer for Mazda, the continued sales in the sector due to compact cars has provided much needed stability. “This year we’ve had a 25 percent increase in car sales. Why? Because the market is stable, we are number one in the premium category, and some seven brands are selling volume cars,” he says.

Wider selection sells

With the market having clearly shifted downwards in size, dealers outside of the A and B segments and with higher prices, have had to advertise heavily, as well as improve in-house management and services to keep customer footfall in showrooms. New models are a particular boon to get clients to trade in older models and take advantage of the current offers.

“New models have been a savior in a way, as there’s always demand for a new model. This allows you to have some air, and puts you in a nice mood for a product launch and to have some nice marketing campaigns,” says Homsi.

To adapt to changing market dynamics, dealers have urged manufacturers to cater to broader segments and reposition prices to be competitive. “We have been absent for more than a year from the B segment — the Chevrolet Sonic — as what happened in 2013 was that General Motors couldn’t give us a good price on it, so we didn’t have good volume sales, but after pushing hard for them to reposition the vehicle, they accepted, and repositioned the price, which will help us compensate for the missed sales in this segment, with our plan in the last quarter to sell 100 units,” adds Homsi.

Nissan had been the top seller in the country prior to the shift to A and B cars, and the aggressive entry of the Koreans. With Nissan not having a car below $15,000, RYMCO like other dealers globally have pushed for compact cars. “We don’t have A and B but are planning to hopefully launch models in these categories in the next few years,” says Rasamny.

Having a stronger low segment offering has certainly kept up sales for Suzuki, which only has vehicles in the A, B and C segments. “Whoever can offer more choice and wider selection in these segments will sell more. It is not about growing the market, but about getting into segments,” says Bazerji.

[pullquote]“New models have been a savior in a way, as there’s always demand for a new model”[/pullquote]

Diverse offerings have equally been a boon for Bassoul Heneine, dealer for BMW, Mini, Renault, Dacia and Rolls Royce. “This year has been better than last year for all our brands. The premium sector has improved by more than 20 percent for Mini and BMW, and the generalist sales, Renault and Dacia, is improving this year, up by 15 percent, whereas the market is plus 3 percent,” says financial manager Pierre Heneine. “This is due to two things, in luxury we have many new models and for the Renault group, the brand image is improving really well, with very reliable cars, and well positioned in terms of prices. One of our most successful cars is actually the Renault Duster, which even after three and half years into its life cycle accounts for a third of sales, while one third is for other models, and a third for Dacia.”

Keep it small

The Koreans dominate the sector, riding high for the past several years due to their affordable prices and the packages offered. Kia has 23 percent of the overall market, with 6,597 cars sold, and Hyundai is in second place — in trend with the rest of the Middle East market — with 19.5 percent share, at 5,637 units.

The A segment sales account for between 40 to 50 percent of Hyundai’s sales — similar for Kia — allowing the brand to grow by 8 percent this year. Hyundai have done so well due to low pricing, but also having a broad range of vehicles. “We have cars from $9,000 to $115,000, with over 18 models, and we can’t fit them on two floors of the showroom,” says Rachid Rasamny, general manager of Century Motor Company, distributor of Hyundai and Genesis.

The company was trying to bolster sales in its larger car segments, and to ensure the brand was not solely identified by low cost models, but the Korean brands have faced more competition this past year due to the depreciation of the Japanese Yen.

“Over the last year we’ve been trying to enhance sales of larger cars, but as the yen dropped it made the Japanese brands more price competitive, so we shifted our focus again to small cars,” says Rasamny.

[pullquote]“Next year we don’t think the market will grow, it will at best be stable, perhaps decrease a little”[/pullquote]

BDL regulations

While the sector has muddled through the year, the outlook ahead is perhaps less bright. Not just because of political and economic uncertainties, but due to the measures that had pushed the bulk of sales in recent years — low interest rates. As of late August, the Banque du Liban (BDL) issued a circular requiring 25 percent of down payment on vehicles and real estate, with only 75 percent on credit.

Dealers have different takes on the impact of the legislation. Some consider only volume sales will be affected, and not luxury, whereas others believe the whole sector will be negatively affected. Furthermore, some say they had not had reports of any defaults on loans, whereas others had, indicating that financing is a growing concern, with the BDL acting conservatively to stave off an unwanted flurry of defaults.

“Apparently a lot of clients that bought small cars have defaulted. If the [BDL move was] needed to regulate a more healthy environment, it is necessary,” says Fayez Rasamny. “But the provision they implemented doesn’t make sense, as it is too strict on banks. They will be really reluctant to finance. Although if we believe banks are not accepting clients, this will trigger in-house financing.” It is of course too early to tell the impact on the market, but overall sales volumes are likely to be affected. “Next year we don’t think the market will grow, it will at best be stable, perhaps decrease a little. Why? BDL wants to control consumer credit, whereas before you could have 85 percent, and sometimes even 100 percent credit,” says Heneine.

The BDL’s move has also drawn ire as there has been no corresponding move by the government to bolster public transportation (see “The road to more traffic“). “When you have good public transport, then this law on down payments makes sense. But with no public transport, this puts pressure on people in the lower economic category,” says Boukather.

Government Action

While dealers are awaiting the impact of the BDL regulations, they are also waiting for the government to make decisions on fuel requirements. For instance, fuel is officially of Euro 3 standard, whereas Europe is now operating at the Euro 6 level, which certain  new car engines can only use. As a result, dealers cannot import such models. “There needs to be major legislation enacted to have proper fuel quality. That is why we cannot import the new Smart car, as it is Euro 6, unless [Mercedes] downgrades [the engine] for countries with bad fuel,” says Aoun.

Dealers are equally waiting for a president to be appointed to give the market a boost. “People are looking for any positive news, so if a president is elected, even though the whole country has many problems, his symbolic presence could have a positive impact on the economy,” says Naffi.

Correction: A previous version of this article misidentified Rachid Rasamny as a sales and marketing manager at Century Motor Company; he is the general manager. Apologies.

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Paul Cochrane

Paul Cochrane is the Middle East Correspondent for International News Services. He has lived in Beirut since 2002, and has written for some 70 publications worldwide, covering business, media, politics and culture in the Middle East, East Africa and the Indian subcontinent.

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