Luxury vehicles are an industry of pure prestige, and the Middle East is far from lacking in demand for opulent car brands. While numerous reports say that luxury sales in Dubai are down around 45 percent in the first two quarters of 2009 compared to the same time last year, most car manufacturers are surprisingly optimistic.

Since the financial crisis began, prices for luxury automobiles have not fallen. Instead, leading extravagant car brands have tailor-made their strategies, altering the supply to demand equation by offering fewer cars than they did before, while not lowering the asking price for each model.

The Gulf is highly dependent on expatriate spending, but the financial crisis has lowered their spending power, especially in the United Arab Emirates. But there is still much growth potential that stems from demand among the Gulf population. This situation leaves the luxury car market room to roam in the region.

Levant vs. Gulf

In Lebanon, a major speedbump for the deluxe car industry is high taxes. Nabil Bazerji, managing director of G.A. Bazerji & Sons Co., the country’s Maserati dealership, says the accumulation of taxes on luxury vehicles is outlandish.

First, consumers in Lebanon must pay a customs duties, which is 5 percent of the cost of the car. Next, customers spend another 45 percent of the car’s price tag on the ‘consumer tax.’ Then, buyers pay a value added tax of 10 percent of the car’s selling price, as well as registration taxes amounting to 7 percent of the product’s worth.

“When you pay 10 percent VAT, you’re paying it on the built-up costs, which includes taxes already,” says Bazerji. “When you pay the registration tax, you pay it on top of the selling price, including VAT. So we pay tax, on top of tax, on top of tax, on top of tax!”

Wissam Trad, director at Saad & Trad, Lebanon’s distributor for international luxury leaders Lamborghini, Jaguar, Bentley and Rolls Royce, agrees that the luxury vehicle taxes in Lebanon are absurd.

“This is too high and discouraging to potential buyers. Should these taxes be revised, I am sure sales would be even higher,” he says.

Consumers in Dubai get a much better tax deal. Assaad Raphael, chairman and general manager at Porsche Center Lebanon illustrates the drastic taxation contrasts between Lebanon and the GCC.

“[In the Gulf], there is a big tax incentive because the cars are taxed only 5 percent, which makes it the cheapest place in the world to buy a car,” Raphael says.

This benefit makes buying a luxury vehicle more reasonable in the GCC than in a country like Lebanon, where the taxes add up to more than 60 percent of the car’s total value.

Still, sales in Dubai have gone down rather noticeably. 

“They’re dumping prices and it’s another issue of flooding the Lebanese market and other markets with the overstock and excess products they have from their market,” Bazerji says. “This is a serious problem. We are losing opportunities and sales, especially since a lot of potential customers are taking advantage of registering their cars in the Gulf to avoid paying [the high taxes they would face in Lebanon].”

A question of sales

In times such as these, who would buy a brand new, luxurious, exclusive car? It seems the current economic circumstances have mostly affected the middle class.

“High net worth people are still today’s spenders,” says Raphael.

Frank Bernthaler, director of sales and marketing at Mercedes-Benz Middle East and Levant, believes consumers looking to purchase luxury vehicles may put a bit more thought into what they’re buying now than before the financial crisis.

In Lebanon, luxury vehicles have fared well amidst the global chaos.

“We are enjoying our best year ever in terms of Bentley and Lamborghini sales, and second best with Jaguar,” notes Trad. For Bentley, the Middle East represents 12 percent of the brand’s sales worldwide.

Maserati in Lebanon has also performed remarkably well in 2009.

“Sales in the first quarter of 2009 have been better than that of 2008,” Bazerji says. The brand’s opulent Quattroporte, which was launched in 2005, is the company’s bestseller.

Sales of lavish vehicles have, without a doubt, softened in the Gulf. Despite scarce liquidity and credit, GCC sales are expected to pick up as the crisis bottoms out.

Compared to the first quarter of 2008, Audi reported a 16 percent drop in sales in the first quarter of this year. A spokesman for the company says they remain optimistic.

“It is a tough time for the whole industry, but our outlook is very positive,” he says.

BMW sales have also dipped this year. Sales fell by 9 percent overall for the company. But the brand’s sales in Lebanon and Syria grew by more than 100 percent, while in Saudi Arabia they accelerated by 15 percent.

According to Stathis I. Stathis, general manager at AGMC in Dubai — the sole importer of BMW in Dubai — this year will present the industry with many obstacles, but hopes remain high.

“We anticipate 2009 to be challenging, but consumer demand in the luxury segment still remains healthy,” he says. “We have several new products planned for the year, so we are optimistic that 2009 will be another good year.”

Bernthaler of Mercedes notes that it hasn’t been all bad for the Middle East luxury car industry.

“Looking at the market in the Middle East and the Levant, we’ve seen year-on-year sales increase. Our most iconic vehicle, the evergreen G-Class SUV, grew by 139 percent in May 2009 compared to the same time last year.”

Candidly, Raphael admits that the global financial crisis has taken a toll on Porsche’s transactions.

“Of course, the economic crisis has had a negative effect on our sales, that’s for sure,” he admits.

Thankfully, Porsche’s production strategy has allowed them to avoid major fallouts.

The engine of strategy

“We forecast our deliveries from the factory one year in advance,” Raphael says. “So by the time the crisis happened in September 2008, the factory had time to react. The strategy of Porsche factory was to produce less cars, and the reason is that we’d rather sell one car less than discount our cars.”

Thus, by producing less the company itself modified the supply-to-demand equation in order to not feel the burn of the crisis.

Trad’s company also uses a similar approach to working around the financial crisis.

“In terms of adjustment, we are more careful with the way we order and stock cars compared to last year,” he says.

Regardless, most luxurious car brands only produce a small amount of each model in order to keep the exclusivity of each design. The crème de la crème of premium manufacturers remain confident that their grandiose brand images will help sustain their sales and consumer loyalty.

Sanguine about his dealership’s brands, Trad sees opportunities.

“We are confident that our portfolio of brands[Lamborghini, Jaguar, Bentley and Rolls Royce] are very strong and have a bright future,” he says. “For this reason, we are investing in new showrooms.”

Speeding past crisis

The epitome of luxury is the $1.4 million Maybach Landaulet. The 2009 limited edition model allows passengers in the rear to relax with the top down while the driver remains separated and covered. Maybach has produced only 20 units of the Landaulet for the entire global market, and the Middle East was the first to receive one of these vehicles.

Mercedes and Maybach are some of the top-selling brands in the Middle East. According to Bernthaler, one in every 10 Mercedes S-Class vehicles sold around the world is delivered to the Middle East. Porsche is also amongst the region’s favorite list.

“Porsche has had strong growth in the Middle East in the past six years,” says Raphael. “We have grown from 2,500 cars seven years ago to 8,000 cars this year.”

Compared to last year, 2009 sales have been rather exceptional and are even higher than 2007, according to Raphael. In the Middle East, the average age of the Porsche buyer is around 35 years old, whereas in Europe the profile is around 45.

The new Porsche 2009 Panamera is the brand’s luxurious new four-door sedan. This model is expected to alter the performance of the posh sedan market, as critics say it will create high competition with Maserati’s Quattroporte, a more expensive four-door sports car.

Although car sales in many places have dropped this year, most upscale players in the luxury market segment remain optimistic. With manufacturers such as Maybach rolling out new models like the Landaulet in 2009, who is buying? The richest of the rich, of course. For the rest of us, we’ll keep on dreaming.

It hasn’t been smooth sailing for the region’s luxury yachting industry for some time now. Even before the global financial fiasco in the Middle East, shipyards had to contend with the exorbitant cost of oil that makes up most of the resin-based raw material costs of the industry.

“A lot of companies had to adjust their prices according to how much sellers were selling raw materials, and the price of a lot of boats soared,” said Camille Chamoun, chairman and chief executive officer at Lenco Marine, a Lebanon-based boat manufacturer. “You just had to adjust, you couldn’t do anything else.”

Nonetheless, the consumer appetite that was driving oil prices higher and filling up the coffers of regional governments kept the industry afloat. In turn, manufacturers continued to maintain high levels of supply to the market that ultimately proved to be unrealistic.

“The brands that built many boats and accumulated excess stock have really been hit hard,” said Alain Maaraoui, chairman and chief executive officer of Sea Pros Yachts, a yacht service and sales company with outlets in Lebanon, Kuwait, Egypt and the Emirates.

“Boats that were being produced for clients who had financial problems and had to cancel their order. The companies [producing the boats] are now contacting us to try to sell some of their boats.”

The cloud’s silver lining

That push, coupled with the plummeting price of oil and, by extension, raw materials for yacht makers, translated into a window of opportunity for anyone who loves the smell of the sea, and had a few million dollars to spare. But initially, it did not seem like the fish were biting. Even Saddam Hussein’s former luxury yacht, which includes a submarine, a helicopter landing pad and golden bathroom faucets, failed to entice yacht buyers when it was put on sale back in January, according to an Iraqi government spokesperson.

There are signs, however, that demand may be returning. The downturn resulted in boat valuations hitting all time lows as the rules of oversupply have pushed prices down, all but quashing the margins of boat-makers. Manufacturers are now looking to get rid of their excess stock and reposition themselves for better times.

“After the downturn you found a lot of beautiful yachts that were selling at half price,” said Chamoun. “A lot of boats were being sold at cost price.”

Many in the yacht industry agree that the time to make a buy is now, but it won’t last forever. The coming summer season means high-season for yachting and vacationing in the region. That will inevitably have a positive effect on sales in a region where boat shows still feature the latest, newest and glitziest products, albeit with a few less exhibitors. For instance, this year’s Dubai International Boat Show, the biggest annual boat show in the Middle East and one of the top five in the world, attracted 721 exhibitors from 50 countries at the Dubai International Marine Club. The event suffered only an 11 percent decrease in the number of exhibitors from the year before.

Fewer and fatter

The industry itself also looks to be consolidating as companies attempt to make themselves less vulnerable to the ongoing downturn.

“All the companies are restructuring, and there have been several mergers abroad, which means they have lowered production costs because of economies of scale,” Chamoun said.

The regional industry focus also seems to be shifting away from traditional markets, such as the Emirates, toward more liquid areas in the region.

“Abu Dhabi, Dubai and Kuwait have been hit hard but Lebanon has not been affected at all and there is a lot of demand, especially after the elections,” Maaraoui said.

The region’s largest economy, Saudi Arabia, also looks well positioned to harbor much of the excess supply being placed on markets, because the effects of the crisis there have been “marginal,” Chamoun said. “They are booming and building lots of marinas because there is a lot of cash flow out there.” 

Today the chance to get a good deal still persists as excess stocks have not yet been depleted.

“The production that was available will be done in a month or two after the summer is over,” Maaraoui said. “There is a gap until the end of the summer at the most, so today there is an opportunity to buy.”

The Middle East has been one of the world’s fastest growing regions for luxury goods. From yachts to private planes, cars to clothes, the last decade saw the region’s luxury sales skyrocket as much as 20 percent per year. But now that consumers have tightened their purse strings, demand has fallen, and luxury market sales in such high-profile shopping destinations as Dubai have dropped as much as 45 percent. Some retailers estimate the region will rebound more quickly than others, due to the rising price of oil. But how are those tasked with making and selling luxury goods dealing with the downturn in the meantime?   Some are focusing on long term customers, others on consumers looking for quality instead of flash. In this special summer section, Executive profiles the purveyors of premium goods and services in the Arab world to find out how they’re faring and strategizing in these challenging times.

There is little doubt that the region’s jet-setting executives have been humbled by the global economic downturn. As a consequence, the slump has left the high-flying Middle Eastern private jet industry feeling the turbulence of the downturn’s headwinds.

“Today, the rates we are offering are 20 to 25 percent below what they were before the crisis,” said Abed el-Jaouni, chairman of Imperial Jet, a multi-national aviation services group based in Lebanon, Saudi Arabia and the United Arab Emirates.

The global airline industry is set to lose $9 billion in 2009, according to the International Air Transport Association, and the business jet industry is by no means bucking the trend. Bombardier, the Montreal-based transport behemoth and the largest manufacturer of business jets globally, recently announced that it expects new orders to slow to 375 aircraft this year and not to return to last year’s level of 1,400 aircraft until 2013. The company also announced that it will lay off more than 4,000 employees and lower production due to the slump in demand. 

Western woes

Most of the damage that has been done occurred in western markets where jets are produced. But if one compares the region to other more developed markets, the Middle East seems to have been spared the brunt of the downturn.

“The market in Europe is dead and it will continue to be a medium to bad year [for them],” said Jaouni. “But here in the Middle East it is picking up.”

Nicholas Meszaros, general manager of the Beirut-based Executive Aircraft Services, agrees.

“Manufacturers are looking more to the Middle East because there are still some deals to be done here, as opposed to the States or Europe,” he said.

It would be fallacious, however, to say that the entire region has flown right through the storm. Those who splurged during the upturn now seem to be in a tailspin.

“Most of the operators in Dubai had to take some dramatic decisions,” Meszaros said. “They have reduced their pilots, cutting down on routes and stops, and have cancelled a lot of aircraft they were waiting to get on management certificates.”

But those companies in the region that did not over-extend have done moderately well considering the economic turmoil afflicting the world today.

“The two biggest markets we have in the region are Saudi and Egypt,” Imperial Jet’s Jaouni said.

Other markets such as Qatar and Kuwait are expected to continue to do relatively well in the months to come, according to most observers.

The good news for the region’s executive jet industry is that the negative effects of the downturn on western manufacturers has led to bargains for the Middle East’s aviation service operators and jet enthusiasts.

“Manufacturers have stopped production on certain things and what has happened is that people have forfeited their down payment so the manufacturers are saying ‘take it for cheaper,’” Jaouni said. “I see the bottom and the right time to buy planes. [An] aircraft that was valued only eight months ago at $38 million is being offered to us today at $22 million.”

Landing in reality

With less disposable income and a risk-averse approach, manufacturers are less keen to build large, expensive aircraft. Operators are shying away from large aircraft as well, having less money for purchases, operations and maintenance.

“More people are looking at the smaller airplane, because when you are looking at 10 or more seats, you are looking at long-range expensive aircraft, and the demand has been less in this area,” said Meszaros.

While the skies over the Middle Eastern jet market may still be cloudy, aircraft services executives say the region’s market is already looking brighter. 

“It is better today, it will get better come the beginning of next year and it will be much better towards the end of next year,” Jaouni said.