The climate for Lebanese industrialists is perhaps the toughest it has been since the Civil War. A combination of geopolitical turmoil, challenging economic conditions and a lack of political support are working against them. In these circumstances companies need to have smart survival strategies. Executive talked to three companies taking very different routes through these challenging days.
Coping strategy 1 – Go Niche
It is a brave man that establishes a factory in Lebanon in the current economic and political climate, but Marwan Malek — founder of Pharma M — isn’t one to shy away from a challenge. His small seven-man factory in Brumana opened in January and is the Middle East’s first, specifically designed to manufacture dietary supplements.
Malek’s Pharma M is a relatively new company
The supplements market in Lebanon is worth $120 million annually, with annual growth rates of over 20 percent for the last four years. Malek believes that a Lebanese firm has a huge advantage in the domestic market, which is currently dominated by Western brands.
“We should become number one in the market. As the only Lebanese manufacturer, we have so many advantages: we know the market, we are very flexible, we follow what the market needs,” he says. As an example of how local market knowledge can help the company thrive, Malek, a trained pharmacist, cites the Omega-3 group of fatty acids. The standard Omega-3 supplement has the unfortunate side effect of sometimes opening in the stomach, giving the taker a fishy reflux.
“Outside Lebanon this is not a big problem but in Lebanon we have one of the highest reflux percentages in the world, that is why we have an abuse of acid medication,” he explains. As such he has developed a tablet that does not open in the stomach but instead is protected by a gel that ensures it only dissolves once in the intestines.
Malek’s belief is that by focusing on a specific niche for the local market and having better intelligence on his customers, he can buck the trend for industrial companies in Lebanon. The company is currently on course to manufacture about 200,000 tablets in its first year, with the capacity to reach 600,000 in the future. They also have long-term expansion plans, with northern Iraq the primary target, but Malek says that in the short term he wants to focus on conquering as much of the Lebanese market as possible.
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It helps that, unlike most industrialists, Malek has been supported by the government, specifically the Investment Development Authority of Lebanon (IDAL). The agency supported the firm and has helped them get a ten-year tax exemption on all its manufacturing products.
Malek says he was pleasantly surprised by the support offered. “IDAL is a very, very important support for companies in Lebanon. When you go to something governmental you are going with, as they say in Arabic, one foot forward and one back — you are hesitant [about whether] they will help you,” he says. “I was surprised they were very helpful, very professional, very nice people. They consult you on stuff that doesn’t have to do with IDAL, if you want advice on the market they help.”
But despite IDAL’s backing, Malek doesn’t feel there is enough support for industry in the country in general. “Actually for us as pharmaceuticals we are very scientific, we have very expensive raw materials and we don’t need a lot of electricity, we don’t need a lot of fuels. But for companies that produce plastics, that produce cement, bricks, stuff — they are in huge trouble. They cannot compete with the Chinese, Turkish — [in those countries] they have a lot of support on energy, a lot of support of fuel, even the land is for free almost.”
Coping strategy 2 – Go Outside
Until the 2006 war with Israel, Carlos Sfeir and his company Sfeir Industries had focused all their efforts on Lebanon. The firm, a specialist producer and manufacturer of high-end steel products mostly for kitchens, had become a major player in Lebanon’s small market.
But the 33-day war left them unable to pay the salaries of their employees, and Sfeir said he and his father decided that enough was enough. “It was a wake up call. We decided to go out [of Lebanon]. It was the best thing that ever happened to us. Thank you to the people that made war,” he says.
Sfeir is looking outside of Lebanon for future profits
Since then the company has branched out into new markets, particularly West Africa, Saudi Arabia and Qatar. Sfeir senior died two years ago, but Carlos has overseen continued growth — with the company’s $10 million turnover three times what it was in 2006. Of this, three quarters is now coming from abroad. “Before 2006 we were focusing 100 percent on Lebanon, now we are 75 percent outside Lebanon — targeting 95 percent,” Sfeir said.
This has been achieved largely through the outsourcing of the company’s industrial production to companies outside Lebanon. In the last two years, particularly in the wake of what Sfeir called the “catastrophic” government decision to increase minimum wages for private sector workers, he has effectively given up on Lebanon as a base for manufacturing. He has reduced his factory staff from 35 to 15, and admits that there may be further lay-offs.
But he has kept the company’s logistical base in the country, taking advantage of lower salaries and the highly talented local workforce. “If I want to take an engineer to Saudi, his package is very heavy. I need to pay perhaps $25,000 [a month] but here I can pay him $6 or 7,000,” he says. Sfeir travels between his more profitable projects in other countries and the less valuable ones in Lebanon, but says he is able to control everything from Beirut.
The company still has a small factory in Lebanon
The cumulative result is a Lebanese-based company at least somewhat inoculated from the economic crisis and the effects of the civil war in neighboring Syria. “I found the right formula with my team here to be able to grow. That is why we are [still] paying good salaries. Everyone [in Lebanon] is paying half salaries now because there is a crisis — we don’t have any crisis,” Sfeir says.
For Lebanon’s policy-makers, however, Sfeir Industries’ change in policy must represent a personal failure. For an established firm to move away from manufacturing is a bad indictment of the country’s lack of support for industrialists. While Sfeir highlights the wage hike and corruption as factors driving him away, the most basic one is the increasing tension in the country. “We need stability … we need security,” he says. And, at least in Sfeir’s case, it appears once he gives up on the country there is little that can be done to lure him back. “We definitely will not invest any more in Lebanon, definitely,” he says.
While he has no current plans to set up a factory outside of Lebanon, he admits that he has discussed the idea of doing so in Saudi Arabia, partly due to the kind of government support lacking in Lebanon. “In Saudi there are a lot of facilities, they give you the land for free for 25 years — it is crazy,” he said. “They give subsidized loans very easily, especially for industry … so maybe.”
Coping strategy 3 – Adapt fast
Al-Wadi Al-Akhdar is in perhaps a fortunate position in the Lebanese industrial sector. The food giant, which has over 200 products including Lebanese specialties, frozen vegetables and tinned goods, benefits from the fact that it operates in a market less prone to cyclical trends than others. “You are in the food business; you cannot have people not eat,” Gay Mandour, marketing manager for the firm, says bluntly. “You just have to be more proactive than the competition and you will be ok.”
This proactivity manifests itself in an in-depth knowledge of the local market, and a constant struggle to readjust. In the past 18 months, Mandour says, the deteriorating security situation has caused a shift in shopping trends. Previously, Lebanese people had been moving toward large supermarkets for their weekly or monthly shops, but there has been a shift back toward local stores. Adjusting to this has been a major part of the company’s strategy.
“When people are insecure and there are bomb threats, people don’t go out of their neighborhood as much — so they shop in their local mini markets,” Mandour says. “So you have to try to make sure at this level of distribution that you have all your products [in smaller stores] as well and the best offers available. If you don’t know that this is happening you are losing part of your sale.”
The company has set itself the perhaps ambitious target of 9 percent growth for 2013, a goal Mandour says they are on schedule to meet. While sales of staple goods such as canned products — a field in which the company is the market leader — continue to grow at a solid rate of between 2 to 3 percent, the real expansion comes from introducing the right new products to the market — decisions that are carefully made based on their knowledge of local demand.
Mandour gives the example of balsamic vinegar, which they have started packaging and importing from Italy in the past 18 months. “For the Lebanese, balsamic vinegar is very Italian so people thought it might not work. But today we are number one in the country, because people trust our brand,” she says.
With over 700,000 Syrian refugees in Lebanon, it would be fair to assume a large knock-on effect on staples that the company sells — particularly tinned foods. While they have seen a small lift, Mandour says that the company has not seen a major boost, partly because many refugees are reliant on aid.
There are, however, exceptions. The company has four recipes of foul — one Lebanese, one Egyptian, one spicy and Aleppan. Until the Syrian crisis began sales of the latter were, as Mandour says, “peanuts,” produced mostly for range expansion and because some customers preferred the larger bean. Since the crisis, refugees looking for a taste of home have boosted sales exponentially. “We used to sell 100 cases a month, today we sell 300.”