Neemat Frem is the president of the Association of Lebanese Industrialists, chief executive officer at INDEVCO Group and founder of technology service provider Phoenix Machinery. He recently sat down with Executive to discuss the state of the industrial sector in the face of regional turmoil, high energy costs and the economic downturn in Lebanon.

Let’s start off with some statistics. Lebanese industry had five years of strong growth, but 2011 and 2012 were slower, reflected in lower exports, a drop in machinery imports and also fewer bank loans to the sector. What do you attribute the drop to?

No doubt the first half of 2011 was tough… basically, Lebanese industry doubled in size in five years. In 2011, it was not a slow down in growth but a complete stop and it was the second half of the year that did all the damage. This year we started to regress, about 6 percent below 2011 — I am using exports as an indicator. Now, what do I attribute this fall to? What happened with the flare-up of oil prices was a major handicap to the Lebanese economy, and I can’t stress enough the fact that our economy is inversely correlated to the price of a barrel of oil, as we have no other form of energy. This is number one. The second factor is the turmoil in the Levant today. Also, a loss of confidence by the Lebanese consumer, and this has affected patterns of consumption, no doubt about it, plus the fact we missed our tourism season, which affected our local market.

Are you optimistic about the rest of the year?

I think 2012 will end as a tough year and I am personally worried, not only for the situation of industrialists but also because of the condition of public finances and the pressure it puts on the private sector. Our indicators are not good, to say the least. I know there is a major struggle within the Cabinet on the level of taxation policy and strategy, but I tell you with such public financing it is hard not to expect that the economic environment will be [negatively affected].

What is your stance on the draft law for a 50% tax cut on exports?

It would help for sure but we asked for 100 percent as that would really change things and attract foreign capital while enticing non-Lebanese industrialists to relocate here. But we ended up with 50 percent. Again, the problem is overall profitability, and it is not easy to be profitable today and to feel the effect as (the tax reduction is based on) profit tax rebates. To tell you the truth, we are not looking today at incentives from the public sector, but are worried about what kind of handicaps we will experience in the coming years due to the level of deterioration in the public sector. What sort of problems are we going to have due to this changing situation? This is my worry today.

What contingencies are in place?

The only contingency Lebanese had for a long time was to relocate, but this time I think the Lebanese are intelligent enough to do it in a flexible way, to stay in Lebanon and have new deployments in emerging countries, like in Africa. I see it more than exports in the coming era. I see Lebanese industrialists having satellite operations to protect their export markets.

One contingency that could be prepared for is if the border with Syria is completely closed.

I doubt it will be completely shut. So far it hasn’t, despite everything. If it is shut, our research shows that the two countries that are the hardest and most expensive to reach are Jordan and Iraq, as [there are] major land freight costs. The others, well, [there will be] a delay in time but costs are almost the same, to Saudi Arabia, Egypt, the United Arab Emirates and Kuwait. Regarding Europe it will be open, and the Balkans, which we… export to by land, as we have a RORO (roll-on-roll-off) vessel to Turkey and from there continue north.

Is the RORO vessel between Mersin (in Turkey) and Tripoli running effectively?

It is already in operation, twice a week. Again, for Iraq that is a way to get there, Kurdistan especially, but it is expensive, double the price.

What prices are we talking about?

It is around $4,000 to $5,000 for a 40-foot container. The problem is the land cost, this is why Iraq and Jordan are the problem. The Jordanian market is up north, not in Aqaba, so you need to drive there.

If we look at the situation in Syria it is obviously affecting us here, and in Syria companies are lacking raw materials and workers. Could Lebanese companies step in to fill the gap?

They already are, first of all in the Lebanese market as competition from Syria is decreasing by the day.

So taking up that slack is primarily for the Lebanese market, not replacing Syrian goods say sold in the Gulf? Could you see that coming?

The Syrians were never big competitors with Lebanese products. I foresee however that once everything settles down there will be a construction boom and a big market for Lebanese cement and other products.

Yes, figures are already being thrown around of $15 billion to $20 billion needed for Syria’s reconstruction, and this could be good for Lebanese business…

No doubt about it. Since the start of the Arab Spring there have been a lot of opportunities the Lebanese could seize, but our history has shown we don’t know how to seize these opportunities. And we haven’t till today. Will we this time? Only time will tell.

Is this due to the divergence between the private and public sector, where the private sector is left to do its own thing? 

Mostly because the political situation needs to [fit] an agenda to seize opportunities for economic growth. But today, the government has other priorities and this is a problem.

…such as industrial zones talked about for years and years?

Forget about it, there is a complete paralysis on the economic zones. Today we are talking about developing private industrial parks and have suggested creating private power plants, as industrialists, and selling to the grid at the same contract and conditions as the government signed with the Turkish power ships that are coming (a three-year, $390 million contract to provide 270 megawatts); this is nothing but fair. What the government gave to a Turkish company should be starting conditions for Lebanese industrialists on the ground to sell electricity to the grid. We have given this proposal to the Industry Minister to put it on the agenda of the Cabinet, but we’ve had no answer.

Where would you set up such zones?

The Zahle area, near Saida or Batroun. You can’t go further than this.

Are there any success stories you’d like to highlight?

We are still surviving in Lebanon, which is a success story and still importing machinery. Okay, machinery imports have decreased by 12 percent this year, which is a leading indicator of growth in the sector, but for me it is quite an achievement. In other terms, in 2012 the sector will import almost $180 million to $200 million of new machines, and this goes straight to the expansion of the sector.

Syrian industry has been seriously hit by the ongoing conflict, suffering from a lack of raw materials, workers, energy and capital amid heightened risk. Multinational companies such as Proctor & Gamble that sold fast-moving consumer goods exited the Syrian market last November when European Union sanctions went into effect.

Turkey has not filled any supply gap, with exports from Turkey into Syria dropping from $2.3 billion in 2011 to just $302 million in the first five months of this year. However, exports from Lebanon to Syria have risen by 18 percent to date on 2011, to $126 million, while for the first time in years Syrian products headed the other way have fallen, by 8 percent to $142 million, according to Lebanese Customs data. Are Lebanese industries stepping up to fill an apparent supply and demand gap?

The short answer is: not really. Firstly, demand for non-essential items in Syria has plummeted as prices have risen, people’s finances have been squeezed, and stores are infrequently open, if at all. Take for example the sales of Lebanese cosmetics firm Ch. Sarraf & Co., part of the Malia Group, in Syria. When the group started a distribution company there in 2008, sales quickly reached the same volumes it had taken 10 years to achieve in Lebanon. It was a good market. But since the uprising began in March, 2011, business has dropped.

“We are facing export difficulties so a few months ago we put aside stock as a preemptive measure, but demand [for cosmetics] is about half of what it used to be as purchasing power is down,” said the company’s general manager Joanne Chehab. “People are only buying products of first necessity, although shampoo is still one.”

A second factor is that demand for more life-sustaining essentials has also not risen. According to a report in As Safir newspaper, the Lebanese Farmers Association said that exports to Syria have dropped by two-thirds on last year. Demand has equally not risen for items more suitable for life under a siege than fresh fruit and veggies — tinned and packaged foods. According to the head of a leading Lebanese agro-industry company who asked to remain anonymous, there has been no marked demand by Syrian companies or traders.

One necessary product that is facing production shortages in Syria is pharmaceuticals, yet while there may be demand, potential increased exports from Lebanese pharmaceutical companies are complicated by the borders still being under the regulation of the Syrian state.

“Until now, exports from Lebanese pharmaceutical companies to Syria are subject to regulations by the Syrian authorities; that is why it’s not as easy as one would think [to export],” said Neemat Frem, president of the Association of Lebanese Industrialists. “But in areas that are unregulated, that is completely different, and we might see more in those areas.”

Cash flow curbs

While generator manufacturer Saccal Industries has witnessed a 100 percent growth in demand for generator sets due to power shortages, Syria is not as lucrative a market as one would expect. “We are selling more but there is the problem of cash flow. People are afraid of spending money in the current environment,” said the company’s general manager Asaad Saccal.

The United States sanctions banning the use of Visa and MasterCard, as well as transactions in dollars, and the considerable depreciation of the Syrian pound are both major contributing factors to the squeeze. “We are selling for cash not credit as the currency is fluctuating a lot,” said Chehab. “We sell in Syrian pounds and then transfer on the spot.”

Compounding the situation is problematic  distribution, which has become more difficult. Traders are looking for higher margins to cover inflated insurance premiums and container hires.

A little silver lining

So what has caused the up-tick in exports to Syria reported this year? Data is not broken down by category, but one reason for the increase is a 25 percent spike in exports of machinery, spare parts and engines due to international sanctions, according to economist Kamal Hamdan.

Another factor is fuel. Subsidized Syrian fuel used to be smuggled into Lebanon; but as the conflict dragged on and shortages emerged in Syria, this flow has reversed, causing Lebanese imports of fuel from abroad to jump, both to make up for lost supply to the domestic market and to feed the export and smuggling markets in Syria. Lebanon’s imports of oil and mineral fuels have surged 89 percent year-on-year, to $3.2 billion. Non-hydrocarbon imports on the other hand have grown just 1.8 percent, according to Byblos Bank data.

In addition to fuel exporters and smugglers taking advantage of the conflict, some other companies are also directly and indirectly benefiting from industry shutdowns in Syria. Aluminum tube manufacturer Universal Metal Products (UMP) has noted an increase in orders from Saudi Arabia, which the company does not attribute to the closure of three Syrian manufacturers in the same field — they did not have the ISO specification required in the kingdom’s market — but rather the drop in Turkish trade with Syria.

“Due to the broken trade links with Turkey we are picking up slack from Turkish business they have lost,” said UMP’s general manager Nizar Raad. On the labor side, for manufacturers such as Carosserie Abillama, the closure of Syrian manufacturers provided the Lebanese firm with skilled workers that had been laid off.

All in all, there is little silver lining to the Syrian crisis for Lebanese industry, with the situation causing more damage to the sector than any potential sales up-ticks due to shortages over the border.

Where industry may well experience an upside in the near future is if goods that have been hoarded away start running out. Otherwise, it will not be until the conflict is over, when the rebuilding effort in Syria creates a massive demand for materials and products.

Lebanese industry has been dealt many a bad card in its recent history. Yet when the sector went through a five-year boom, with exports nearly doubling in value from $2.17 billion in 2006 to $4.059 billion in 2010, it seemed as if industry had finally found some playable hands. The sector could raise the stakes, throw out an ace or two, and show the banking, real estate and tourism sectors that industry was an equally important player at the country’s economic big-boys’ table.

But the winning streak was not to last. The global financial crisis — which the sector had managed to bypass for a while — political uprisings throughout the region, and sluggish domestic economic growth all started to affect business in 2011, the second half in particular. In the words of the president of the Association of Lebanese Industrialists (ALI), Neemat Frem, “It was not a slowdown in growth but a complete stop”.

Although 2011 marked a new record in industrial exports from 2010 at $4.064 billion, growth was minimal and hardly comparable to the $729 million jump in exports between 2009 and 2010.

Furthermore, despite export figures being used as a benchmark to gauge the sector’s general health, they do not give the overall picture, given that exports account for only 40 percent of sales in domestically manufactured goods with the remainder destined for the local market.

The glass half empty?

The mood of industrialists certainly reflected the downturn. In the central bank’s quarterly business survey, it showed that by the fourth quarter industrial production had retreated, with a balance of opinion (the proportion of surveyed managers who consider that there was an improvement in a particular indicator and the proportion of those who reported a decline in the same indicator) standing at -11, compared to +18 at the same time in 2010 and zero during the third quarter of 2011. The balance of opinion for overall demand for industrial goods was no brighter, at -14 in the fourth quarter of 2011 compared to +4 in the same quarter of 2010.

To the sector’s relief, 2012 did not start out too shabbily, in exports at least, with first quarter results up 9 percent on 2011 at $808.1 million, according to Ministry of Industry figures. Yet the downbeat sentiment that had prevailed at the end of last year lingered, with the same debilitating factors deteriorating moods further: higher oil prices, more frequent power shortages and the situation in Syria on a slippery downwards slope. By the end of July exports were down 9.5 percent to $1.7 billion, when compared with the first  seven months in 2011.

Consumer confidence was also in the gutter. A survey conducted in March and April 2012 by United States-based opinion polling think tank Pew Research Center indicated that 53 percent of Lebanese considered that the economic situation in Lebanon was very bad and 35 percent thought it was bad, compared to 12 percent who believed it was good.

“Three channels were hit the most: One: the flow of tourists was down, which lowered demand for industrial and agricultural goods; Two: exports through Syria were down, and Three: the loss of foreign investment into Lebanon, including industry, because of the security and political situation and heightened risk,” said economist Mazen Soueid.

Indeed, tourism figures were down 8 percent in the first half of the year. Exports that had gone overland via Syria were down, notably plunging by 40 percent to Turkey and by 15 percent to Iraq. Indicative of reduced investment in industry, imports of machinery were down 12 percent.

While Lebanese industry has long struggled to be price-competitive within the region and other emerging economies, from wages to operational overheads, the sector had another cost to factor in this year when the government raised the minimum wage.

“The increase in salaries has affected us. Our products are customized and cannot be mechanized so we rely on labor. Our prices are up 6 percent, so it’s significant,” said Daniel Abboud, general manager of Carosserie Abillama, which has a staff of 300 to manufacture trailers and other automotive add-ons that are exported to some 27 countries.

“The wage increase from $333 (500,000 LL) to $450 (675,000 LL) is a big jump if you have 150 women working for you. That is the basic minimum,” said Nizar Raad, managing director of Universal Metal Products (UMP), a leading manufacturer of collapsible aluminum tubes for pharmaceutical and cosmetic companies. “It is a big increase in costs for us and we can’t pass that on to customers easily as competition is worldwide, from Pakistan to India and China. And they don’t have the fuel costs we have. We are paying $0.15 a kilowatt while others are paying just $0.04.”

The country’s chronic power shortages, with Électricité du Liban (EDL) producing only 1,500 megawatts (MW) of electricity and peak demand at more than 2,500 MW, has long been an existential problem for industry. This year the power outages were even more frequent than in the past and were further compounded by oil prices averaging more than $100 a barrel, which has bitten into industry’s margins as well as lowered consumer purchasing power.

Some industrialists want to solve the crisis by developing their own power plants, with excess sold to the grid. They have submitted a proposal to the government but it has been stymied by EDL holding the monopoly on energy sales.

Logistics costs have also risen, partly due to oil prices but primarily because of the conflict in Syria affecting overland trade, with the number of trailers crossing the border down by around half, from 450 a day last year to 200 to 250 a day, according to Gezairi Transport. Trucking costs are up by around 15 percent to the Gulf due to oil prices and insurance premiums have increased to cover the risk of transporting through Syria. Such factors have prompted a rise in sea freight, but add further costs to companies, with sea cargo to the Gulf around 40 percent more expensive than by land, as well as taking an average of two weeks longer to get to the end destination.

Regional issues are also playing their part, with Saudi Arabia no longer allowing Syrian drivers multiple entry visas — Syrians account for around 80 percent of the truckers of Lebanese products — presumably for political reasons, which adds on more time for visa applications, while the kingdom is also squeezing the Lebanese electricity generator sector.

All in all, industry is facing many obstacles. “I think Lebanese industry is going through its worst period since the end of the Civil War,” said Soueid. “We have never had this agglomeration of domestic, regional and global factors affecting supply and demand. If this continues, and unfortunately the indicators point in that direction, we will see closures of industries in Lebanon.”

The glass half full?

While the economic situation is certainly not rosy, with overall growth forecast at 1.2 percent this year by the Washington-based Institute of International Finance, it is not all doom and gloom. Taking the ‘glass is half full’ approach, ALI’s Frem is confident that the sector will prevail, stating that while industrial machinery imports have dropped, they could have dropped more — especially after significant investment in recent years — and this year he forecasts that up to $200 million of newly purchased machinery will go “straight to the expansion of the sector”. Since being interviewed in early September, Frem’s outlook has been somewhat confirmed, with statistics released by the Ministry of Industry showing that industrial imports at the end of July were up 22 percent, to $172.2 million, on the same period in 2011.

Industries not overly reliant on the local market are stoic about the situation. “We have to live up to the challenge, otherwise we shouldn’t be here,” said Raad of UMC, which exports 85 percent of its products. “We will maintain the same figures as last year; not more or less growth.”

“Business is good, despite the situation,” said Asaad Saccal, general manager of generator manufacturer Saccal Industries. “The reason is 85 percent of our turnover is export. Lebanon is good business of course, but small in terms of quantities; we need bigger markets to sell to.”

To Abillama’s Abboud, companies should have anticipated the regional and domestic situation and adapted their business model accordingly rather than whining about the obstacles in place. “This is a problem I see many people complaining about, but they don’t look ahead, taking the punches while sitting down — move!” said Abboud. “The key is not to be static and wait, but to be proactive. As soon as things started to happen in Syria and we saw that the economy might slow down here, that the road to the Gulf might be difficult and we would have to focus on sea export, we put all [our] sales people on West Africa to be dynamic, and it worked,” he added, with Abillama having a “nice order book” for the year ahead.

Indeed, as the saying goes, one man’s loss is another man’s gain. Some exporters have benefited from the current regional crisis by picking up orders that Syrian and Turkish manufacturers cannot fill.

The economic sanctions imposed on Syria by the United States and the European Union (EU) have also been a boost for certain Lebanese companies, with imports from Syria down 8 percent in the first half of the year, and exports to Syria up 18 percent, according to global information company IHS. It would appear, though, that the negative impact on some Lebanese companies in losing the Syrian market and that export route outweigh the opportunities for their industries to fill the gap left by the collapse of Syrian industry.

Government support?

The government is not helping the sector through these trying times, with the Minister of Industry, Vrej Sbounjian — a Utopian at heart — stating there is no cause for concern.

“We don’t have any complaints concerning the economy or industry… We need to be more realistic and enjoy life a little bit. We don’t have to make money every year,” he told Executive.

The ministry itself could certainly do with more money, with a budget of just $5 million, just more than half that of the Ministry of Youth and Sports, at $9.7 million, and a third of the tourism ministry’s $14.6 million.

“The ministry’s share in the budget seems way too low to me,” said Abillama’s Abboud. “There should be more than just enough to pay salaries.”

“The ministry should be able to afford promotion programs and to fund delegations from the ministry to visit seminars and industrial meetings with specialized bodies in the Arab League, the EU  or others,” he added.

There have also been no steps made to set up dedicated industrial zones despite government pledges over the years to do so. As Frem observed, “Forget about it, there is a complete paralysis on the economic zones.” Industry, as in the past, is being left to its own devices to stay alive, not even getting governmental contracts to bolster domestic sales.

However, the Ministry of Industry has put its, albeit limited, weight behind a joint scheme launched in September with the ALI to promote Lebanese products under the slogan “Your industry your identity: Buy Lebanese.”

While a promotional campaign may help, industry needs more than just marketing, it needs solid support from the government and for the ministry to tout the sector at international exhibitions, just as other countries do. A bigger industrial sector would, after all, help to lower unemployment and boost the overall economy.

“It is not that Lebanon cannot be industrial, but that it should be seen as a sustainable sector,” said Abboud. “It is great to have an ad agency here, but they could leave tomorrow; industries can’t get up and leave like that. Industry should be a priority and not be seen by the government as a cash cow. Industry is a social contributor as well as a fiscal one. In the past, industry was looked at as a polluting sector or as exploiting the masses — this is not the case anymore.”

To economist Soueid, the government needs to implement any of the economic plans drawn up over the years, whether by external actors such as the World Bank, or by ministries and economists. “Industries in Lebanon don’t need a ministry, they need an economic policy that supports industry and reforms in power, infrastructure and telecoms,” he said.

Given the rough ride this year, Lebanese industrialists could use some better cards to play.