If you go by the headlines in financial reports, the car market is doing surprisingly well given the staid economic climate; growth of 7.6 percent was registered in the first eight months of the year, relative to 2011, and up 2.1 percent on the same period in 2010. But delve further into the Automobile Importers Association (AIA) monthly reports and all is not well, certainly for most dealerships, with just three brands accounting for 61.37 percent of sales this year.
“The market is very bad. People feel all is well as volumes are up but turnover is much lower than last year,” said Samir Homsi, president of the AIA. “Only baby cars are selling, in the $10,000 to $12,000 range. The situation is very lousy and profit margins are down.”
Brands which have had strong sales this year all have compact models in the A, B and C categories, which have steadily grown in recent years, with low horsepower vehicles currently accounting for an estimated 80 to 90 percent of sales. For Rymco, dealer of Nissan, the A category (think of the Micra) has gone from 18 percent of sales in 2010 to 21 percent this year, and the B category (the Sunny) from 15 percent to 20 percent, while other categories have contracted by 10 percent.
“We are seeing a trend where nearly every household has a small car now; it is a must,” said Farid Homsi, general manager of IMPEX, distributor for GM, Chevrolet, Cadillac, Hummer and Isuzu. “The Chevrolet Spark is by far our number one seller, by a big, big margin.”
Kia, Hyundai and Nissan are the top three sellers, with the next leading four brands — Toyota, Chevrolet, Renault and Volkswagen — accounting for 15.21 percent. Out of some 70 car brands available in the market, these seven account for 76.58 percent of sales.
“It is amazing if you look at the sales results that three brands control around 60 percent of the market and all the others share the rest. There is something wrong. Consumers are being followers rather than choice makers,” said Nabil Bazerji, managing director of G.A Bazerji and Sons, distributor of Suzuki, Lancia and Maserati.
The shift toward smaller vehicles is driven primarily by rising fuel costs, the lack of public transport and financial constraints. “People don’t have the budget anymore, fighting to get $4,000 for a down payment, and some distributors are even selling without a down payment,” said Samir Homsi. “People are only buying because there is a need, not to put a key holder on the table to say I own X or Y. It is for commuting, so they want a small, economical car.”
With dealerships offering warranties and free servicing deals for up to five years, and banks aggressively financing loans, this has helped drive the surge in sales of lower-end models. For market leader Kia for instance, 60 percent of sales are through financing.
On the positive side, demand for more fuel efficient vehicles has resulted in a drop in sales of used cars — in addition to individuals banned from importing second-hand cars — which plunged 28.89 percent last year on 2010, and year-to-date down 17 percent on 2011, from 25,281 cars to 21,424 in 2012.
The biggest gainers from the shift to smaller cars and new vehicles, over buying that long popular second-hand choice of a Mercedes or BMW, are the Korean brands, which have a staggering 44.81 percent of the market — Kia with 26.88 percent and Hyundai with 17.92 percent. Cheap Chinese brands have also made gains this year, up 85 percent, albeit only selling 308 cars and accounting for just 1.18 percent of the market, indicative of how price sensitive consumers are.
Kia has been number one for three consecutive years since knocking Nissan from the top spot, and sales are up 13 percent this year. “Lebanon is the only country in the world where Kia is number one, everywhere else it’s Hyundai,” said Dayala Dagher Hayeck, general manager of NATCO, distributor of Kia. “We’ll be number one again next year and in the coming years. The challenge is to remain there. As long as there’s no public transport it’s good for sales.”
Korean cars have been popular in the Lebanese market before, when in 1995 five brands were available (including the now defunct Daewoo, which was absorbed by Hyundai) with 43 percent of the market share. The share steadily dropped to 18 percent in 1999, to 7 percent in 2003, and then started to steadily rise from 2008 with a 19.3 percent share until the current new peak. The rise in Korean sales correlates to an exchange rate change in the Japanese yen to the dollar, from over 100 yen to the dollar for a decade until late 2008, when the yen’s value rose. As of the end of October, the exchange rate was around 80 yen to the dollar, and sales of Japanese cars were down 1.8 percent on last year.
Bazerji argues that the exchange rate has made Japanese cars uncompetitive versus Korean brands, as Japanese vehicles would be on par price-wise if not actually cheaper. “Japanese cars are cheaper than Korean cars. If you take for example a Toyota Rav 4, Honda CRV or Suzuki Grand Vitara versus the Kia Sportage, with the exchange rate at 78 yen it is $34,000, whereas at 110 yen it is $24,400,” said Bazerji. “Koreans are taking advantage of the yen’s appreciation to sell cars for more than they should be, but the consumer is not looking at this; they should bargain for Korean products and not accept the prices.”
If the yen managed to trade at over 100 to the dollar again — and there is a lot of pressure on Tokyo to do so to bolster exports — Japanese brands might regain some of the ground lost to the Koreans. “From my experience automotive sales are cyclical. Nobody stays at the top,” said Bazerji. “Till 2009 the Japanese were market leaders then they lost ground. But if the yen improves they [the Koreans] will be killed in the market as they were unable to sell in 2008 when the yen was at 110.”
Manufacturers, however, are not banking on a weaker yen. “It would be fantastic as it is a head wound at 79 yen to the dollar, but you can’t run a company on hope,” said Trevor Mann, senior vice president of Nissan, at the launch of the new Altima in Beirut.
What may impact on Korean brands’ competitive pricing is the recent decision by Hyundai and Kia to scrap overnight shifts at manufacturing facilities, replacing two 10-hour shifts with an eight to nine hour workday, while wages have also been increased.
But it is not just pricing that has made Korean brands cars of choice in the Lebanese market. The improvements in Korean car quality, design and re-salability over the past decade have made it harder for Japanese, as well as European and American brands, to tout their advantages of heritage, safety, reliability and so on. In global brand recognition for instance, Koreans are on the up. Interbrand’s survey of brand values for 2012 showed Hyundai and Kia’s respective brand worth improve 24.4 percent and 50 percent, respectively, with Kia in the survey’s top 100 for the first time, ranked 87th. Among automotive brands, Toyota remained on top (ranked number 10 among all brands), followed by Mercedes in 11th place, BMW (12), Honda (21), Volkswagen (39), Ford (45), Hyundai (53), Audi (55), Porsche (72), Nissan (73), and Ferrari (99).
The Koreans are equally upping their game, bringing out hybrids, and Kia is soon launching a new sedan, the Quoris. “In 2013 we’ll launch a new model that’ll compete with BMW and Mercedes, a high class luxury sedan to attract a new category. This will be a big challenge to make people buy Kia at a high price,” said Dagher Hayeck.
The bulk of automotive sales, some 65 percent, used to be in the $22,000 to $90,000 price bracket, but with an increasingly financially squeezed middle class, brands selling in that range are having to go the extra mile to generate sales. Extended warranties and competitive pricing are major tactics, with a shift over the past year toward advertising the cost, which used to be primarily in the lower price segment. “You used to advertise to emphasize the brand image. Now it is what GM calls ‘bretail’ — a focus on retail with some branding,” said Farid Homsi.
Price wars between dealers are also generating sales, enabling certain luxury European and American brands to have had a relatively good year. As of the end of September, BMW has sold 524 units compared to 396 in the same period last year, while for Audi it was 422 compared to 462 last year, and Mercedes 514 compared to 616 units.
“Everyone says business is bad but when I see the figures it is not too bad, and there’s been growth. It is a bit weird,” said Cesar Aoun, general manager at Gargour & Fils, dealership of Mercedes, Smart, Jeep, Chrysler and Dodge. “In general, consumers are getting good deals due to price wars between dealers.”
Gargour arranged with Mercedes-Benz to only buy cars in dollars to avoid price fluctuations in the euro and remain competitive, as the brand can oly offer incentives by way of free optional extras; price discounts are only allowed for year-end specials. Instead, Gargour is planning to introduce securitization to self-finance sales, working on improved customer service and building a new showroom in Doura.
Volvo is also banking on financing to bolster sales. “We want to double sales in the next few years through financing, to 200 to 300 cars a year,” said Marwan Naffi, general manager of Gabriel Abou Adal and Partners, distributor of Volvo.
Building new showrooms is a recent strategy among dealers. Volvo plans to build a flagship showroom in Ashrafieh, while Mazda and Nissan look to new showrooms on the coastal road north of Beirut. Impex plans to build a new one in Beirut, and dealerships are going more regional in outlets rather than being focused on the capital.
While such a move is considered necessary to bolster sales and retain customers in the lucrative after-sales market, some dealerships are not happy about it due to the current tight margins, as the new spaces are being forced on them by regional headquarters in the Gulf.
“We wouldn’t have invested now due to the situation, but regional management is based in Dubai where it is stable and there is the mood for branding. If the region were broken down, to Syria, Lebanon and Jordan, they wouldn’t have asked for expansion but we’re included in their Middle East plans,” said one dealer.
With the market extremely competitive, as it is around the world with car sales projected to grow by just 5 percent this year, from 75.69 million cars in 2011 to 79.70 million, it is optional extras and new technologies that are setting brands apart in the higher end categories. Volvo is to introduce its Polestar technology — similar to Mercedes’ AMG — which is a chip that boosts engine power by up to a fifth, and next year will launch the V40, which will have a pedestrian airbag, a global first as part of its 2020 strategy to have no mortalities connected with a Volvo, whether inside or outside the vehicle.
sMeanwhile Cadillac is to launch a new compact luxury model, the ATS, to tap into the trend for smaller vehicles, and in other models introducing its CUE technology, a combination of intuitive control, like smart phones and tablets within the car, with the US brand having patented the technology for two years.
Such extras are expected to bolster sales in what has been a poor year for sales of luxury and premium vehicles. No Ferraris, Lamorghinis, Rolls Royce or Maybach have been sold so far, and just two Aston Martins and eight Bentleys, whereas by the same time last year 10 Aston Martins, nine Bentleys, and one Lamborghini were sold. Maserati, however, is up by two units on last year to 17.
As we move into the last two months of the year, dealers are hoping that the government does not decide to reintroduce diesel for passenger cars or increase value added tax from the current 10 percent. “It would be stupid to raise VAT as it would kill the market completely, which is already going through a very severe crisis,” said Samir Homsi.