Uprisings in the region, financial tumult on the global markets and the ever-capricious dramas on the domestic political rostrum have not made life easy for Lebanon’s industrialists in 2011. Yet the sector has doggedly managed to hold ground on its shaky shores. Just.
In the first eight months of the year, industrial exports — a good indicator of the sector’s competitive performance — were up 7.4 percent on the same period in 2010. If not quite cause to crack open the champagne, the figures may at least elicit a sigh of relief from Lebanon’s industrialists.
Keen to tout the successes of his sector, Minister of Industry Vrej Sabounjian struck an upbeat note in November, glowing over the fact that 206 industrial licenses were issued in the first half of the year. However, a closer inspection of the figures blurs this rose-tinted depiction of the industrial landscape in Lebanon. Only 41 of the licenses are for new operations while 18 are for plants whose construction has been completed and are now ready for production — that is to say 59 are for genuinely new operations, while the rest included items such as license renewals and transfers of ownership. The ministry also provided no record for the number of factories that closed down in 2011.
Thus it is difficult to verify the facts when the minister declares: “With new industries — and I know there are from the licenses we have signed — come new jobs as these people are all in business now.”
The President of the Association of Lebanese Industrialists (ALI), Neemat Frem, offers a somewhat more muted assessment of the past year in industry: “2011 can be considered the year where growth stopped in the industrial sector. We have not started, to date, to enter into negative growth, but I am worried that is coming very quickly if we don’t do something.”
His concern seems justified. The 7.4 percent rise in exports from January to August pales in significance when compared to the 29.5 percent leap from 2009-2010, which was in step with previous years’ increases (apart from in 2008 when exports were shaken by the global financial crisis). What’s more, imports of industrial machinery, an index to the levels of investment in manufacturing, rose by a paltry $300,000 over the same eight-month period.
Sign of the times
Growth in the Lebanese economy has dwindled to 1.5 percent this year, according to the latest International Monetary Fund estimates, with foreign direct investment (FDI) levels plummeting. According to statistics compiled by the Financial Times, the industrial sector has been hit disproportionately hard. In 2010, 36.4 percent of FDI in Lebanon was to industrial activities, but in the first 5 months of 2011 that proportion fell to 24.7 percent.
Despite his confidence in the acumen of Lebanese business leaders, Charles Arbid, founder of Rectangle Jaune and president of the Lebanese Franchise Association (LFA), warns that the situation is very precarious. “Looking at the Gulf and the Mediterranean, 2011 has been a terrible year. We are in the middle of this crisis. What will happen in the future? We have to take [great care] now,” he warns.
Chartering a course out of these troubled waters will not be plain sailing and may involve tough calls from industrialists and policy-makers alike. Jad Chaaban, acting president of the Lebanese Economics Association and a professor of economics at the American University of Beirut (AUB), contends that the Lebanese industrial sector will have to focus on its comparative advantages if it is to remain internationally competitive.
“Something basic in economics is that if you have a product that is not competing well then perhaps you need to shut it down,” he says. “What we can do is to see which sectors and products we have a comparative advantage in and then we can compete.”
ALI’s Frem goes a step further, identifying the electromechanical, agro-food and jewelry sub-sectors as areas that proffer particular promise for growth. “With the adverse conditions, many sectors regressed, but these grew, which tells us they survived the test and we have a comparative advantage in these fields,” he reasons.
In the latest available study on Lebanese industry — published in 2010 — food products and beverages were identified as the biggest subsector, accounting for 25.7 percent of industrial output, contributing 26.9 percent to the total value added of Lebanese industry and employing 24.9 percent of the industrial workforce. In the first nine months of 2011 prepared foodstuffs accounted for 10.5 percent of Lebanon’s industrial exports.
In the same study, electrical machinery and related apparatus manufacturing were reported to have grown significantly over the previous decade. In 1998, this area accounted for less than 0.5 percent of the industrial establishments employing more than four workers, and produced just 2.8 percent of total industrial output. In 2007, the same type of establishments represented 2.1 percent of the total number of enterprises and produced 10.6 percent of industrial output. The study suggested electrical machinery was set to expand further, with 16.7 percent gross fixed capital formation over fixed assets — more than twice the ratio of all other industries combined.
A perusal of the most recent export statistics also lends credence to the argument that jewelry is a potential area of growth for Lebanese industry. In the first 8 months of this year, pearls, precious and semi-precious stones (excluding gold ingots) represented 24.47 percent of total industrial exports, rising steadily from $39.2 million in January to $99.3 million in August — where it topped the list as the number one export.
Exploiting the niche
Ramzi Cortas presides over the family business, Cortas Canning and Refrigeration Company, which first opened in 1927. Having weathered the vicissitudes of doing business in Lebanon for more than eight decades, Cortas argues that developing a niche is vital for individual industrialists and the sector as a whole.
“You cannot compete in mainstream items. There has to be know-how and niche markets that have a barrier to entry,” he says. For Cortas one of his niches is high-end jams. “It took us years to develop the process and somebody starting in this area will not be able to produce this by just throwing money at it. You can compete [in areas such as this],” he says.
Whilst the dictates of the markets will inevitably push Lebanese industrialists into areas where they are more able to maintain their competitive edge, concerted efforts in both the private and public spheres could help facilitate the process.
ALI’s Frem argues that, as well as more merging and greater consolidation within the sectors, you need “the right infrastructure around [the clusters], the right labs, the right packaging companies… you need to create a whole system that would be self-justifying.”
One of the first steps would be progress toward the development of the oft-promised, but as of yet undelivered, industrial zones. When the new cabinet was formed in June, it pledged “[the government] will also create a committee to administer industrial centers and look for industrial zones.”
It has been six months since the cabinet was formed and still there is no committee and hence no tangible developments with regards to the establishment of the zones.
According to AUB’s Chaaban, the move to allow, or perhaps encourage, some areas of industry to flourish and others to wither would likely meet resistance from vested interest groups within the government and among industrial leaders. He believes the government is held captive by private interests that are dominant in certain sectors, while companies that have already established products lobby for protection.
Chaaban reasons any structured approach to developing Lebanese industry will have to involve a mixture of public and private input. “A hybrid of entrepreneurs in the private sector and bankers and investors, along with academics and elements of the government; it has to be a broader alliance that drives this strategy, that is not confined to a single entity. No one can claim to have a magic wand to solve this.”
An important element of the “holistic system” says ALI’s Frem is a greater emphasis on research and development (R&D). To incentivize spending on R&D he is lobbying the government to tweak an existing decree for tax credits on reinvestments. “If you reinvest you get a tax credit and we think it would be a great and creative idea to include R&D in this,” says Frem. “By just tweaking this law we can create a new momentum in R&D.”
As he envisages it, development in R&D goes hand in hand with his plans for the development of specific sub-sectors. “We have a cluster in Lebanon for sectors such as electromechanical or food, whereby with the universities we have, we can bridge a gap between them,” says Frem.
Chaaban agrees that there is too little spending in R&D, but also argues there is a mindset within the industrial establishment that has to be overcome if spending in the field is to increase. “[There] is risk aversion by companies not wanting to invest money given the whole uncertainty and also there is a culture of people not wanting to wait,” he says. “Research takes time, and many companies want quick solutions, especially in Lebanon, because of uncertainty; they can’t wait for the results of R&D.”
Pressure from piracy
For Nassib Ghobril, head of economic research at Byblos Bank, the development of more innovative and creative industries, and thereby the creation of niche products, not only necessitates developments in R&D, but also greater protection of intellectual property rights.
“Piracy and the losses from piracy are bad for the image of the country, deter FDI in the economy and prevent the development of parts of the economy that are dependent on [intellectual property rights] protections,” he reasons. The laws do exist, although many intellectual property rights advocates argue they should be strengthened, but they are not properly enforced.
Industrialist Charles Arbid lobbies in his capacity as the president of the LFA for the development of stringent intellectual property rights in Lebanon.
“We are working with WIPO [World Intellectual Property Association] and the Ministry of Economy to implement this culture. There is an education issue because unfortunately in this country we used to think we can just take any service or innovation,” he says, before adding, “There is also a lobbying issue. There are many laws stuck in the parliament itself because the political crisis makes the enactment of laws a very slow process.”
No help from the helm
The impotency of the political establishment in implementing the measures necessary for the evolution and development of Lebanese industry is a perennial gripe with industrialists.
“The Lebanese private sector has learnt to believe when it sees, so we have the right to be skeptical about promises and plans and so on,” says Ghobril. A particularly pertinent case in point for industrialists is the $1.2 billion electricity bill, which after ludicrous histrionics and political wrangling was passed in September.
Although the Minister of Industry Vrej Sabounjian is confident that, based on these proposals, “we will have a much better electricity situation a year and a half from now,” the response from industrialists is tempered with caution.
“This [decree] will not give us confidence,” says Frem. “What will give us confidence is when we see how ideas, or decrees, are going to be physically implemented, because we have learned there is a major difference between the map and the territory in Lebanon.”
Lebanon’s debilitating high energy costs raise issues beyond the fate of the nation’s crumbling infrastructure. When Cortas grumbles that “the prices of [oil imports] are fixed so you have to pay the high price for fuel and this is not at all healthy for business,” he is echoing a widespread perception that the system is rigged in favor of those in power.
Economist Chaaban believes this has a most pernicious influence on Lebanon’s industries. “Most of the people in power have links to monopolies or oligopolies in the private sector, including industry,” he reasons, and oil imports is one of the areas where he argues this holds true. Furthermore, Chaaban argues that the prevalence of exclusive dealerships reinforces these power structures, driving prices up for industrialists.
“All of the petroleum imports have to go through the cartel that is in place… There are 11 companies that dominate the market and three of them have more than 60 percent of the market,” he explains.
It is debatable whether the absence of a coherent vision for Lebanese industry is due more to organizational and political incompetence or malevolent and duplicitous dealings, but what is clear is that without a concerted and viable plan, industry will flounder.
The economic forecast for Lebanon in 2012 is conservative at best; the tumult in Europe and Syria shows no sign of abating and the infrastructure deficits at home will not be put straight in the short term at least. If industry is to emerge from the maelstrom emboldened, then it is in need of responsible and transparent stewardship to guide it through.