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Society

House of Stone

by Nabila Rahhal October 3, 2012
written by Nabila Rahhal

Anthony Shadid’s remains were scattered under the olive tree in the garden at his house in Jdeidit Marjeyoun, South Lebanon. He was not buried in the United States where he was born and raised, but in the home he had chosen as his own. This home, or bayt, as Shadid refers to it, is the main character in his third book “House of Stone”, and represents the very human concept of belonging.

Returning to Lebanon on sabbatical from his post as a journalist covering the Middle East for the New York Times, Shadid was not at peace. In his words he was “stunned by war, and shockingly no longer young, married or with my daughter Layla.” Perhaps this emotional state is what led Shadid to decide to fix his ancestral home in Marjeyoun, as a distraction from his internal turmoil and to finally have a place he could call home. 

Through describing the renovation, Shadid draws a picture of modern life in a small town. His prose is simple yet well crafted, bringing the characters to life with an objectivity which allows the readers to draw their own opinions of each. Shadid enters Marjeyoun a stranger, but since his roots are from there, townsfolk immediately know his whole family history and think him insane for deciding to repair the house; others simply think he is an American spy. Gradually though, some warm up to him and Shadid’s retellings of nights around the dinner table with some of his new friends are absorbing.

The repair process clearly fascinates Shadid and some parts of the book get weighed down with the details of knocking down a pillar or building up a stone wall.

However, interactions between contractor and workers lighten the tone with humor. When he tries to locate antique tiles for his flooring and ends up meeting a dealer who strips tiles from homes destroyed by the war, the story sheds light on the lesser known aspects of home repair in Lebanon. 

Rebuilding memories

Parallel to the home repairs is Shadid’s recounting of the history of the house and his ancestors who lived in it. With the same precise attention to detail he was known for in his journalism, Shadid reconstructs the life of his great-grandparents, while imagining them in the various rooms of the house and what they would have been doing at the time.

Through this, the reader learns about life in Lebanon during the Ottoman Empire and the French Mandate which brought on the beginning of Lebanese emigration.

Shadid’s depiction of his great-grandfather, Esper, and his struggle to decide whether to send his children to the United States for a chance for a better life, or to keep them with him in the perilous times he was living, carried an understanding and sensitivity for not just his own ancestor’s quandary, but one still as relevant to Lebanese families today. And while Esper’s children emigrate after all, they take their home with them in their hearts.

This is evident when Shadid describes the almost daily Lebanese gatherings his grandparents used to host in the US, which again parallels the experience of many Lebanese emigrants to foreign lands who try to build space in which to belong.

Unfortunately, the author passed away before he had the chance to really enjoy the fruits of his labor, his bayt, and after finishing the book, the reader is left with a sense of loss for Shadid, his home and a Lebanon long gone.

It was not in the house of stone’s fate to be forgotten once again, however, as neighbors say Shadid’s second wife and his son still reside there on weekends and vacations. Shadid would be pleased.

October 3, 2012 0 comments
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Society

Nicolas Chammas under the cosh

by Nabila Rahhal October 3, 2012
written by Nabila Rahhal

There seems to be little end to the litany of woes Lebanon’s economy has been suffering this year, brought on by regional unrest and internal instabilities mushrooming across the country. Many industries have felt the impact. For a closer look at the implications of this soured environment on the country’s traders, Executive sat down for a frank one-on-one with Nicholas Chammas, head of the Lebanese Traders Association (LTA).

Mohammad Choucair, president of the Lebanese Chamber of Commerce, Industry and Agriculture, as well as some economists we have been speaking to, are saying the economic situation in Lebanon is the worst it has been in a while. What are the figures that alarm you the most?

In the first quarter of the year the numbers were exceptionally good where the trade sector is concerned. We had an increase of 7 percent compared to the same period in 2011, and this is because it came in the realm of a very strong fourth quarter for 2011. Unfortunately, the middle of the second quarter (April-June) 2012 saw a strong turnaround due to the events in the north and the other instabilities, which led to a barely even quarter as compared to 2011. In the third quarter, all hell broke loose due to the closures of the airport road, the abductions of foreigners and the continuing violence in the north.
These factors and the [Gulf] Arab travel warnings, led to the almost complete absence of Arab tourist. Also, Lebanese expatriates have not come back for the summer in the expected numbers. Add to that the slim purchasing power of those residing in Lebanon and you have a recipe for an economic disaster.

How much has the trade activity fallen from the beginning of the year?

So far, we have dropped a good 15 percent compared to 2011 as the third quarter accounts for about 50 percent of our annual sales and when it is hit, our entire year suffers.

What is your forecast for the rest of year?

Though Q3 has not ended, if you extrapolate and assume all things remain equal, I foresee a drop in the commercial activity of around 20 percent for the year 2012 (as compared to 2011). This is a disaster because trade constitutes about one third of the total gross domestic product (GDP) of Lebanon.

Your forecasts are based on 2011 numbers, which was already a bad year…

We have been going downhill since 2010; 2009 and 2010 witnessed a growth rate of 9 percent, which benefited the trade sector a lot. Unfortunately, we got the wrong cues and traders spent hundreds of millions of dollars on luxury retail expecting good times to come. Then the events in Syria happened, and now traders are in a debt trap; they borrowed huge amounts of money and now the cash flow is severely restricted and our expenses have skyrocketed.

So you forecast bankruptcies going forward?

Definitely. The operational costs have risen so much and at the same time the top line has dropped in a dangerous way. Either you incur more debt, which is poisonous in the long run, or you have to increase your equity or you liquidate. They are all bad solutions and there are no good options.

How much do you believe the raise in minimum wage has contributed to speeding up the pace toward bankruptcy?

Very much so, as we have stated plainly in past negotiations with the Ministry of Labor when all was well. Back then, we agreed that there is an imported inflation due to the high exchange rate of the euro versus the United States dollar and the expensiveness of raw materials like oil — raising wages only lead to home grown inflation.

Last time you spoke to Executive, you were asking the government for subsidized loans for the retail sector, which they have done for other sectors. Where do you stand on this now? Is it likely it will still occur?

We are very much in need of this and are even more strident about it as we are facing difficulties with outstanding loans, and need to renew the loan base with more favorable conditions. But, I don’t see it happening now as the government’s budget carries a huge deficit and they are unable to figure out ways to pay their dues.

What is the LTA doing to help support the sector in these challenging times?

We are a strong voice within the economic organizations of the country and we often take the lead in negotiating with the government on issues that affect the sector. In the end, 80 percent of our problems are due to security issues and the lack of law enforcement in the country, so we cannot do much more than give advice and be persistent about representing our demands.

Regarding social security, the National Social Security Fund (NSSF) is requesting that the salary ceiling for contributions to the end-of-service indemnity funds be increased from LL1.5 million to LL2.5 million. This would represent an additional burden on the private sector. What would you be rooting for in this case?

Our position has been adopted by all the economic organizations. Early on, we refused to move the ceiling, but we were outnumbered on the board of directors of the social security fund. [The NSSF board is made up of 10 representatives of employers, 10 for employees and six from the government.] The issue went to the government who stopped it because they realized it was unfair to the employers. As a concession, we agreed to take the ceiling up from LL1.5 million to LL2 million.

With the economic crisis we are facing, what sectors in your opinion are the most heavily impacted?

The most exposed sector is obviously tourism. We cannot expect hotels to fill up when there are no tourists in Lebanon. Directly after that, restaurants have been suffering and then it comes to us, the traders. We had increased our capacity in the wake of 2009-2010 to accommodate for the demands coming from abroad and now there is an increase in supply and hardly any demand.
Manufactures are also suffering and while they are selling abroad, they are facing logistic problems when it comes to shipping over Syria. The banks will be the last to suffer because they deal with us and there will be a leap time before they start to suffer. As for real estate and construction, they hit a plateau in 2011 because of increased capacity and no demand and a bubble was created, but it will take a while to pop and even then, it won’t be as drastic as it was in other countries, such as the US.

Do you think there are any economic opportunities for Lebanese companies from the increased inability of Syrian companies to meet their domestic demands?

We have noticed that imports of merchandise into Lebanon have increased 11 percent year-on-year (for the first three quarters of the year) and this is not explained by domestic consumption. So, part of it is explained by the Syrian [impact] on Lebanon.

You are threatening civil disobedience. Who are you going to strike against and what are your demands?

This is the last resort for us. We will first try to keep the discussions with government officials open and convince them of the danger of the situation we are in to reach a common ground. Then, we are willing to symbolically close down for one hour or a day, followed by an open-ended strike. For us, it is an issue of survival, so if we have to go on strike, we will. The key demands are the basic demands of order, a state of law and security.

Do you believe the situation is a cycle the Lebanese will eventually overcome, like the ones before, or is it more severe this time?

I have mixed feelings about this. Speaking about the long run, Lebanon has seen and overcome worse. But this is not just another obstacle, it is extremely painful and no one would have imagined the extent of the economic chaos due to the situation in Syria. So far we have shed five percentage points of growth in 2011 and 2012, which means billions of dollars lost that cannot be made up for.

October 3, 2012 0 comments
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The Buzz

Morning briefing: 3 Oct 2012

by Executive Staff October 3, 2012
written by Executive Staff

Politics

Two car bombs exploded on a main square in a government controlled central district of Syria's second city Aleppo on Wednesday morning, a pro-government television channel said.

Al-Ikhbariya TV said the bombs detonated in Saadallah al-Jabari Square in western Aleppo, Syria's largest city which has now been split in two with forces loyal to President Bashar al-Assad mainly in the west and rebel fighters in the east.

Fighting only with light weaponry, rebels have resorted to bomb attacks in areas still controlled by Assad. Several large protests in support of the president have been held in Saadallah al-Jabari square.

More from Reuters

 

Iran would enrich uranium up to 60 percent purity if negotiations with major powers over its nuclear program fail, an Iranian lawmaker said on Tuesday, in comments that may add to Western alarm about Iranian intentions.

Mansour Haqiqatpour, deputy head of parliament's Foreign Policy and National Security Committee, said 60 percent enrichment would be to yield fuel for nuclear submarines, which often require uranium refined to high levels.

But it would also take Iran another significant step closer to the 90 percent enrichment level needed to make atomic bombs. Iran says its nuclear program is for peaceful energy only.

More from Reuters

 

Economics

Latin American and Arab leaders agreed to form a joint investment bank during a summit in Peru.

At the end of the two-day meeting on Tuesday, the heads of state announced the investment bank would integrate national banks and could finance common projects between the Union of South American Nations and the Arab League.

The third summit of South American and Arab countries (ASPA) – representing some 32 countries – focussed on economic and political cooperation.

More from The Daily Star

 

Economic growth in Jordan slowed slightly to 2.9 percent year-on-year in the second quarter but was supported by a sharp rise in tourism, official data showed on Tuesday.

The pace of growth eased marginally after a first-quarter expansion of 3 percent year-on-year.

Jordanian authorities expect the economy to expand by around 2.7 percent in 2012. The International Monetary Fund (IMF)recently forecast growth could reach 3 percent with signs of a recovery in remittances and a rebound in tourism receipts.

More from Arabian Business

 

Iraq’s Finance Ministry has begun paying an initial $650 million to Iraqi Kurdistan for oil companies working in the autonomous region, Deputy Prime Minister Rosh Nuri al-Shawish told Reuters Tuesday.

Baghdad and the Kurdish Regional Government agreed last month to settle a dispute over oil payments, after the latter pledged to continue exports and the Iraqi government said it would pay foreign companies working there.

“The federal Finance Ministry has started transferring the first oil payment of $650 million to the Kurdish region,” said Shawish, a Kurdish member of the central government negotiating team.

More from The Daily Star

 

And finally…

US pop sensation Rihanna is to perform at Dubai's Meydan Racecourse.

Meydan commercial director Mohammad Nasser Al Khayat told Arabian Business at Cityscape Global 2012 that an official announcement on the 'Umbrella' star's performance in the emirate was imminent, without indicating when Rihanna would be playing.

Meydan, according to Al Khayat, is lining up a series of high profile concerts for next year in a bid to turn up the heat on Abu Dhabi’s Yas Marina, which in recent months has boasted gigs from the likes of Madonna, Paul McCartney and Elton John. Hip hop performer Eminem will headline next month's Abu Dhabi F1 Grand Prix, alongside heavy metal group Nickelback, further cementing the UAE capital's reputation for live music.

More from Arabian Business

 

 

October 3, 2012 0 comments
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Economics & PolicyIndustry

Q&A: Vrej Sbounjian

by Paul Cochrane October 2, 2012
written by Paul Cochrane

Lebanon’s productive sectors are often short-changed in favor of tourism, real estate and banking. What’s more, Minister of Industry Vrej Sbounjian commands a paltry budget of LL7.71 billion ($5.14 million). In such an environment the nation’s industrialists need a well-informed fighter holding their corner in the Cabinet.  Executive met with the minister to see if he has been up to the task.

The 2012 budget lacked any tangible or creative initiatives to boost Lebanon’s productive sectors. Was this not a failure on your behalf?

We can’t forget previous governments in the past six or seven years couldn’t even pass a budget, so I want to congratulate this government on even having passed a budget. With regards to industry, it is fine, we don’t have any complaints concerning the economy or industry.

Where are we at with the draft law to slash export taxes?

That law has been approved in the Cabinet and I met with [Speaker] Nabih Berri and he promised me it will be in the first parliamentary meeting. That law will mean taxes on all Lebanese products that are exported will be reduced by 50 percent. We pay 15 percent on income tax and profits, but that will be reduced to 7.5 percent.

Can the government afford to lose that revenue?

We don’t look at it from that perspective but rather at how many more jobs we will create and how many more opportunities and investments will come to the country.

One of the biggest disincentives to invest in Lebanon is bad infrastructure.  What has happened to the plans to develop industrial zones in Lebanon?

There are lots of industrial zones in Lebanon that you can use.  If you want to build a factory or a warehouse to produce or assemble a product you don’t need to go to an industrial zone.

In this government’s mission statement it said new industrial zones would be created…

I’m not saying I don’t want to do it. These are for places where there is no industry in Lebanon. But in a lot of areas there are factories that have been there for years. We cannot ask them to move.

It’s not about moving existing factories but providing the infrastructure to attract investment for new industries…

We are not looking to heavy industries. We are interested in service industries and assembly industries for export to other Arab countries. The investor will take advantage of the 7.5 percent tax rate, plus…

It’s not 7.5 percent yet…

It is 15 percent but it will be 7.5. There is nobody against this law.

If you are not focusing on heavy industry, what efforts are you making to develop high-skilled, light industry within Lebanon?

First of all we have great education and great schools and I would like to encourage…

The problem is that the well-educated and skilled workforce leaves to work elsewhere. 

I think the reason of leaving is because the opportunities available in a large economy are more than in a small economy. This is not new. Look at Spain and Italy now and how many people are leaving.

They are going through an economic crisis and there are huge levels of unemployment.

And we are having an economic downturn. It happens.  

But once intelligent and skilled young people finish their education, what strategy is there to keep them in Lebanon to help develop its industries?

We have to create the right environment and laws and then leave everyone to be creative themselves.

In your last interview with Executive you said more bilateral agreements were in the pipeline once those with Armenia and Sudan were signed. Are they?

Absolutely, we are looking to have agreements signed with Tunisia and Cyprus very soon.

Why is there no progress on Lebanon’s plans to join the World Trade Organization?

I want to ask you, is the WTO doing well for other countries?

Are you insinuating you are against Lebanon joining the WTO?

I didn’t say I don’t think it is a good idea. With my experience I have learned we have to take into consideration the size of the country and the size of the population. I don’t know all of the details of the WTO but I think that those two issues must be taken into consideration.

What have been the major impacts on Lebanese industry from the Syrian crisis and how has the government responded?

I think the major impact is the fear. People from any country that had a neighbor at war would be worried. People are seeing what is going on and are understandably worried. This is the only major worry so far.

But what about tangible impacts such as increased costs of overland freight?

We have found some ways, such as getting to Iraq going through Tripoli in the north to Turkey and overland from there. As for other countries, for some we are shipping from the Port of Beirut but in many cases the overland route is still fine.

Could the Qlaiaat airport be opened up for the freight of Lebanese produce to foreign markets?

This is one of many ideas people have…

But is it an idea you support?

Would it work? Would it be sustainable? Or would it just be another cost for the government? We are just speculating. Everything is working so far. Everybody is able to export fine from land via Syria and imports are coming in.

Lebanon’s industrialists have asked for faster reimbursement of the value added tax (VAT). What is being done in this regard?

I want to ask what are they doing in other countries? Some are doing well but all the rest are in financial trouble.

VAT reimbursements is a local bureaucratic issue; how is that related to the Eurozone crisis? 

In some countries they raised VAT to say 21 percent. We are at 10. They are reimbursing but taking the money back in another way. The Lebanese enjoy very low taxes.

What is your stance on article 59, which allows industrialists to reclaim their VAT on industrial machinery and mineral materials?

If you are importing a product that you want to use to manufacture items and then you want to resell it, that should be excluded from VAT. Secondly, industrial machines that are imported should be excluded. Also whenever a product is being sold to the army we are putting VAT on it. This should be excluded.  

Is this up for discussion in the Cabinet?

I need to discuss with my friend the Minister of Finance, but this is the right thing to do…

I would like to add a comment about the economy here. There is a lot of complaining but I don’t think it’s justified. There was great growth from 2006 to 2011, but in economies there is growth and then recession. Without the discipline of recession, continuous growth would bring us to a larger fall into recession. 

But the lack of development of Lebanon’s productive sectors makes it more susceptible to external shocks and undermines long-term sustainable growth.

Where are the Lebanese? We are innovative, we had vision, where are these people? Why are we always complaining now? We need to be creative and have a long-term vision.

You need electricity, you need Internet, you need good roads…

We have some drawbacks, but we also have many advantages. We had six years of great expansion with an incredibly strong real estate market. We may be in a recession but that is a discipline we need to go through. We need to be more realistic and enjoy life a little bit. We don’t have to make money every year; there are many nice things to be done in the country.

October 2, 2012 0 comments
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Business

Money for ideas

by Maya Sioufi October 2, 2012
written by Maya Sioufi

An “American Idol” for entrepreneurs; that’s how the first round of selection for Beirut-based business accelerator Seeqnce could be called. The 436 applicants — ranging from designers, developers to business people from 30 countries and places as far apart as California and Romania — had three minutes to pitch their idea to the three-person jury of Seeqnce program directors. Their dream? To become the next DropBox or AirBnb, ideas that found financing from Y Combinator, a renowned Silicon Valley-based accelerator.

All you needed was an Internet business idea, or techie aptitudes as a developer or web designer, and you could have applied to the program to be part of one of the eight startups that were recently selected. There was just one condition. You had to commit to being in Lebanon for six months, the duration of the program, which started on September 25.  The 150 candidates selected after the first screening process had to partake in “shuffles” (where participants worked in teams on assigned projects), and “mixers” (Saturday night rooftop parties to network and share ideas). The aim was for the participants to eventually form their own teams.

They then went on to partake in Seeqnce’s four-day “hackathon” workshops. Some teams fell apart and other opportunities surfaced. Rawad Hajj, cofounder of Rikbit, an online platform for group outings and one of the selected startups, started off with two Romanians who left the program because of the August kidnapping spree that struck Lebanon. He then joined another team that was working on a similar idea. Finally the teams had to participate in the “challenge”, whereby they had 48 hours to pitch their business ideas to the Seeqnce directors. Eight startups were finally selected [see box], of which seven are from Lebanon and one from Egypt.

Funding the startups

Nine investors with links to Lebanon — high net-worth individuals, angel investors and a venture capitalist whose names were not disclosed — are betting on the success of these newly formed startups, each investing $68,000 to deploy a total of $612,000, of which $306,000 will be directly injected into the startups in cash and the remainder will be given in the form of Seeqnce services. Each startup receives $38,250 in cash and an equal amount in form of usage of the Seeqnce space for six months, mentorship from the five program directors, access to the accelerator’s network, and workshops provided by “successful businesspeople and excellent designers,” according to Fadi Bizri, one of the founding members. He did not disclose the names of those providing the workshops, as the roster was not yet confirmed as Executive went to print.  In exchange for this amount, founders of the startups have to give up a hefty 30 percent stake in their newborn company to Seeqnce and the nine investors, which will each receive a three percent stake, valuing the startups at $121,000 each (by taking into account the cash component). Accelerators in the United States and in the region that offer a similar program normally take a lower stake when investing in startups, as two of the most famed US accelerators, Y Combinator and TechStars, both take an average 8 percent stake and value the startups at $300,000; Jordan-based Oasis 500 and Dubai-based SeedStartup both take a 10 percent stake and value their startups at $140,000 and $200,000, respectively.

Cedric Maalouf, founder of et3arraf.com, an online dating site for the Arab world selected by the Seeqnce program, does not believe that the 30 percent stake is too much. “I just had an idea,” he says. “I didn’t have a team or a prototype. I really had nothing.”

The real work begins

According to Michel el-Meouchi, one of the founding members of Seeqnce, “It’s a different environment. We were going for the best balance between investors and startups. It had to be attractive on both sides and had to take into account the risk of the country and the region.” Venture capitalists were not too keen to participate in the program, according to Bizri. “The general attitude was that ‘we love the Seeqnce program and would love to meet the startups when they are out,’” he says. “We told them to get them out, we need to fund the program. Some are getting to a point that they understand that the upstream is necessary, it’s essentially their downstream.”

After the six-month program, the startups are expected to have a product out with at least early users and clear monetization options. At the end of the program, they will have the opportunity to pitch their ideas to investors for a round of financing, though after giving up 30 percent, handing over more equity might seem daunting for some. “It’s a jungle out there so not all the startups might get financing,” says Bizri.

After two rounds of financing, they have the option of buying back 10 percent of their startup. “If they make it big, they can take out some ownership” adds Meouchi.  Holding their first run this year, Seeqnce aims to have it annually. “If we are still alive, we will do it again,” joked Bizri, still recovering from the rooftop party they threw in Hamra to announce the eight startups. Now selected, however, the party is over and the real work begins for these startup founders.

If these startups succeed, the market will likely open to other business accelerators, meaning a more competitive environment; one where the terms are less demanding on the entrepreneurs yet still attractive for investors.

Where Seeqnce invested

elManshar

Similar to Chicago-based Threadless, elManshar is an online community for Arab designers to upload and sell their work. Starting off with T-shirt designs, elManshar will allow its viewers to ‘like’ designs and popular ones will go into production.

Bayt Baytak

An online real estate website for the Middle East, Bayt Baytak will start by listing residential real estate for sale and for rent in Lebanon, with an aim to expand and cover the region. It will be map-based, whereby real estate owners and agents can locate their properties on the site.  

Kactus

To-do lists for “how to certify your baccalaureate diploma” or “how to handle government bureaucracy” are what Kactus aims to provide. It will be an online community-generated collection of to-do lists, or Kacts, that would be easy to manage and to share.

et3arraf

et3arraf is an online dating website for the Arab world in Arabic. It will introduce affinity matchmaking, whereby subscribers need to complete an in-depth questionnaire and matches with blurred pictures will be proposed initially. Following interaction between the matches, a progressive sharing occurs whereby the relationship can be taken to the next level.  

Presella

Presella is a web platform that guarantees a specific number of attendees for an event before it is paid for. Once the desired number of tickets is pre-sold, the event is officially confirmed.

eTobb

eTobb is an e-health platform in Arabic and English.  Similar to WebMD, eTobb allows checking for symptoms online and finding information on medical conditions. It will also list doctors’ and hospitals’ information and allow for ratings and reviews like ZocDoc.

Yoofers

Yoofers is a social gifting platform. It will list a selection of products and users can request from their friends and family to contribute a small amount to a specific gift, and the person with the highest amount pledged wins the gift.

Rikbit

Rikbit is an online platform for group outings. Starting off with outdoor events and gradually branching out, Rikbit aims to allow users to create group events or browse for events that their friends or other Rikbit users can take part in.
 

October 2, 2012 0 comments
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Society

Starved for business

by Nabila Rahhal October 2, 2012
written by Nabila Rahhal

With so many foreigners and expats altering their vacation plans to avoid Lebanon this summer, it is no wonder the hospitality sector, which relies heavily on tourism, is struggling.  

According to statistics by the Ministry of Tourism, the number of tourists entering the country this year, until July, had decreased 12 percent in comparison to the same period last year, which was already weak tourism-wise. Hotels, which usually rely on the summer to make their profits, suffered the most this year and median room occupancy was around 45 percent — even with deals on lower room rates — when usually it is between 55 to 60 percent, according to Pierre Achkar, head of the Lebanese Hotel Owners’ Association.

He says the first half of 2012 saw hotel occupancy percentages rise as compared to the same period in 2011. Last year started terribly, says Achkar — noting the collapse of the Lebanese government in early 2011 and the beginning of the Syrian uprising — but the situation improved with the formation of the government in June, and this spilled over to create a comparably good first half of 2012. “The numbers deteriorated by summer 2012, with the spread of Syria’s troubles to Aleppo and Damascus and the associated difficulties in reaching Lebanon by land,” says Achkar, adding that hotels have experienced an almost empty summer.

In line with Achkar’s assessment, though declining to provide numbers, major hotels in Beirut have admitted to an unusually quiet summer, especially during the Eid period after Ramadan,  which is usually abuzz with tourists. According to Christophe Hazebrouck, general manager of Le Gray Hotel, contingency plans hotels have adopted to weather the crisis include cost savings, such as sending employees on vacation, and business plans like targeting other countries and promoting attractive room packages.

The main blow for hotels this season, according to Achkar, was the travel warning on Arab tourists, as they account for 60 percent of a hotel’s business. He says he sees thoughts of replacing Gulf Arab tourists with others as irrational: “We can diversify our base, but we cannot replace them as no one will spend as much as them or even visit as much as them, especially since they are so close to us distance-wise.” says Achkar, giving the example of a Saudi tourist who prepaid for 56 weekends in Lebanon at a certain hotel beginning in the summer of 2010.

To aid them through these difficult times, the Hotel Owners’ Association is appealing to the private sector and the government: “We are approaching the central bank, Al Kafaat Foundation, the association of banks and the prime minister and asking for the following: financial support for fuel, a one-year grace period for our loans which we usually pay at the end of the summer and a subsidization for the National Social Security Fund and taxes.”

As an immediate solution to the tourism crisis, the association suggests working on monetary incentives to attract the Egyptian, Iraqi, Jordanian and Syrian tourists, who are still coming to Lebanon despite everything. “Instead of wasting the ministry’s budget of $3 million to $5 million a year promoting Lebanon to European cities which usually don’t visit the country, it would be better to use this money to target the Levant tourists and provide them with charter planes or discounted plane tickets,” says Achkar.

Empty seats at the table  

Restaurants, cafés and bars in Lebanon are also feeling the effects of the unstable regional and internal situation. The Syndicate of Owners of Restaurants, Cafés, Night Clubs and Pastries in Lebanon pegs the number for such venues in operation at 6,000, accounting for 9 percent of the total employment in Lebanon. A decline in this industry would therefore have a noticeable impact on the country’s economy. 

In line with Achkar, Ziad Kamel, treasurer of the Syndicate, sees 2012 as the worst year for the hospitality sector since 2006 (when the July war with Israel occurred). “The year 2007 showed some growth, which continued steadily until 2011 when the situation stagnated and then plummeted to the 40 percent decrease in turnover we are experiencing now,” explains Kamel. 

Offering explanations for this decrease, Kamel says: “All types of establishments in our business are affected due to the travel bans on the Arab tourists, the expats not returning as much this summer and the war next door which is spilling over to Lebanon. With all that is going on, who would choose to come to Lebanon for a vacation?”

Speaking about his own restaurants and those of his colleagues, Kamel sees that people are not going out as much and consumer confidence is low. “In such uncertain times, it seems local residents are in crisis mode and tend to save their money in case they need it for something more important than going out,” he says.

Kamel says the industry has seen closures as a result, especially in areas like Aley and Bhamdoun, as well as restaurants in downtown that mainly depend on Arab tourists.

“The people with investments in the country cannot hold on for much longer,” he says. “We, the restaurant owners, already have a lot to deal with from outdated laws and license procedures to competition without the added concern of the security situation. Investor confidence is down and national expansions are being put on hold.”

Using himself as an example, Kamel’s own expansion plan for Couqley, a restaurant he founded in Gemmayze, has been delayed. 

Looking ahead

Achkar believes Lebanon has seen worse, and believes Lebanese expats will return, in small numbers, for the Adha holidays, should the situation remain relatively stable. On the issue of tourism, however, Achkar believes it is too far in the year to see any real change in numbers. 

“Only regional security and internal stability will get the tourist back. Once we have those, they will come to Lebanon without us having to do any promotions,” says Achkar. Until then, the hospitality industry has no choice but to hang on and try to be creative.

October 2, 2012 0 comments
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Business

Where Europe and the Middle East meet

by Maya Sioufi October 2, 2012
written by Maya Sioufi

Ongoing political instability in the Arab world’s most populated country has not scared off at least one private equity (PE) fund from making major investments. Beirut-based Euromena recently deployed $20 million in an Egyptian oil and gas company, Sakson Petroleum Services, after having invested $13.5 million in an optometry hospital, Al Oyoun Al Dawli, earlier this year.

“It’s a country that had already a lot of potential and revolution gives it more potential,” says Romen Mathieu, managing director of the Euromena funds. “There are 80 million people looking to live, get medication, wear clothes and if you select well, you can make a lot of money.”

Since the launch of Euromena’s first fund in 2006, a total of approximately $100 million has been invested by the two Euromena funds in 14 companies in four countries in the region [see chart]. With an average ticket size of $8 million per company, these funds also offer co-investment opportunities in specific names, bringing the total amount invested to $175 million.

Seeds of the idea

Armed with PE experience from investment bank Lazard and accounting firms Arthur Anderson and Ernst & Young, Mathieu saw an opportunity in 2004 to invest in medium-sized companies in the Middle East. While certainly aware of the lack of transparency, stability and infrastructure in the region, Mathieu saw this as outweighed by the opportunity and decided to launch a PE fund dedicated to the Middle East. His strategy was to start off by attracting European public institutions to provide credibility to the fund and eventually attract private Gulf investors reassured that it would abide by the book. His goal was to create a Euro-Arab partnership. As he needed a platform and a solid partner to launch his fund, he went to United Kingdom-based private equity firm Capital Trust, which had previously tried but failed to venture into this region and was keen to give it another go. With Capital Trust on board, the European Investment Bank (EIB), the first European institution to deploy capital into Mathieu’s venture, soon followed.

“By creating opportunities for work, Arabs can educate their children and instead of holding the Bible and the Koran and running with it, they can think of a better life,” says Mathieu. “If the Gulf and Europe understand this, they will face the enemy of fundamentalism and illiteracy.” That’s how he says he succeeded in gathering interest from three European public institutions — the EIB, Proparco, a Paris-based development institution  and Averroes Finance, a fund of funds — accounting for 30 percent of the committed capital. Equipped with European public money, he raised the remaining capital from 45 private investors in the Middle East.

There are also bigger plans for 2013, despite the European sovereign debt crisis and the uncertainty in several countries in the Arab world. Mathieu’s next aim is to raise a minimum of $200 million starting next year for Euromena’s third fund, and he is keen on adding companies in Libya, Iraq and Sudan to the Euromena portfolio. The final composition of the investments, however, depends on the final makeup of investors of the funds — with major targets including the International Finance Corporation, the private sector lending arm of the World Bank, and Germany’s DEG, one of Europe’s largest development finance institutions — as they may put restrictions on where their money goes.  
For this third fund, he will also be seeking to tap private European wealth from families such as the Rothschilds and institutions such as Paris-based PE Quilvest, in addition to Arab public investors such as sovereign wealth funds (SWFs). Mathieu seems more confident on attracting European private investors, given the previous funds’ track record. The first fund’s three exits generated an average return of 2.5 times the investments, and one of the exits was completed through the sale to French building materials leader Saint Gobain and another one to London-based international pharmaceutical company Hikma.

“We are getting appetite from European private investors,” adds Mathieu. As for Arab public investors, he is less confident and laments that “one can never understand why they would or would not give you a penny; it’s not a transparent process.” Despite this, he has not given up and will pitch to Arab SWFs again next year.

For now, the focus is on investing in two additional companies already on Mathieu’s radar — one in Morocco, still untapped by Euromena, and another in Egypt — which would complete the investments of the second fund, as well as exiting two additional companies by year-end, which Mathieu is confident will be completed despite the challenges in the region. He says the exits will be done through sales to professional investors and high net-worth individuals in the region, as strategic international investors are less willing to deploy money due to the given uncertainty in the region and the European economic crisis. With lack of visibility on prospects in the Arab world, Euromena exits its investments when it has the chance to make at least two times the investment.

“Especially in times like today; if I wait one more year, I might make three times [the investment] if the ‘Arab Spring’ turns into an ‘Arab Summer’ but I would definitely sell today because there is a big question mark on tomorrow” says Mathieu.

October 2, 2012 0 comments
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Real Estate

Q&A: Ziad el-Chaar

by Thomas Schellen October 2, 2012
written by Thomas Schellen

After seeing some delays in expansion beyond the Gulf Cooperation Council countries, Dubai-based luxury developer Damac Properties is moving closer to completion of regional projects. These include a residential tower in Beirut where interiors from the lobby to the last apartment will bear the identity of fashion brand, Versace Home. Executive inquired with Damac General Manager Ziad el-Chaar on the company’s strategy.   

What can you tell us about the state of the Damac Beirut project?

This project has reached an important construction milestone. We finished the last foundation [at the end of July] and reaching this in downtown Beirut took some time, because we had some challenging excavation [working] next to the tunnel connecting the InterContinental Hotel area to Ashrafieh. 

When are you planning final delivery of the project?

We are hoping to finish the entire project within 30 months from January 2013.

When the Damac Tower project was first presented in 2010, there was talk of a starting price for a unit at $700,000. How have things developed on the pricing?

The pricing has definitely progressed since we have launched and most of the units that this talk was about were units on the third, fourth and fifth floors. Those units are depleted now and we are now selling units on higher floors with superb sea views. The prices of those units differ from the prices of the units that we started with.

How much has pricing gone up?

Our prices have progressed since the launch in excess of 20 percent. A price growth of approximately 10 percent per annum is huge in the real estate market. This is not usual. It is a strong market that grows at  10 percent.

Lebanese real estate developers saw strong price increases from 2005 to 2010, but since then things have slowed for them and market indicators point to weakening of demand for large, high-end units. Was that also your experience?

When we launched this project, we came in at a totally independent section of the market because we launched with interior design by Versace Home.

So you do not see yourself competing with the other developers of high-end towers down at the sea front?

We are in a category of our own. The fashion branding that we have provided with that project has taken it to a totally different level [than other projects in central Beirut].

Does that mean you are not planning other projects in Lebanon?

We are always on the lookout for new projects but we are not planning a second project by Versace, because this project is very exclusive for a long time for the current buyers.

So whoever buys a unit in the project today knows that there will be no Versace 2, 3 or 4 towers coming up anywhere nearby in the near future?

Not in the near future at all.

But you do have a second Versace project?

In Saudi Arabia, but they are in totally different markets. One is in Solidere in Beirut and the other is on the Corniche in Jeddah. The attraction of the project in Solidere is mainly for the many Lebanese expats and many GCC buyers, but in Saudi Arabia only Saudis can buy.

Saudi buyers play a role in Lebanon. Does what you say imply that there is no overlap between your clients in Saudi Arabia and buyers of the project here?

On the contrary, we see many of our Saudi investors invest with us in Dubai, investing with us in Saudi and investing with us in Beirut. It was one of the main drivers for us to launch a project in Beirut, that many of our current investors wanted a project in Beirut.

One of the topics in high-end real estate is a developer’s branding. Is Damac as well known in the Lebanese market as you are in the United Arab Emirates and GCC?

We entered Lebanon aggressively two years ago while we have been in the GCC market for the past 10 years. This is an eight-year difference and perhaps you see us not advertising the brand so much in Lebanon because most of our buyers are living outside Lebanon. This is where we put heavy advertising for the Lebanese product, to invite investors from outside Lebanon to invest here.

In regional expansion, you were addressing Egypt and Jordan besides Lebanon. Has the unrest of the ‘Arab Spring’ and the civil war in Syria affected your strategic expansion?

We are still aggressively building our project in downtown Amman, in Abdali. We are going to start handover definitely next year of this 35-story tower, the highest residential project in Jordan. In Cairo we are aggressively finishing our Park Avenue mall in the 6th of October [City] area and handover started last March.

When will the mall be opening?

Based on the programs of the shop owners’ fit-out, we hope to be open by the end of 2013.

Is this a solitary project or do you plan more mall ventures?

The mall project was a successful venture for us. That mall is not a shoebox mall. It is a retail strip of shops where you can enjoy indoor and outdoor walkways throughout the year. We are on the lookout to replicate that elsewhere; the challenge is to find a suitable plot of land.

You were also engaged in a resort project on the Red Sea in Egypt but there were allegations of impropriety in the deal for this land, issued by the Egyptian government after the fall of the Mubarak administration. Is there still ambiguity about the resort project or has it been buried?

This is now a subject of international arbitration.

How do you see supply and demand factors in the luxury and super-luxury segments go together with the mood of the ‘Arab Spring’?

I don’t think I can reply to that question in regard to the ‘Arab Spring’. What I can tell you is that demand for luxury real estate is still growing and in Dubai, we recently introduced a new category, which is the luxury serviced apartment. We aspire to be the number one operator of luxury serviced apartments in four years from today. Our aspiration is to manage 4,000 units.

In Dubai or anywhere?

In the areas where we are present today, which is Dubai, Abu Dhabi, Doha, Jeddah, Beirut, Amman and Cairo.

Your track record as developer began in 2002. Is it correct that you have delivered more high-end units as a luxury, private developer in the Middle East than anybody else? And how many units have you delivered to date?

We say we have delivered approximately 7,500 units in 36 buildings and currently have approximately 10,000 units under construction in 50 buildings.

What was the worst delay that you suffered in any of the projects during the UAE downturn?

We had some acceptable delays in some of the projects but these were mostly due to challenges in the new [Dubai] master plan.

How long is acceptable?

It depends, it usually is in months.

You mean in months and not in years?

Yes.

It appears that you are venturing into two new areas: the development and operation of luxury serviced apartments, and the mall business. Are you then moving toward services more than build and deliver?

We are moving more and more into the hospitality business, yes. Our new offering will include the sale of luxury serviced apartments and the operations of those units in the hospitality sector.

Does this mean you have to reinvent the company in structural terms by building new capacities and expanding human resources?

We are building a massive hospitality division in our company.

Can you tell us how much you are investing in financial terms into building these capacities?

I don’t have that number now. I will let you know once we deliver that budget.

Returning to the Damac Tower in Beirut, we would of course like to know what the tower’s top floor will see as price per square meter.

We have not reached the top floor yet. We are still selling [units] in the middle of the project and the prices are, on average, between $10,000 and $12,000 per square meter.

October 2, 2012 0 comments
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Real Estate

Fractured but not fretting

by Thomas Schellen October 2, 2012
written by Thomas Schellen

For a country facing economic turmoil and new business risk at every turn in the road this year, Lebanon sports an alarmingly content real estate sector.

Intermediaries whose livelihoods depend directly on commissions from arranging sales and rental contracts are not frantically waving red flags as many other of the country’s economic agencies are.

“The [sales] market is in slow motion since the beginning of 2011 until today, but there is still a market and it is not down,” said Walid Moussa, chief executive of PBM, a real estate brokerage and facilities management company, as well as secretary of the board of the Real Estate Association of Lebanon (REAL). “I always say the market is sleeping. When you sleep you wake up and just continue.”

Over at Ramco, one of the oldest intermediaries and consultancies in the Lebanese real estate sector, Director Karim Makarem agreed that both demand and prices are in a trough since the end of 2010, but he too would not talk of a crisis. “The word crisis entails too many negativities. I don’t believe the market is anywhere near that,” he told Executive.

Any analyst probing the market’s numbers without being very familiar with the peculiarities of Lebanese property might be excused for asking if that “sleep” is restful and if the denial of a crisis is just that — desperate denial. By the numbers, business in the primary brokerage activity of property sales is down again in 2012 to date, regressing for the second year in a row.

“According to the latest numbers, we are down 10, 12 percent on 2011, but 2011 was not such a good year either, it was about 12 percent behind on 2010,” said Elie Harb, president of Coldwell Banker real estate brokerage in Lebanon. That doesn’t sound too healthy, he acknowledged: “Two continuous cycles in the negative are not a good sign.”

A “staircase” market

Most brokers and research analysts at large local banks Executive queried said they see no crisis lurking in the lull of the local real estate market because they view market functions like a staircase, where prices go up and stabilize or freeze but not retreat. Phrasing it in a hands-on way, Christian Baz, owner and general manager of brokerage and facilities management company Baz Real Estate, said, “The price for properties in Lebanon will never go down. It always is stable or goes up.”

The staircase scenario is based on a threefold specificity which Moussa described as “the small size of the Lebanese market, non-debt financing of projects and high demand by expats and foreigners from the region.” According to Makarem, normal population dynamics of marriages and divorces and demand from regional buyers make local real estate an obligingly safe bet.

“There are still people who are getting married or move into their home and this demand will always exist regardless of external factors. Lebanese expatriates are still a market for buying at home; Arabs still believe in Lebanon and provide demand,” he said.  

This is despite the fact that increased land prices and construction costs are making newly built apartments in Beirut less and less affordable, a trend that is not only hard to bear for newlyweds and new labor market entrants but also has led brokers to focus their efforts on marketing smaller units, just as it put developers of the traditional large units into a squeeze.

For Moussa, the disparity between growing real estate prices and local incomes is explained easily enough by the origin of demand: well-salaried Lebanese working abroad. “It is a supply and demand market and prices for real estate in the Lebanese market are related to the purchasing power of Lebanese expatriates. Many Lebanese expats are holding out on buying now but the minute things change, the Lebanese market will be alright.”

Adding in cultural factors such as attachment to neighborhood and community — which narrow the desirable locations that Lebanese buyers seek and thus supposedly increase the scarcity factor and resultant value retention of properties — the ruling perception is that the Lebanese real estate sector is not in, and is not going to enter, a crisis of property values or ever experience a real estate bubble. This is precious news for a country whose real estate sector, according to Coldwell Banker’s Harb, is worth about $12 billion in transactions annually. The huge caveat is that the reported real estate transaction figures can be both understated and late.  Relative to gross domestic product, there is significant turnover in the real estate market, but that doesn’t mean there are no pockets of inefficiency and downside risks. Take the case of Mark Sleiman, an entrepreneur [interviewed by Executive in summer 2010] who started the company Creative Solution For Housing (CSH) in 2009, with the idea to provide a progressive home financing scheme for young career starters with good credit profiles but still low incomes.

The concept was to create “demand loyalty of young Lebanese to their country” by facilitating home loans with increasing payments. “I want the expatriates who work outside to buy at home, and I don’t want the young professionals to leave, by giving them a way how they can afford a home,” Sleiman said, but admitted that the company had done very badly over the past two years because of depressed demand for real estate and some creative differences with banks. In short, CSH is today in a state of dormancy with Sleiman voicing some — but by no means exuberant — hope that a pickup in demand from young Lebanese expatriates will give the company a second wind. 

Syrian neighbors

When asked if the influx of Syrians driven from their country by the civil war there has brought new vigor to the Lebanese real estate market, brokers did not widely agree. “There is a lot of talk about Syrian families moving to Lebanon,” Makarem said. “This perhaps had a slight impact on the rental market. We have seen a little bit of it at Ramco, other people claim to see a lot of it. Some people claim to see none of it. It is open to debate.”

According to Moussa, the Lebanese who want to rent out apartments seek long-term tenants who will sign a contract for a minimum of one year. The Syrians who can afford apartments in Lebanon have so far largely asked for shorter-term solutions, one-month, three-month or six-month contracts. In this segment of short-term rentals, the market is delineated by vacation homes or ‘chalets’ and renters might have taken spaces that were not filled by Gulf Arab vacationers this summer. “There is high demand on short rentals but very weak supply,” he said.

Coldwell Banker, which has one of the largest networks of real estate operators in Lebanon, records the strongest rental demand in Ashrafieh, where broking of rental contracts accounts for 50 percent of the office’s revenue. “Other offices do not experience so much rental business. However, in the past month there were more rental activities due to the Syrian influx,” Harb said.

Schooling, safety and affordability are decisive for Syrian clients that have been looking for furnished apartments, said Baz, whose business is concentrated in Beirut’s Ashrafieh district. He explained that he observed an increase in demand for rentals as soon as the Syrian conflict engulfed the city of Aleppo with its large Christian population. “The war on Aleppo created a boom in demand for furnished apartments.”

According to Baz both rich and not-so-rich Syrians have been knocking on his door in search for apartments but the latter group mainly seeking to find places in Beirut’s northern hinterland where the rents are lower. In his view, the main difference why he saw demand grow substantially in 2012, from a very bad 2011, was that visibility has improved, in the sense that the Syrian conflict is not abating but also not spreading to Lebanon.  “I think the situation in Syria is clear now,” he said. “Clients have visibility today — they rent and while they don’t buy like they used to, they buy small-size [apartments] and they invest.” The greater clarity about the Syrian civil war and its likely persistence meant for Baz that 2012 was his best year in rental brokering, and enabled his company to generate as much income in the first seven months of 2012 as he did in all of 2011.  For Moussa, demand indications from Syrian customers could be realigned in September and point to where trends might be going into this winter and next year. “September in my opinion is a very important period to test the market for rentals, because the schools will start and people will have to take a decision. If people put their children to school, they will rent on yearly basis.”

Fundamentally, however, the limited impact of the Syrian demand correlates with the realities that most refugees cannot afford to rent in areas and price segments that the professional real estate intermediaries cover.  According to Makarem, the situation in the low end of the real estate sector — also affecting the majority of Syrian refugees — is a mixture of consistent under supply and total deficiency of building quality. “The problem is that the lower end is particularly low-end,” he said.

Brokers do not dabble in this part of the Lebanese landscape, except perhaps in carrying out property valuation studies for projects that involve buying up decrepit properties for later demolition and development of the lands. In this context, the increased need for homes, or at least decent shelter, by Syrian refugees ties in with the permanent Lebanese housing crisis and its components of insufficient infrastructure, insufficient supply of socially adequate building stock and insufficient public and private sector management of mass housing needs.

The fuse of future crisis

This crisis, known and lamented but ignored in all practical terms, could come back to haunt the Lebanese real estate sector even in those housing segments where developers, brokers and buyers have a common market. This is because the housing crisis has a large infrastructure component that spans physical, social and administrative infrastructure, from roads and utilities to public transport and inefficient permit, registration and taxation processes for real estate.

In Harb’s assessment, a continuation of the Syrian conflict over several years could move demand by Syrian expatriates in Lebanon from rentals to apartment purchases, and he said it would be very conceivable that 20,000 requests for property purchases in Lebanon could originate annually from migrants — equal to the annual demand of Lebanese in a country where approximately 20,000 to 25,000 new units can be delivered per year.

Under the capacity restraints caused by insufficiency of hard and soft infrastructures, it would not be possible to drastically expand the supply of new units, Harb said, with overall negative effects. “This will put the Lebanese buyers into direct competition with these requests. The developer has no loyalty anywhere. These [Syrian people] will be paying in hard-core cash more often and make higher down payments,” Harb cautioned. “It could lead to an explosion in demand for real estate in Lebanon.”

October 2, 2012 0 comments
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Economics & Policy

Executive Insight: Price wars

by David Tusam, Abhijit Navalekar & Najwa Aaraj October 2, 2012
written by David Tusam, Abhijit Navalekar & Najwa Aaraj

The thriving market for mobile services is intensely and relentlessly competitive, where mobile phones today outnumber inhabitants in 105 countries, according to the International Telecommunications Union, the United Nations body that works to coordinate telecommunications policy globally. Operators are constantly seeking new promotions, enticements and other marketing “hooks” to attract new customers, and capture share from their competitors.

In this noisy and highly-pressured landscape, one such hook — the price war — reaches the top of marketing department agendas with alarming regularity in markets of all maturity levels and across all service categories, voice and data. Yet, while this always sounds like a good idea, our research shows that in practice, this hook should be rejected quickly and firmly. Put simply, nobody wins. Price wars damage entire mobile markets every time they are rolled out.
Which factors make price wars look attractive? New market entrants, changes in market structure, regulation-enforced mobile number portability or simply aggressive management targets can all prompt marketing managers to push for the quick surge in sales that can come from a price war.

However, price wars leave the aggressor operator, and the market as a whole, worse off because they stop market value from developing to reach true potential. Consumers, superficially the winners thanks to tantalizing price offers, also lose. Network quality becomes strained as available capacity falls, driving dissatisfied customers to churn again. Customers expect ever better deals from their new operators, and the downward pricing spiral gains momentum.

Given the negative impact of price wars, telecom players should take steps to avoid them at all costs if they can. Indeed, where they have been successful in taking evasive action, the negative impact of price wars has been largely contained. Yet we also realize that situations can spiral out of control. In these cases, and only when there are no alternatives, we accept that operators have to join the battle. Hence our price war mantra: “Avoid if you can, win if you can’t.”

Anatomy of a price war

From the outside, all price wars look very similar. They start when one operator becomes an aggressor in the market. Prices are slashed, generous offers are made, and some consumers start chasing the best deal. Other operators quickly lower their prices in response, eager to contain the damage. More consumers churn, and eventually market prices stabilize at a new, lower level.

From the inside, the perspective is quite different. Gross additions to the aggressor jump as customers join the aggressor’s network. But network capacity is tested as traffic rises, with increased risk of blocked calls and lower voice quality. Competitors increase their media spend and offer incremental incentives to lure their customers back. Even if they succeed, their customers return at a lower average revenue per user (ARPU), similar if not slightly increased traffic, and after considerably increased cost of acquisition.

By any measure, the net outcome is positive for the consumer’s pocket in the short term, and negative for the operator. Value has been removed from the market for good, while the costs of acquiring and keeping customers have risen. Shareholder returns have been lowered permanently.

The Middle East has not been immune to detrimental price wars among competing operators after governments opened markets and subscriber numbers soared in the past 10 years. In one Middle Eastern country, for example, the mobile market was at 79 percent of potential value in March 2008 when a price war broke out. If ARPU and customer growth dynamics had remained at pre-war levels, it would have reached 100 percent of potential over the following year and a half. Instead, that year and half was spent on a damaging price war that reduced the market to 74 percent of its potential value. And yet the dynamic persists; while full-scale wars are rare, smaller scale price wars — in effect brush conflicts — break out in most markets on a monthly basis.  

Facing the threat

We see three short-term “plays” that will allow mobile operators to face the threat of price wars, each requiring a different, defined set of capabilities. We also advocate a fourth, bolder play, in which the mobile operator completely revises its cost structure, and enters the fray with a sustained, structural advantage.

We refer to the short-term plays as: “Sword Waving”, “Surgical Strike”, and “Capture and Keep the Hill”. Each involves a measure of risk, but when applied correctly they can defuse a price war or shorten the conflict. We call the fourth play “A New War-Fighting Machine”, in which the mobile operator redefines its cost structure — and enters the “no-go area” where all-out price wars are waged.

Our first play, “Sword Waving”, aims to postpone conflict by signaling the intent to win, whilst not actually engaging. In this play, defending operators can deter a price war by drawing attention away from an imminent attack. We see operators using free minute bonuses for pre-purchased blocks of time, free trials of new content services, discounted tickets to an event for higher-ARPU customers and so on. In the best outcome, the aggressor retreats, and the price war is avoided.

“Surgical Strike”, our second play, acknowledges that conflict is inevitable. The defending operator changes the direction of the price war to its advantage, chooses the marketing weapons it will use, and hence aims to wrong-foot the aggressor. We see operators executing this play by targeting a narrow audience and focusing on value delivered, not price offered. Offering a time-of-day-bound, low-rate international tariff accessed only through referrals is one example of a possible tool. Executed correctly, this play can increase value extracted from a specific mobile market segment.

Our third play, “Capture and Keep the Hill”, joins the price war with an aggressive counter attack, limiting the scale of engagement while ratcheting up the level of intensity. “Capture and Keep the Hill” targets an entire market segment with the intent of dominating it, rather like isolating and taking a hill on a battlefield. Typical approaches may involve operators providing special services to niche vertical or lateral segments, such as medium and large enterprises or advertising agencies and creative media companies. In the best outcome, we see operators using this play to establish a commanding presence in a specific segment which yields sustained, protected value.

To weigh the risks of being forced into a price war against the potential gains that operators can achieve if they apply the above plays, we calculated a risk to reward ratio of 1.34:1 based on average additional revenues across three plays if the play is successful versus the drops in revenue that operators would risk if their plays are not successful.

Our fourth and final play is somewhat special. “A New War-Fighting Machine” requires mobile operators to rethink their business models. This play can involve organizational restructuring and process reengineering to yield substantial, structural reductions in operating cost. By dramatically refining and improving these structural elements, the operator builds a new war-fighting machine with a structurally lower cost model capable of supporting market price leadership. The result is an operator that can lead all-out price wars if necessary, entering the dangerous “no-go area” in which price war engagement and escalation are at their most intense.

While we believe price wars are in general value-destructive and produce no winners, we contend they are controllable and often avoidable if others are set to trigger them. Our three tactical plays present a framework within which operators can avoid the most harmful effects of conflict, while entering the fray where needed. Finally, our fourth and most demanding play outlines a roadmap for sustained market price leadership. Avoid if you can, win if you can’t.

October 2, 2012 0 comments
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Since its first edition emerged on the newsstands in 1999, Executive Magazine has been dedicated to providing its readers with the most up-to-date local and regional business news. Executive is a monthly business magazine that offers readers in-depth analyses on the Lebanese world of commerce, covering all the major sectors – from banking, finance, and insurance to technology, tourism, hospitality, media, and retail.

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