Consumer Society

Automotives – Gearing down

by Executive Staff
written by Executive Staff

The automotive industry is feeling the full force of the global financial crisis. General Motors, Ford and Chrysler are on the brink of collapse after their failed bid to get $25 billion in aid from Congress and many of the major automakers are temporarily shutting down production plants as sales drop around the world. In the Middle East, however, car sales have not been so gloomy. Positive growth has been achieved by all the major brands in the region and massive amounts of investment are being put into improving car sales and after-sales facilities. Still, there is nervousness about the financial crisis’ impact on the Middle East, given the significant amounts of investment that have been made and are being made in the region. Thus, 2009 will be a precarious year for automakers and their local partners in the Middle East.

But 2008 was a good year overall for manufacturers in the Middle East. As Phil Horton, managing director of BMW Middle East, pointed out, “Our January to October sales across the Middle East are up 12% over the same period last year.” Horton is confident that BMW will achieve its sales target for 2008. Julian Millward-Hopkins, press manager for Mercedes-Benz, also reports that 2008 was a good year. “The performance of Mercedes-Benz in the region this year has been exceptional with deliveries currently up nearly 20% over the previous year. For the first time we achieved sales of over 10,000 vehicles for the first half of the year,” he said.

The big manufacturers’ new playground
The continued growth of BMW and Mercedes in the region is significant because the big three markets — US, Europe and Japan — are increasingly saturated and competition is becoming increasingly intense in the Middle East. Infiniti and Audi are two manufacturers that have rapidly increased their presence to capture some market potential, both launching a renewed, more substantial presence in 2005. Abhijit Pandit, director of marketing for Infiniti, reported that the Japanese company has achieved rapid growth since 2005 and now the Middle East is the number two market after the US. In 2008, Infiniti achieved 50% year-on-year growth. Audi tells a similar story. Jeff Mannering, managing director of Audi Middle East, stated that Audi believes it can end 2008 on strongly, “finishing with around 7,500 deliveries to customers, which is a healthy 18% increase over 2007.”
Rapid expansion is being undertaken by manufacturers and their local partners. Horton extolled BMW’s local import partners investments in the brand and stated that, “Our importers in Dubai, Abu Dhabi and Saudi Arabia are all undergoing multi-million dollar expansion plans to accommodate their growing business.” This rapid expansion, which is being replicated by almost all manufacturers in the region, has brought the challenge of ensuring that infrastructure keeps up with this expansion. “With growing sales the biggest challenge is always to provide a strong support system. Audi has invested heavily into training, continuous improvement in after-sales service and the development of our infrastructure,” said Mannering. For brands such as Infiniti that have yet to penetrate fully the Middle East, rapid programs of expansion are being rolled out. Pandit said that new showrooms are constantly being opened for Infiniti cars and by 2012 all the market in the GCC and Mediterranean markets will have exclusive facilities.
His company, Pandit said, “pioneered the crossover SUV with the Infiniti FX,” and now all the car manufacturers are bringing out new SUV crossover models, which are set to dominate sales in 2009. The SUV is an important segment of the car market in the Middle East in particular and, according to Pandit, dominates the luxury car sector. With global warming becoming increasingly important in the minds of consumers, the desire to have an SUV with lower emissions has given birth to the crossover SUV and their popularity has been insatiable. Thus all manufacturers are racing to get their versions onto the market. BMW has brought out the X6 Sport Activity Coupe, which has sold out the year’s quota, Audi reported a strong response to its anticipated Q5 and Mercedes has released the GLK, which is expected to achieve strong sales in the region.

Currency chicane
The major challenge that automakers have faced in 2008 has been currency fluctuation. For Infiniti, which deals in yen, this was a major challenge and for BMW and Mercedes, dealing with Euros, it has also been problematic. Horton also stated that “price increases for raw materials including oil, steel and energy,” were issues for manufacturers in 2008 and this decreased the profit margin.
But the biggest snag was encountered at the end of the year: the global financial crisis. In 2009, all manufacturers will be waiting and watching to see what its full implications on the region will be before they make any big decisions. Millward-Hopkins believes that the Middle East is in a much stronger position than the rest of the world, but “we are putting in measures to ensure that our distributors across the region provide customers with a suite of offers.” Thus, even in the surplus-rich GCC, manufacturers are preparing for customers to tighten their belts. “Oil prices are continuing to stay low but I hope the government will intervene as this is a big challenge for the region,” Pandit said. Although manufacturers are aggressively pushing forward their brands in the region, due to the economic crisis they will be hard pressed to achieve a growth on sales in 2009. As Horton stated, the biggest challenge next year will be, “to increase our sales over 2008.”

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Banking

Overview – Banks temper the tempest

by Executive Staff
written by Executive Staff

Before the fateful weekend of September 13-14, 2008, the hot topic on all bankers’ minds in the GCC was how to tackle inflation. Every country in the Gulf was battling ubiquitous, long-lasting and soaring inflation rates and deciding if they should de-peg their local currencies from the dollar. By mid-September, the picture was no longer so black and white — banks in the Gulf, like everyone else in the world, were scrambling to come up with emergency funds to mitigate lending restrictions and to guarantee bank deposits in order to ease the credit crunch they were facing. While the economies of the GCC were hoping the international crisis would blow right by them, Standard & Poor’s noted that, “recent events have shown that as these economies have opened up to the rest of the world in recent years, so too have their vulnerabilities to global economic conditions.” Merrill Lynch expects non-oil GDP growth in the GCC to decline to 7.5% in 2008 and to a mere 5% in 2009. Budget surpluses are also predicted to drop sharply, with Merrill Lynch’s forecasts reporting the current account surplus to plummet from 22% of GDP in 2008 to 15% in 2009. As for Lebanon, the IMF forecasts GDP growth in 2008 to have reached 6% and to drop to 5% in 2009. The Cedar Republic, on the other hand, was not affected in the same way by the global financial crisis. To cushion the effects on local banking sectors, governments around the Gulf have been injecting sizable amounts of liquidity into their banks. Paradoxically, the Lebanese banking sector continues to loan to its government and not vice versa. In the UAE, for example, the central bank plans to feed an estimated $19 billion into domestic banks across the Emirates. Other members of the GCC have announced similar plans, with Saudi Arabia’s central bank voicing a capability and willingness to inject cash into its local banks if and when necessary. David Gibson-Moore, president of BMB Group, believes that the banking sectors of the Gulf have “held up well in 2008” and that even though direct exposure to the subprime crisis has been limited until now, “further exposure is likely to surface.” Lebanon had also not been exposed to the subprime crisis, because the Lebanese central bank has — for quite a few years — imposed tight regulations on the banking sector, prohibiting its banks from investment in structured financial products. Seeing as the Gulf’s state finances are quite robust, the banking sectors of the GCC will surely be able to stay comfortably afloat despite the turbulences. Without such buffering support from their governments, banks in the Gulf would undoubtedly be feeling the effects of the international financial crisis much more.

Most experts hold that banks in the Gulf have been almost entirely unaffected by the global crisis. Such statements are expected — no one wants to hear the grim truth that if it weren’t for the local governments having the ability to provide large amounts of cash to the banks, many of them would have collapsed or would have been forced to merge with other banks. Analysts are dismissing the need for mergers and acquisitions, while some banks are revealing their inclinations towards ‘possible’ mergers in the future. Obscurity is rampant in these uncertain times and it seems neither mergers nor acquisitions will surface until mid to late 2009.
There are many lessons to be learned from the global crisis and the failures of major regulatory frameworks (such as Basel II). Seeing as Lebanon has been able to successfully insulate its banking sector from regulation failure, maybe regional banks could learn a lesson or two from the Banque du Liban. Regional banks need to make sure their money supply is properly supervised, especially since past controls were rather lax and thus “fed the asset price bubble,” said Gibson-Moore. Also, in order to maintain stable levels of liquidity, regulatory systems must be firm and sustained to make sure banks are lending sensibly. To ensure banks do not continue with their bad habits, Gibson-Moore noted that, “compensation systems need to be properly aligned with the successful long-term performance of banks.” Another lesson to be learned from global chaos is that banks and financial sectors altogether need good governance, with board members “that understand what is happening,” stated Gibson-Moore.
In general, the true effects of the crisis will be felt by banks across the MENA region early next year. Gibson-Moore believes that, “the effect of the financial crisis on the banks in the GCC countries is [to] be far from negligible and it will not be confined to the financial sector but it will [also] affect the real economy as well.” Banks in the Gulf are all facing challenges of how to maintain liquidity and the regulators in the GCC “are going to play it safe and be [more] cautious” in 2009, and rightly so, said Gibson-Moore. Lebanese banks, in stark contrast to their Gulf counterparts, have had no problem stabilizing liquidity, as theirs is one of the most liquid sectors in the world. Gibson-Moore feels there is an “urgency for tougher controls,” especially in Qatar and Dubai. Seeing as banking assets per capita are “still relatively low in most GCC countries,” Gibson-Moore contended that, “this leaves sufficient room for growth for all participants [in the Gulf].” Much is to be learned from the mistakes of 2008 and even more from those that began well before the 2008 fiscal year (in terms of investments and lenient policies). Still, Pik Yee Foong, CEO of Standard Chartered Bank Lebanon, expects the Gulf economies “to remain strong.” Most bankers and financial powerhouses are optimistic that although 2009 will present many challenges and growth will slow, banks are expected to perform reasonably well.

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Tourism

Lebanon – Back on the map

by Executive Staff
written by Executive Staff

Since the assassination of Prime Minister Rafiq Hariri in 2005, the Lebanese tourism industry has fallen victim to one crisis after the other. This year, as feuding political factions struck a fragile peace in Doha, Qatar, the industry recovered some of its former luster, with Arab tourists and expats flocking equally from East and West.

As the summer approached, market players in the tourism industry kept their fingers crossed, hoping for a good summer season to beef up their fragile balance sheets in a country where Arabs visitors usually represent about half of hotel reservations. Tourist figures have drastically changed since 1974, the last year before the Lebanese Civil War. That year, 500,000 Europeans and 900,000 Arabs visited Lebanon and the tourism industry accounted for 19.4 % of the national GDP.
“Ever since the end of the war in 1990, Lebanon has not been able to reclaim its former status as one of the region’s prime tourist destinations. The structure of Lebanese tourists has changed as well with many of the incoming flows of foreigners actually being Lebanese nationals holding dual citizenship. Other factors that have also affected Lebanon’s performance in terms of tourism figures can be attributed to the emergence of new destinations such as Jordan, Syria and Turkey, while Arabs have also started venturing into new countries, such as in Asia,” explained Mohammad Chamsedine of Information International.

By the numbers
In 2004, just four years ago, 1,278,500 people visited Lebanon, 457,000 of whom stayed in hotels for a total of 1,018,000 tourist per night. Over the next three years, the number of visitors steadily dropped, from 1,140,00 tourists in 2005, to 1,063,00 in 2006, and then just 1,017,000 in 2007. Information International estimates average expenditure of tourists visiting Lebanon at about $1,000. According to figures provided by the Ministry of Tourism, about 984,000 tourists came to Lebanon this year excluding the months of October, November and December, which will most likely witness growing numbers with the Adha and Christmas holidays, thus possibly reversing the trend of the past years and restarting a growth in visitor numbers.
Chamsedine estimates that one of the main obstacles to the development of the tourism sector resides in the weakness of its budget, estimated at $7.8 million in 2008. “The contribution of the tourism sector to GDP varies between 8% and 11% but it is difficult to assess if one takes all other sectors involved, such as the retail industry, that without a doubt contribute indirectly to it,” said Pierre Achkar, head of the Lebanese Hotel Association.
Independent economist Ghazi Wazni adopted a more conservative estimate, bringing the figure down to about 6%, comparing it to the Gulf countries’ 15% level. “In 2007, the sector’s growth was at 9% in various Arab countries, while it was nearly negative in Lebanon. Lebanon also lags behind in terms of investment in the sector,” he explained.
In the last few years, hotel industry growth plummeted due to the 2006 War, as well as to the multiple political crises that shook Lebanon. “The situation was a real disaster until the month of May, when the Doha Accord was struck. Occupancy in hotels located outside of Beirut did not exceed 5-7% and only reached 20% or 30% for hotels in the capital. After Doha, the situation improved dramatically, with hotel occupancy reaching 44% in June, 65% in July and 90% in August. This also reached hotels outside Beirut where reservations were rerouted when the capital’s hotels were overbooked,” said Achkar.
The head of the hotel syndicate explained that Lebanon remains a very attractive destination for tourists because of the country’s natural beauty, the hospitality of its people and the lifestyle they lead, the affordability of prices relative to the region as well as the quality of the service provided by industry players.
As hotels, travel agencies and restaurants slowly emerged from their 2006-08 slumber and came back to life, they were accompanied by a flurry of cultural activities such as festivals, estimated this year at about 60 by Nada Sardouk, general director at the Ministry of Tourism. “The number of incoming tourists also grew due to the facilitation of visa procedures for over 36 countries, a process which was jump-started by the late Prime Minister Hariri. During his recent trip to Egypt, Prime Minister Fouad Saniora discussed easing up visa formalities for Egyptian tourists. A distinction was established, however, between working and tourist visas,” Sardouk added. Despite these optimistic developments, some nationalities were scared away by their countries’ negative travel advisories, like in the case of Saudi Arabia, after threats were voiced against their governments.
The director said that the number of restaurants grew by about 325 venues, while some 20 new hotels and residences opened their doors. “Investments in the sector are increasing significantly, which in the case of hotels are usually a mix of Arab and Lebanese capital, while the restaurant business is essentially funded by locals,” Sardouk said.
The restaurant business has been booming as well. During the last two years more than 300 new restaurants have been launched, mainly in the Greater Beirut and Kaslik areas, according to Paul Ariss, president of the Syndicate of Restaurant and Café Owners. Ariss estimated that about 70 venues opened in Gemmayzeh and Saifi, 10 in Ashrafieh, 50 in Hamra and Verdun, 40 in Antélias and Dbayeh, 30 in Kaslik and Jounieh and 10 in Batroun.
Sardouk explained that most restaurants setting up shop in Lebanon are not snack venues but rather high quality gourmet restaurants. “Some investments that poured in are massive, as an example we have witnessed that the cost of the land alone for one project was $4.5 million. Smaller projects usually vary, however, between $200,000 to $500,000,” she added.
However, not all is rosy. Ariss pointed out that in Beirut’s downtown, not all restaurants have reopened their doors, with only 40-50 restaurants, out of 104, resuming operation. “Despite the dramatic events in 2006 and 2007, restaurants located in the North, the South, the Bekaa and Mount Lebanon did succeed in keeping up, since they mostly are owned and run by families with very low operational costs,” he added.
One of the main setbacks for the tourism sector is the brain drain that occurred in Lebanon in the wake of the 2006 and 2007 events, forcing thousands of skilled laborers to look for jobs abroad. “This happened at a time when the economies of Dubai, Abu Dhabi, Qatar, Kuwait and Saudi Arabia were booming and investments in hotels and restaurants were skyrocketing. Although most universities have high-level hospitality schools and there are a few recommended technical schools, the graduating staff does not comply with the local and regional demand, leaving a gap on the level of the local market in term of recruitment,” explained Ariss. Moreover, the increase in local restaurants and the high number of franchises of Lebanese concepts — not only Lebanese food — have created a very sharp demand for skilled labor.
Lebanon has also been unable to recover regional levels in terms of business conferencing. “Hundreds of conferences take place every year in the region, of which Lebanon is unable to attract more than 20,” said Chamsedine.

The Lebanese forté
However, Ariss was keen to emphasize that “the strengths of the industry in Lebanon remain in the dedication, innovation and professionalism of market players. As an example, during the last four years more than 30 restaurant companies, such as Casper & Gambini, Waterlemon, Burj Al-Hamam, Kabab-ji, Crepeaway, Zaatar w Zeit, Roadster Diner, Lina’s Sandwiches, etc. have been signing more than 400 franchise contracts in the Arab countries. This is living proof to the strength of the industry, whether nationally, regionally and someday internationally. Most of these companies are ISO-certified since they have been trained with Qualeb and ELCIM.”
As long as political stability remains, Lebanese emigrants, Lebanese expatriates and foreign visitors will arrive steadily. “The tourism industry will keep on expanding and pulling up its share of the GDP from 10% to more than 15% in 2012,” Ariss claimed. According to Sardouk, VAT figures from tourist activities improved by 40% last year and some 1.2 million tourists will have visited Lebanon by the end of 2008, in addition to the one million Lebanese expats who flock annually to their home country.
Achkar concurred, saying that most hotels around the country are fully booked, while he added that he doubts the global financial crisis will directly affect Lebanon. Achkar explained that although the crisis may impact investment levels, it will not hurt actual tourism figures. “Lebanon has an excellent year, ahead provided stability reigns over the country in the coming months,” Achkar concluded.

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Private Equity

Maghreb‘s frontier feel evolves to emerging market

by William Fellows
written by William Fellows

Although marked by the escalation of a global financial crisis, the close of 2008 is also showing the results of a healthy fund-raising season for a third generation of venture and private equity funds in the core Maghreb countries, with Morocco leading in domestic funds raised, followed by Tunisia.

Interest in Maghreb markets has followed a boom in global emerging markets’ private equity that began in 2005. As the model has proven itself, venture capital and private equity industry investment in the region have grown. Local Moroccan fund managers raised at least $1 billion in the 2006-2008 fund-raising season, an unprecedented sum that more than doubled funds under management, with a third generation of local fund managers gaining the confidence of core local and foreign fund investors for second or third funds.
In Tunisia, the Maghreb and Africa regional manager Tuninvest stood out, raising $161 million for its second Maghreb Private Equity Fund (MPEF II) covering the entire Maghreb region. This amount was more than double its first MPEF fund and Tuninvest also closed a second pan-African fund, a $25 million fund for investment in the African financial sector. The only Maghreb-based and Maghreb- focused PE fund, MPEF II is expected to emphasize Morocco and Tunisia, due to their greater attractiveness in terms of market depth and eventual exit opportunities. With reasonably successful private investment track records, attractive investment and business environments, and maturing and reforming financial markets, both countries are on the path to successfully leveraging their proximity to the wealthy Western European markets.
Venture or PE investors are drawn to the two countries’ domestic market growth and improving export capacity, as well as the emergence of a real exit market. These investors have achieved attractive trade sale valuations in deals with regional and European players, who are looking for the kind of quality firms that venture and private equity investors have nurtured. In the case of Morocco, the bourse has proven to be an attractive liquidity option for outstanding firms, and remains by far the leader of Maghreb region bourses in terms of liquidity.
Tunisia and Morocco now stand out as the leaders in venture and private equity investment in the southern Mediterranean basin and African continent. Other members of the Arab Maghreb Union (AMU) like Algeria, Libya and Mauritania, remained frontier markets for venture and private equity investors in 2008. And even though these countries are undertaking reforms to render private investment more attractive, they will remain frontier markets in a more cautious 2009. Challenging private investment climates with high uncertainty, cumbersome foreign investment and trade regimes, and limited exit possibilities will continue to limit classic venture or private equity investment. However, they will continue to attract discrete investments (versus dedicated funds), as market reforms take hold to enable better private investment and exit opportunities. As financial and investment infrastructure matures, the natural attractiveness of these markets will render classic private equity and venture investing more consistently profitable and secure, and thus attractive

The year ahead
Looking to 2009, the current global economic uncertainty and a global financial freeze that has touched most if not all major investors, suggest that 2008 marks the close of the current Maghreb fundraising boom. Nevertheless, the roughly 18 country or regional (Maghreb) funds, raised by Maghreb region fund managers in the 2006-2008 season, face an encouraging opportunity to invest well and counter- cyclically at attractive valuations in growth firms for an attractive exit in 3-5 years time. If local Maghreb firms can follow this investment cycle and intelligently overcome the near term market challenges, they will be well positioned to realize important returns after investing counter-cyclically. International funds, whether global or Middle Eastern, will likely continue to invest opportunistically but will be limited by investment focus and size.
The leading Maghreb region countries benefit from having launched small-and-medium-sized (SME) focused private equity and venture capital sector initiatives relatively early. Despite early disappointments, sustained public support as well as active investor interest driven by market liberalization helped overcome early disappointments and deliver real returns to patient investors.
The launch of first generation funds in 1991-1994 disappointed, returning more in terms of learning for local teams than financial returns to investors. The second generation of local Maghreb funds, mostly bank affiliates of 1999-2001 vintage, focused on later stage, largely growth and buyout investments of around $1-5 million in medium sized local or regional firms, as well as minority partnering in major investments by European firms in key growth areas like telecoms and tourism services. This strategy, in keeping with the investment teams’ more financially oriented profiles as well as market maturity and needs, seems to have paid off. While early stage venture investing has presented attractive opportunities for venture oriented funds with appropriate teams, a conservative business culture with a heavy orientation to founder and family control has limited opportunities. Similar challenges have limited the scope of later stage venture or ‘small’ private equity investments. Nevertheless, thanks to domestic market modernization and an emerging back flow of experienced Maghrebi managers from Europe and North America, venture and private equity firms have been increasingly successful in two arenas: one, investing in startups launched by ‘reverse brain drain’ managers with European or North American experience and two, attracting management talent to support buyouts or ‘transition financing’ as the post- colonial generation of managers near retirement and look to professionalizing their firms.
High-quality, objective benchmarking data is unfortunately not yet available, although reliable anecdotal data indicate that best second performers (with an unsurprising overrepresentation of independent fund managers) matched or beat their investors’ benchmark return expectations. Although a majority of exits realized from this generation were private trade sales (i.e. acquisition by another firm), some notable IPOs have been possible in Morocco, most notably High Tech Payment Systems (HPS).
Looking forward, investment focus for the third generation of funds remains relatively stable, with Maghreb region funds looking at growth and management buyout opportunities in a range of sectors. There is an accent foremost on opportunities in industrial investment in off-shoring, particularly the outsourcing of parts and components to lower-value finished products in the electronics and automotive areas. This is followed by interest in the telecom and IT sector, including investment in off-shoring oriented IT services like call centers. Other areas that are attracting investment include agribusiness and transport, both areas in which emerging modernization trends are expected to create real growth and innovation opportunities.
In the Middle East, mega private equity funds are the trend, at the upper end of hundreds of millions of dollars, with minimum to average investments in the upper
double-digit millions. In the Maghreb, locally-managed funds still remain modest in size, with most in the $15-50 million range, focusing on SMEs (mostly medium sized firms in industry and services). Initial investments fall largely in a $1-5 million range, with a few deals reaching $15 million. In contrast with the Middle East, core Maghreb region business expansion and growth seems to be driven by north-south opportunities, with Maghrebi firms and financers looking north to Europe and south to sub- Saharan African neighbors for export opportunities. Current linguistic affinities and ancient commercial connections help drive this orientation, assisted by an advantageous competitiveness and market familiarities.
The leading local venture capital and private equity firms have followed leading Maghrebi industrial and service sector firms in taking a north-south orientation, as evidenced by the only Maghreb regional fund manager, Tuninvest Group, managing both Maghreb and sub-Saharan venture and private equity funds. At the same time, for a variety of practical reasons, Maghreb-Mashreq investment has lagged. Anemic cross investment is an ongoing challenge. While Middle Eastern private equity and venture capital funds do often include the Maghreb in their prospectuses, actual investment has not followed. Subtle intraregional differences have impeded a comprehensive MENA strategy for private equity and venture capital.

The bottom line
Historical venture and private equity investment experience in the Maghreb has confirmed the classic observation, that all good venture investment is local. Regional differences in business style, a lack of Maghrebi integration and the relatively small size of PE investments continue to limit regional corporate strategies, in spite of a real potential for complementarities. These factors hinder a more dynamic Mashreq-Maghreb investment business and investment connections.
But overall, Maghreb region funds are well positioned to invest during this difficult economic cycle. An expanding investor base, with significant private local capital in partnership with international investors (increasingly private and European), should support the development of a well-institutionalized sector. The emergence of a pool of experienced local venture or private equity firms with clear local mandates matching market needs is encouraging for future growth.
Overall, 2009’s key opportunities in the core Maghreb countries (excluding the oil sector), will continue to be in industrial and services off-shoring, with a focus on leveraging the region’s proximity to Western Europe. Opportunities will emerge in the domain of modernizing lower value added agricultural products to export high- value added processed products to Europe. In the tourism sector, investment in the management and services sector of underdeveloped areas is also anticipated. The energy sector, outside of Algeria’s hydrocarbons, has attracted a potential interest, particularly in renewable energy. Algeria remains a country with high potential but considerable complexity on the frontier of private equity and venture capital investors. Although Algeria is attractive to PE investors, especially those looking for “chunky” investments, the absence of near-term exit strategies and ongoing delays in structural reforms are still deterring investment.
Maghreb-based funds will remain the most effective vehicles for investment in Maghrebi markets, where successful equity investment windows remain small in terms of initial equity sizes and ill-fitted to global or MENA fund investment needs. But in spite of logistic hurdles, the Maghreb region remains well positioned to capitalize on its connections with Western Europe.

WILLIAM C. FELLOWS is country director – Maghreb, Financial Sector Reform Program with FSVC

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Consumer Society

ICT – A slower connection

by Executive Staff
written by Executive Staff

Seven hundred billion dollars is a lot of money, no matter who you are. Just to put things into perspective, besides $700 billion being the amount that the US government is dishing out to its corporations in the hopes of saving them from economic peril, it is also the size that the global consumer electronics industry is said to be worth at the onset of 2009, according to the Consumer Electronic Association (CEA). A big chunk of that consists of the ICT market that governments in the region have been keen to remove from their bookkeeping.

Middle Eastern spending on ICT is expected to rise to more than $95 billion dollars in the next three years in a global marketplace that will top $4 trillion by 2011, according to the World Information Technology Services Alliance (WITSA) and Global Insight. Naturally, much of that $95 billion comes from retail expenditure on ICT products. For example, according to the International Data Corporation (IDC), the UAE spending on retail ICT currently stands at $5.3 billion and is expected to increase to $6.8 billion in the next three years.
Subsequently, the demand for ICT products continues to look promising to first-time buyers as well as existing gadget owners. “What is happening with these [ICT] products is that they are having a higher penetration rate across the population and consumers who already own these products tend to be highly technology oriented people, so the upgrade rate for these products is quite high as well,” said Adib Cherfan, CEO of Samsung’s exclusive agent in Lebanon.
Most of the substantial growth in the regional retail ICT demand can be attributed to the effects of the regional super-cycle characterized by the exponential advances in technology, a multitude of suppliers and mass adoption rates in the MENA region. “I think it is the nature of the technology as well as the suppliers lobbying to fulfill market needs and demand that is driving the [ICT] market,” said Cesar Chalhoub, vice president of ITG Holdings. Furthermore, the most pertinent effect that is driving demand in retail ICT markets is the perpetual price cuts that the industry is experiencing, with the knock-on effect on profit margins seemingly the worrying many people. “We don’t have any product that is not growing in 2008,” touted Cherfan. “Mainly, prices are the driving factor behind [ICT] industry growth.”
Since first-time buyers ultimately return to quench their thirst for technology, repeat customers and upgrade rates are proving to be the essential elements that are invigorating regional retail markets in 2009. “We see that existing customers will be the ones carrying the market in 2009 because they are the ones who will be acquiring new products and following new product trends,” explained George Khoury, CEO of Khoury Home, Lebanon’s largest consumer electronics retailer. Also, with the increase in competition resulting from the regional super-cycle and the subsequent oversupply of ICT gadgets to regional markets, customers are becoming more demanding when it comes to product availability. “Customers know what they want and if you don’t have it as a retailer they are going to get it from somewhere else,” said Chalhoub.
Above all, it is purchasing power that drives retail markets and within the ICT market the most significant trend taking hold in 2008 is the increased importance of retail financing. Even with a global credit crunch, regional banks (who are comparatively much better off than their western counterparts) are eager to provide funding to facilitate the ICT purchases of lower income bracket populations across the region. “At the end of the day, cash flow worldwide has increased in banks that did not go subprime or invest in derivatives,” Cherfan explained. “[Banks] need to use that liquidity to be profitable.” Moreover, customers are all too eager to embrace the attitude taken by regional banks. “Retail financing makes up almost 80% of our sales in ICT products in 2008,” said Khoury. The expansion and increased awareness of retail financing in local markets has brought lower income bracket consumers into the fray of ICT consumers and allowed them to purchase products that were previously inaccessible to them. According to Cherfan, “Now, even if you are in a lower income bracket, you will be able to get a credit rating and buy your ICT product.”

The notebook is king
On a sector level, the one that carries the most weight is the LCD sector of ICT gadgets, which is synonymous with growth patterns prevalent on the consumer electronics level. “Anything really related to LCD technology has been doing extremely well in 2008 and has replaced the desktop computer as the driving force behind the ICT boom in 2008,” Khoury stated. “We certainly expect this to continue into 2009.”
Furthermore, notebook computers are the big winners in the retail ICT game in terms of volume and revenue on every level of the business. In the Gulf, year-on-year third quarter laptop shipments grew by more than 95% to 982,000 units, compared to 268,000 desktops according to IDC data. The UAE led the pack with 530,000 units, followed by Saudi Arabia (323,000), Kuwait (65,800), Qatar (34,800), Bahrain (14,600) and then Oman (13,800). Moreover, other countries in the region, like Lebanon, are experiencing similar growth patterns. “In 2008 we have seen more than 100% growth in sales of notebook computers,” Khoury said.
Having moved out of the luxury item category, notebooks are now emerging in the region as the next big product that will carry the retail market. “The portable computer is still the major item of consumption in our markets,” Chalhoub pointed out. “Notebooks are the most important product for 2008… and this is expected to continue in 2009,” added Cherfan. The most important element affecting the sales of notebook computers in the region is price. The super-cycle effect has taken a stranglehold on the notebook industry that has seen prices plummet in recent years spurring on mass market demand. “Price is the main impetus for this growth in notebook computers in 2008,” says Khoury. “In the recent past, the price range for laptops used to start at $1,200. Today laptop computers start at $400 or $500.”

Printing getting pressed
Despite all the rosy signs of growth amid lower prices, not all ICT products are doing well. Different explanations apply to different products but the overriding theme of products that are suffering is that they are doing so as a result of the ICT super-cycle. In particular, printers have been hardest hit as the need for printed materials on the consumer end of the sector has decreased dramatically with the increase in data transmission capabilities across the region. “Output devices such as printers are suffering more because materials are more focused on transmission. Internet and communications have taken away the need to print,” Chalhoub said.
Another area that is feeling the weight of the super-cycle is the mobile phone sector. Even though turnover has increased

Q&A: Anssi Vanjoki
Executive vice president & general manager, Multimedia Nokia Corporation

E Where, would you say, are we in terms of technology?
Today, anything that is about emotions and feelings, like words or pictures, can be digitized. And if it can be digitized, it will be digitized. Then it can be put on the Internet and as technology progresses, everything, all feelings, all emotions, all literature and entertainment, all music, everything will be put in this cloud called the Internet. With devices that are able to use all that digital information, this can become as real to me as the physical environment or the analogue information around me wherever I am. The unnecessary use of analogue methods for creating and sharing the concepts of the abstract that the human being can understand is going to change, and we will be living, instead of just in physical reality, in an augmented reality, a virtuality as real to us as the world.

E Isn’t music a bit different? It’s not exactly always around us.
Music has universality everywhere. But it is also a business with rights holders, who are monetizing this feeling that I get when I listen to music. That has been broken. Much of it has been stolen. We aim to get it back to its owners and creators, and to ensure that this business and ecosystem is going to continue.

E How do you do that?
The Middle East is no exception to the world. There is the question of lawfulness and morals. Do you want to be a criminal? If you became a criminal by accident, because you did not know better, but then end up paying, you are not a criminal anymore. Given that, then, all the music you consume is going to become legal.

E But why develop a new music platform instead of using or linking to existing ones?
Because the platforms we have seen so far are inadequate, they are not offering what we believe the consumers are willing to have, but I want to emphasize that our strategies are not exclusive. The whole software is open source. We are inviting other people to join in rather than trying to sort of cut them out. Nokia is about connecting people. Nokia is not only offering commercial content to people but enabling people to create their own content and to share it in interesting ways with their friends.

to an average of 18 months, according to Cherfan, the outlook for the mobile phone sector does not look propitious. Having done well in previous years, mobile phone sales are now looking flat. Net income for Sony Ericsson fell 48% during the first quarter of 2008 and the company later stated that growth in 2009 would be “flattish”. Regionally, other companies, like LG, are falling short in 2008. “We’re not meeting our target this year,” stated K.W. Kim, CEO of LG Electronics Middle East and Africa, in an interview with Gulf News.
Cherfan explained that companies that concentrated on volume models had been growing until the market became saturated in 2008, at which point only the companies that invested in higher-end models continued to do well. “We expect 2009 and 2010 to become more and more difficult in the telecom sector with only one or two major players emerging,” he said.

Slowing down
It is not a presumptuous claim to state that everything in the retail ICT market will continue to be fine. However, the industry is by no means immune to the wider effects of a global recession. According to IDC data, in 2009 the IT markets in the Middle East and Africa will experience a growth of 8.5%. That figure is down from 14% in 2008 and the 12% prediction before the onset of the latest phase of the international financial crisis. Although the retail market is somewhat shielded from the IT market as a whole, since most of the spending cuts will be on the commercial side of the industry, retail sales and growth are bound to be affected as well. “Things will really reposition themselves back to a real environment and get out of a virtual growth cycle,” said Chalhoub. Cherfan added that, “The super-growth across the board in our region will definitely slow down.”
Comparatively speaking, the ICT sector (and in particular the retail side of the business) are better off than many other industries, which are still reeling from the effects of the global financial crisis. The need and the desire for ICT products look to remain strong as the region continues to regard technological advance as a necessity that cannot be forgone. The clicking will continue.

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Banking

Lebanon – Cedar‘s solid assets

by Executive Staff
written by Executive Staff

In recent years, the Lebanese banking sector has been breaking records time and time again. Within the first nine months of 2008, Lebanese banks saw an astounding $7.8 billion increase in deposits — smashing the already record-high $6.6 billion in deposits for the entire year of 2007. Bankers unanimously agree that 2008 has been an unparalleled year in Lebanese banking. With a relatively stable political environment, confidence levels are soaring due to increased foreign remittances, FDI, sound liquidity, strict regulations set by the central bank, a stable currency, a prosperous real estate market and an improved tourism sector. It is fair to say that the Lebanese banking sector is doing exceptionally well. In light of the global financial crisis, Lebanese banks are surely insulated but not isolated, resilient but not immune, and have been heralded in the international press as “a beacon of stability and growth,” as was stated by the New York Times.

The Lebanese central bank is performing extraordinarily, as the regulations and monetary policies it has set for local banks have created great insulation and success across the board. Because the central bank has been able to maintain the stability of the Lebanese Lira, Nassib Ghobril, head of the economic research and analysis department at Byblos Bank, strongly believes that, “the stability of the currency is the cornerstone of the resilience of the economy and of the banking sector […] It has also helped the inflow of deposits, remittances and capital inflows overall.” With a stable currency due to diligent efforts by the central bank, confidence levels continue to rise. Also, conservative policies — such as preventing domestic banks from purchasing structured financial products and subprime products — are chiefly responsible for the continuous sound performance of Lebanese banks. Ghobril is proud to say that being “conservative is cool,” especially since mishandled risk management elsewhere — i.e. in the Gulf, US, and Europe — has proven to be unbeneficial. Confidence in the Lebanese banking system is directly related to “the very strict regulatory frameworks on behalf of the central bank of Lebanon and the banking control commission, [as well as] the conservative practices of Lebanese banks,” said Dr. Marwan Barakat, head of the research department at Bank Audi-Audi Saradar Group.

Foundations of stability
Apart from playing it cool, there are various reasons as to why Lebanese banks have been largely protected from the international crisis. Firstly, seeing as they are so conservative, banks in Lebanon do not lend much — Barakat claims that “the total loans to the private sector as a percentage of their deposits is equivalent to 33%.”
Thus, with a low amount of lending exposure and high amounts of liquidity — Barakat asserts that “primary liquidity amounts to 48% of total deposits, which is very high by all standards” — hence, banks are less at risk than their regional counterparts. Secondly, since Lebanese banks are strong net creditors abroad, “the foreign assets of the banking sector are more important than the foreign liabilities in value — the difference is around $4 billion, to the benefit of [Lebanese] foreign assets.”
Only four years ago, Lebanon faced a great challenge as to how to disperse its high liquidity levels to OECD countries, because at the time, countries abroad did not need cash injections. Now, with the looming financial crisis, Lebanon has been able to successfully lend liquidity to foreign financial entities and thus make them liable to domestic banks in Lebanon. Ghobril finds it “very funny” that OECD countries “are coming to Lebanon to place money in their banks to support their liquidity. Can you believe this? It’s very ironic.” Ironic indeed, but it is surely a good thing for the Lebanese banking sector.
Another factor which is shielding Lebanon from international vulnerability is the fact that the country has contained housing loan exposure. Even though real estate prices have declined since their skyrocketing performance following the Doha agreement, they are stable enough to leave the banking sector comfortable and at present housing loans “are equivalent to less than 2% of balance sheets,” Barakat underlined. Another shield has been the Lebanese banks’ high collateralization. “The amount of loans against collateral is equivalent to 76% to those outstanding in the banking sector, which is a very high level,” Barakat said.
Currently, deposits into the Lebanese banking sector account for around 83% of total assets, “making them among the most liquid in the world,” according to the New York Times. Most experts agree that these deposits are coming from foreign remittances — i.e. Lebanese expatriates living abroad and depositing money into banks at home. Like his local counterparts, Ghobril contended that, “the expatriate remittances are a major source of capital inflow.” Fadlo Choueiri, head of corporate finance and economic research at Credit Libanais Investment Bank, explained that, “the Lebanese banking sector has witnessed in 2008 a unique inflow of foreign remittances from Lebanese expatriates living mainly in the Gulf region, with some 43.1% reported annual expansion in foreign inflows to $5.5 billion though July 2008, up from $3.95 billion in the same period of 2007.” Indubitably, Lebanese banks are increasingly dependent on expatriates. But, Barakat expects in the worst cast scenario that “remittances will be equivalent to 20% of the GDP in Lebanon, which is [still] a very high level.” Total remittances are predicted to exceed 2007’s high of $5.5 billion, which is one of the world’s highest per capita rates.

Pillars of the state
With remittances so high, Lebanon’s banks have been able to outgrow the national economy, with assets having reached a staggering $100 billion, while Lebanon’s GDP is valued at only $25 billion. On a side note, while governments across the world are stepping in to help their local banking sectors, the opposite is happening in Lebanon. Because the banking sector is so large, it has always been supporting the government. Ghobril illustrated this paradox, saying, “We were criticized in the past that the government depends [heavily] on the banks in Lebanon. But now, if you look at the global financial crisis, you have governments, finance ministries and central banks stepping in to rescue entire banking sectors in the US and in Europe. While in Lebanon it is the opposite, as the banking sector has been supporting the government for many years, and not at the expense of the private sector, this is a myth.”
Such remarkable growth has helped Lebanese banks to expand abroad, creating a larger client base and allowing domestic banks to cater to the Lebanese diaspora around the world. Most major players in the Lebanese banking sector — mainly from the alpha and beta groups — have been expanding regionally since 2002 and will continue to do so in the near future. Regional expansion illustrates the robust capabilities of Lebanese banks, thus boosting the image of the Lebanese economy altogether.
Tourism is also playing a major role in empowering the Lebanese economy, as well as the banking sector as a whole. In 2008 alone, Lebanon witnessed a 30% year-on-year increase, and Barakat holds that “it has been an important driver to the recovery that we are witnessing now.” All of these factors — tourism, remittances, high liquidity, real estate and stable currency — are sure to sustain, healthy, robust, and sound growth.

Forecasts
Analysts’ opinions regarding figures of the Lebanese GDP growth seem to vary. The majority of experts tend to agree with IMF forecasts, which prognosticate GDP growth for 2008 at 6% and 5% in 2009. Barakat believes that, “What supports growth in Lebanon in 2008 and 2009 is the fact that our economic recovery is tied to domestic factors much more than regional and international factors.” Given that Lebanon is not an exporting economy — Lebanese exports amount to only 10% of GDP — domestic growth cannot be predominately affected by any international or regional economic slowdowns. But, added Pik Yee Foong, CEO of Standard Chartered Bank in Lebanon, while the “Lebanese banking sector is unaffected by the global financial crisis so far … the market reality is that there will be an impact, it is inevitable.” Still, she believes that “we will remain resilient in the face of this [global] recession.”
Global challenges may thus create opportunities for the Lebanese banking sector, as “the leveling of playing fields offers Lebanese companies [the ability] to penetrate new markets,” said Foong. On another note, Choueiri expects Lebanon “to remain a safe haven for Arab and foreign investors along with Lebanese expatriates, thanks to its sound banking system coupled with an effective monetary policy that infuses an atmosphere of confidence among investors.”
Others are also quite optimistic, albeit with the possibility of political instability in mind. Even with parliamentary elections on the horizon in 2009, some experts think that the political environment will continue to stabilize and hence the banking sector is not likely to incur any negative impacts. Yasser Mortada, general manager at the Federal Bank of Lebanon, finds that “if nothing negative happens politically, 2009 will be another good year for the Lebanese banking sector.”
Barakat remarks that, “what the banking sector has to do is to continue in the same direction that it has been following over the past few years — which is a continuous upgrading of regulatory frameworks, taking lessons from the global financial crisis, while keeping in mind that the Lebanese banking sector has adopted a long term of circulars that have helped the sector avoid the crisis.”
Seeing as the banking sector of Lebanon has not been subsumed by the crisis so far, Choueiri holds that “the Lebanese banking sector remains immune from any imminent breakdown and is thus expected to preserve sustainable growth and prosperity in the coming period.”
While the chief of the IMF’s Middle East and Central Asia department, Domenico Fanizza, applauded the Lebanese central bank for protecting domestic banks from the financial chaos in October 2008, he cautioned that the worldwide turmoil may have incidental, negative backlashes on Lebanon’s economy. Such repercussions could be comprised of a slowdown in economic growth, fluctuation of tourist inflows, and decreased remittances from Lebanese expatriates. However, most analysts are confident that Lebanon’s banks will remain sound regardless of the economy slowing down slightly. With so many reasons for continued success, there are simply not enough significant factors in the banking sector’s way to sway it from further prosperity in 2009.

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Insurance

GCC & Levant – The fog of financial crisis

by Executive Staff
written by Executive Staff

The long-term effects of the global financial crisis have already begun to take hold of the industry as lower demand for oil, resulting from the effects of a global financial crisis, has pulled the rug from under the inflated oil revenues the region was lavishing in only a few months ago — albeit with double-digit inflation. Oil-rich governments do have a certain amount of financial cushion hoarded in their sovereign wealth funds, but individual disposable income will suffer as a result of lower cash flow in the region. Oil-poor nations will also be directly affected by less disposable income in places like the GCC, as their residents will be less able to send remittances to countries such as Lebanon, where remittances constitute around 25% of GDP. The decrease in regional disposable income will prove another substantial hurdle for a regional insurance industry already dealing with low demand and penetration.

For an industry that depends heavily on investment revenues, it comes as no surprise that Return on Investments (ROIs) have suffered greatly as a direct result of the global financial crisis. “Some of the largest players’ 2008 Q3 year-on-year income came down by 70% or more,” said Thomas Schellen, publishing editor at Zawya Dow Jones. Previous statements touting the region’s relative immunity to the effects of the financial crisis have proved to be nothing more than wishful thinking, as the Middle East’s equity markets have tumbled subsequent to the collapse of Lehman Brothers, exacerbating an already unstable market environment. As Executive went to press, the Tadawul, the largest Arab bourse by capitalization ($296 billion), had lost half its value in 2008. Other regional equity markets have followed suit creating a situation where the regional insurance industry will be hard pressed to find lucrative investment opportunities to prop up their recent profit losses in 2009. “The whole investment philosophy is changing […] what we see now is that whatever diversification you do or assets you acquire, everything is going down,” explained Farid Chedid, managing director at Chedid Re.

The bottom line dropping out
The perilous financial environment prevailing today has undoubtedly prompted regional insurers to shift their focus from investment income to technical underwriting, but they will be unable to completely retrench from the investment side of the industry, as “there will be no escape from their [insurer’s] financial dependency [and] this will affect the bottom line of insurers very directly,” Schellen said. Thus, all regional insurance companies can do to shield themselves somewhat from the effects of the global financial crisis is to change their bullish investment strategy to one that mitigates risk and, where possible, pulls out completely. “The average rate of investment income will drop heavily and become very conservative,” said Elie Nasnas, director general of AXA Middle East. According to Michael Bitzer, CEO of Daman, “People will start to reevaluate how they invest for retirement. In the past they were investing in real estate and stock markets here and in their own countries, and now I think that they will be looking for a more stable form of investment and return so this might spur more demand for such products.” Bitzer explained that risky investment products will also make up much less of a proportion of insurers portfolios as customers are less willing to embrace risks under the current financial circumstances.
Furthermore, the exposure of the American Insurance Group (AIG) to subprime losses has tarnished the image of insurance agencies in the public consciousness in the West but has yet to significantly affect the regional insurance environment. “People do not realize that this might affect their local insurer,” Bitzer said. “I think that the majority of our clients are not educated enough to understand that even AIG has a problem and maybe they should check with their own insurer.” Moreover, there is a perceived notion that the losses at AIG have aided many of their competitors in the region. “The troubles at AIG have helped their competitors; there is no doubt about that,” said Chedid. However, if the financial crisis continues to affect AIG the outlook for many regional insurance markets does not look promising, as “there are territories where if, God forbid, AIG falls you will have a crisis, like Lebanon, where their market share is huge and this would become a social problem,” Chedid concluded.
Both AIG and Alico Lebanon (a subsidiary of AIG) declined to be interviewed for this article. However, Osama Abdeen, executive vice president of AIG MEMSA released a statement to Executive saying, “AIG’s insurance companies remain financially healthy and are meeting all policyholder obligations. Insurance is a regulated business. Regulators ensure that each AIG member insurance company has adequate assets to back each policy and meet all policyholder obligations. Policyholders are protected and their policies are safe.”

Losses? What losses?
The unwillingness to divulge information to the public and press about profits and losses during a global financial meltdown is suspicious, as well as indicative, of a general industry slowdown and a loss of profit growth. “Numerous companies in the GCC have put off their announcements of their 3rd quarter results as far back as they can, to as much as 45 days, rather than 10 or 20 days” said Schellen. “This is an indicator that they are not really happy about what they will have to say.”
The lack of transparency in an industry that operates using reserves from their clients to attain ROIs seems contradictory to the interests of the industry as a whole. “The success of the insurance industry is linked to its transparency,” Chedid said. “There is definitely a need for better regulation and automatically more access to information.”
Countries like Qatar, Jordan and the UAE increased their transparency rating in 2008 according to Transparency International (TI), the global organization that monitors transparency and corruption. This, however, is not indicative of wider regional reform and the effects of the sector’s opaqueness are being felt in the regional insurance industry.
“One indicator is that there are laggards currently in announcing quarterly results,” said Schellen. “It took a lot of convincing in order for companies to tell us their breakdown figures in terms of the real benchmarks, like how much revenue comes from underwriting and how much comes from investment. In some countries, like the UAE, they won’t do it by line of business; they will give us technical results but will not announce them for each line of business,” he explained. In Lebanon this trend is proving to be a huge impediment to the growth of the local market, as current legislation is deemed inadequate and government is uncooperative in providing information to local insurers.
“Legislation only goes so far as to require companies to publish their financial statements,” said Nasnas. “We used to compile a report for the Lebanese market, but this year we still have not gotten the consolidated figures from the Ministry of Economics for us to carry on in making the report. Many reinsurers and insurers, both regional and international, as well as many international groups are asking for the figures from Lebanon for 2007 and we don’t have them.”
With the need for growth potential as high as ever, one can only hope that governments increase their efforts to increase transparency in the region for the good of the insurance industry and us all.

Propping up the industry
In times of crisis, the need to stay ahead of the competition is even more pertinent to a company’s operations and the insurance industry is no different. “Modernization is a necessity for local companies to be able to survive if we have an economic downturn in the region,” said Chedid.
To stay ahead, many regional organizations are making blanket investments in the modernization of business sectors and processes. One of the main areas in which the regional insurance industry is undergoing an overhaul is in the IT sector.
“Any company that wants to be significant has to beef up their IT and bring it up to global standards — this started in 2008 and will definitely continue in 2009,” Bitzer asserted. “Companies are focusing more on this, especially regional companies, because when you are of a certain size you cannot operate without a very efficient IT system,” added Nasnas.
Another area of the industry where companies are suffering is in the lack of adequate human resources for regional markets to accommodate the needs of the regional insurance industry, which is “an issue weighing heavily on the back of insurance companies in the region,” according to Schellen. Today, except for Lebanon, Egypt and Jordan, most of the insurance staffing is imported from outside the region. Furthermore, within the region itself local talent is being uprooted from countries in the region where insurance penetration and expertise is concentrated to the more lucrative areas in the region, inevitably causing a brain drain on many local markets. “In Lebanon we had a huge HR problem in 2008 because all the people we train get great offers from the Gulf and leave,” Nasnas said. Also, within the Gulf states many traditional staffers from the Indian subcontinent are moving back to their home countries, now that the opportunity cost of returning has decreased as a result of the emerging nature of these economies. The void created further exacerbates the human resource shortage in countries like Lebanon. “There is a need to replace [the workers from South Asia] and they are doing it with highly qualified human resources that mostly come from Lebanon,” Nasnas said.
At the end of the day, however, it is growth which will accommodate for any pitfalls in the insurance industry. The implications of lower oil prices will have their ramifications on growth capabilities across the region in 2009. However, the nature of the regional insurance environment has the ‘wiggle-room’, as well as the willpower to endure the effects of a global financial crisis and come out on the other end looking better off than when this whole mess began.

 

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The Buzz

Surviving the downturn with intelligent branding

by Joe Ayoub
written by Joe Ayoub

With the global financial downturn impacting on all markets, everyday business challenges have become compounded by reduced customer spending power, budget constraints and more cautious investor confidence. Companies may be turning to downsizing, or outsourcing to meet these challenges yet their biggest asset — their brand — cannot be approached in the same way. True, they can choose to stop spending on their brand, but in a time of crisis, there is actually no better time to leverage their brand assets to produce greater value.

Not just a name

First, it is important to understand what exactly is a brand. With branding still a fledgling topic in terms of awareness among local businesses, many mistakenly believe it means having a strong name in the market. Companies in Lebanon often think, “I have a famous name and it is selling well so this is a brand.” But often it’s selling because there is no real competition, or the product or service is cheap. When a serious competitor appears, they lose market share. In fact, a brand is a total experience: it’s the name plus the logo plus the brand promise and the delivery of that promise — brand equals trust.

Winners and losers

Competition can quickly sort the winning brands from the losers, but a crisis is another force to reckon with. In an economic downturn, consumer spending falls and purchasing shifts away from those brands which lack a strong bond with their customers. Many Gulf real estate developers have already learned this lesson, having spent lavishly on logos and communications but overlooking the need to bond with consumers. Thus, at the first sign of economic pressure, they began to suffer as investors sold their shares.

The new market reality is that consumers are not only spending less, they are  re-examining every single purchasing decision. One global trend also emerging in Lebanon is for strong brands to reach out to consumers in a way that takes advantage of the economic climate but avoids diluting the brand value. These brands are opening new stores, often referred to as outlets, where customers have access to discounted luxury goods. This drives sales for the known brand but by using an alternative name for the outlet, it avoids diminishing the perception of the brand.

This trend is a prime example of well-positioned brands creating value by driving demand. What all successful brands require is a deep understanding of brand mechanics, how their brands influence customer behavior and choice. Understanding the process of brand value creation is vital not only to drive demand but also to improve decision-making and budget spending.

Digging for value

A successful brand strategy consists of determining the brand essence — which is what the brand stands for — and the brand promise, which is what the customer expects to be delivered when they buy the product or service. The branding process starts with an internal brand audit. Working with the company’s management, the audit sets out to discover the core strengths and fundamentals of the brand, what makes it unique and how it reached its current status. Once this is identified, strategies are devised around the brand foundations.

The corporate strategy starts with a vision, a mission, a set of beliefs and the corporate attitude or personality of the company. Once these are set they should first be shared and believed by all employees working in the company so they can deliver in their daily work.

But branding doesn’t stop there; brand management is essential for it to be effective. If you have a car, you change the oil, maintain and clean it so that it always performs. A brand is the same; you manage its image, its performance, and you keep on improving the service or product formula, so that it consistently delivers on its promise.

Sending the right message

All of these are essential before a company should think about advertising. Companies suffering from ineffective advertising shouldn’t blame the ad agency but look internally and see if they have a clear message, brand promise, employee and customer satisfaction. Only once these are really well covered should they consider advertising.

So, in times of crisis, instead of focusing purely on where and how to cut costs, companies should use the period of uncertainty to look at their brand value and strategy, look internally and question everything they have been doing: At the brand level, are your customer touch points well structured? Are your employees motivated and happy? Do they believe in your brand and your company? Then look outward at the customer: are they having a positive experience with your brand? What should you improve?

With companies increasingly focused on the bottom line, the good news is that branding drives up the brand value; the more positive a connection with customers, the more customers will remain attached to the brand and be prepared to spend money on it. Many companies may be looking to outside investors to inject funds into their business, and with a good brand strategy, they can sell at a premium. Even for companies not looking for outside investment, branding done correctly is one way to ensure that once the crisis eases, not only will they still be standing but they will also be among the first to reap the rewards. 

JOE AYOUB is CEO of BrandCell

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Society

Lebanon – Aging potential

by Brooke Anderson
written by Brooke Anderson

A mid a global recession and a decline in wine consumption worldwide, Lebanese are raising their glasses as the country’s $25 million wine sector continues to grow at a steady pace. But experts say that despite Lebanon’s ideal climate for viticulture and a high level of expertise, the sector is still not living up to its potential.

 

World wine consumption dropped by 0.8 percent last year, according to the International Organization of Vine and Wine. But New World wine consumption has increased, and so has Lebanon’s, rising by 1.5 percent during the same period. 

“I think people are searching for a new taste. The wine consumer is always looking for a new product, and Lebanon is benefiting,” says Lebanese restaurant consultant Nagi Morkos. “Worldwide, there is a trend toward ethnic wine and food.”

With domestic consumption still relatively low, the country has relied on exports for most of its profits. Between 2002 and 2003, Lebanese wine exports doubled, and today they continue to increase. According to figures from the Lebanese customs, official wine exports totaled $13.1 million, up from $9.8 million in 2006. The United Kingdom, the biggest importer, bought $4.6 million worth of wine in 2008, compared with $2.6 million in 2006.

Even with the ongoing global recession, some vineyards are opening up to new markets, compensating for a drop in sales to their established buyers.

“We can’t say we’re not affected by the crisis,” says Emile Majdalani, marketing director at Kefraya, one of the country’s top producers. “But our brand is well established and we’re always working on long-term business plans. We’ve never opened so many markets as we have this year — a total of six new countries.”

Kefraya is now exporting to Australia, Benin, Cyprus, Nigeria, Mexico, Poland and Togo.

“We felt the crisis in certain countries, mainly the United States, Russia and Western Europe,” says Majdalani. “But our main markets are more or less compensated. We’ll close the year with no decrease in exports.”

As for wine sales in Lebanon, which has been relatively unscathed by the global financial crisis, he says business is booming, up 15 percent from last year.

From one resilient war-torn country to another

Last year saw a major increase in exports to Iraq, after five years of decline following the US-led invasion in 2003. In 2008, Iraq imported $158,000 worth of Lebanese wine, up from $88,000 in 2006.

“The Iraqi market fluctuates,” says Ramzi Ghosn, winemaker and co-owner of Massaya winery in the Bekaa Valley. “It could be an index of stability in Iraq, according to wine sales.”

Like Kefraya, Massaya is always looking at new markets and trying not to rely too heavily on its established ones.

Lebanese wine is a $25 million industry, large by Middle East standards but small compared with major wine-producing countries such as France, Italy and the US. Since 2005, the number of vineyards in Lebanon has doubled — from 15 to 30. Still, that’s small compared to neighboring Cyprus, whose vineyards number 60, and which attracts an international crowd to its annual wine festival in August.

Observers have pointed to Lebanon’s shift over the past several years from a whisky and arak society to a wine culture, and attribute this to the country’s relative stability over the past couple of years. An example of this is the opening of the first commercial winery in South Lebanon in 2003.

At Karam Winery in Jezzine, founder Habib Karam is basking in the relatively newfound popularity of Lebanese wine.

“Today, if you are a wine importer in America or the UK, it’s your responsibility to have Lebanese wine. Otherwise your list won’t be complete,” says Karam, who exports 50 percent of the 55,000 bottles he produces annually. “We are becoming like Chile and South Africa. Lebanese wines are in demand.”

At Nabise, a boutique winery in Mount Lebanon near Aley, which opened in 1999, the husband and wife co-owners Nazih and Mai Metni proudly note that their vineyard is in an area slowly recovering from sectarian conflict. Since they started a decade ago demand has steadily increased, although this year they admit they have been affected by the recession, as 70 percent of their exports go to the US. But Mai Metni is confident wine is a sustainable export, particularly as there has been a steady increase in foreign demand for their wine ever since they opened. “I’d like to see a hundred wineries open in Lebanon. We need exports for our economy to grow. What else are we going to export? Oil?”

New grapes for an expanding palate

But as demand grows, vineyards continue to open. In April, the Saade Group, a Beirut-based family business that primarily works in real estate and tourism, unveiled their new wine, Marsyas. In November, they will introduce their new Syrian wine Bargylus in the coastal province of Latakkia. Both wineries use their own grapes and are being bottled according to international standards. This is the first time that a company opens a winery in both Lebanon and Syria, another sign of Lebanon’s increased stability.

“Wine is good for Lebanon’s reputation,” says Sandro Saade of Saade Group. “The downside is that there needs to be more regulations that ensure quality.”

For now, most of Lebanon’s commercial wineries buy the majority of their grapes from farmers instead of using those grown at their vineyards.

“Lebanon’s wineries should start investing more in their own vineyards,” says Saade. “All of the wineries have done a good job so far. But we can take the wine-making sector to the next level.”

Despite the competition between Lebanon’s various wineries, Saade hopes to see more cooperation between them.

“What is a pity is that nobody is coordinating,” he says. “In Lebanon, we have everything on our side, and we’re not exploiting it. We need a common vision for the country.”

Unfortunately, right now, he says, “There’s a lack of strategic thinking in Lebanon for everything, including wine. There’s no Lebanese flag on Lebanese wine.”

But this lack of national unity might not be entirely the fault of Lebanon’s wineries.

In the summer of 2006, a National Institute of Wine was slated for opening but has been put on hold ever since the July 2006 war. The purpose of the institute, which would be a partnership between the ministry of agriculture and the private sector’s Union Viticole du Liban (UVL) would be to study wine and enforce regulations to protect the quality of Lebanese wine.

But as the project continues to get delayed, so wanes the momentum to get it started.

The UVL, which is supposed to represent all of Lebanon’s wine producers has only managed to attract 11 wineries, at least two of which have left the union over the past two years. They cite the group’s lack of vision and unity.

 Growing the fruits of success

However, despite the challenges facing Lebanon’s wine industry the ministry of agriculture sees it as a success story. “The wine industry is better than others in Lebanon. There’s competition,” says Mariam Eid, head of the agro-industry department at the ministry of agriculture. “You can’t compare it with olive oil, where they still use out-of-date technology. Wine has an important future in Lebanon. I hope the institute will open soon.”

Other people see the future of Lebanon’s wine industry in “enotourism.” Over the past year, Lebanon’s producers have stepped up their efforts to attract tourists to their vineyards, although it appears to be without coordination. The Saade Group is planning a hotel and wine museum in the Bekaa Valley, both slated to open in 2011. Kefraya says it is also opening a wine museum, which it expects to open next year. Carlos Adem, owner and founder of Chateau Faqra, a boutique winery in Kfardebian, is building a small hotel near his vineyard, which he plans to open next year.

This appears to fit well with a recent initiative by the Ministry of Tourism to promote rural Lebanon.

“Wine tourism is a part of agro-tourism in Lebanon,” says Nada Sardouk Ghandour, general director of the Ministry of Tourism. “When people see the wine label, they also see the name of the village.”

The home front first, then the world

But with all of the recent international recognition of Lebanese wine, it’s the Lebanese themselves who might be the ones preventing their local wines from receiving the domestic praise it deserves.

“In Lebanon there’s a snobbish attitude that everything imported is better,” says Ghosn of Massaya. “For them, it’s not always about pleasure. It’s about having French wine at the table so they can say, ‘I drink French wine.’”

Carlos Khachan, a Lebanese wine expert who leads tours of Lebanon’s vineyards with his group Club Grappe, agrees. He believes that if the Lebanese themselves have confidence in their own country’s products, non-Lebanese will follow suit.

“[The late industry minister] Pierre Gemayal told people to buy national products. If you love your country, you should consume its products,” Khachan says. “Why not apply that to wine?”

If Lebanon is to succeed in attracting more domestic consumption it will have to do so soon as tariffs on foreign wine have been decreasing, making the domestic market even more competitive. Several years ago, tax on foreign wine in Lebanon was 70 percent, but it is now only 40 percent.

“They keep on reducing taxation. In two years, there will be no duties [on foreign wine coming into Lebanon],” predicts Adem. “Lebanon will face more international competition. But this will make us produce more high-quality wine. With taxes getting lower on imported wine, we’ll have no choice.”

Still, to really get Lebanese wine on the map, it will take more than good quality, but also good name recognition. Michael Karam, author of the book “The Wines of Lebanon” agrees that “Lebanon will never make a genuine impact on the international wine market unless it embarks upon a proper generic campaign. By that I mean selling Lebanon — not Musar or Kefraya or Ksara or Massaya — as a wine producer.”

If Lebanon does not address this soon, he believes Lebanese wine “will remain nothing more than an ethnic curiosity, living on the reputation of Chateau Musar, which only appeals to a few devotees and does not represent the new generation of Lebanese wine. We are being left behind.”

He notes that even Brazil, which is not known as a wine-producing country, has a national wine campaign.

“We need to take on the world with our six million bottles, but if we don’t act soon we will have missed the boat,” says Karam.

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Editorial

The silver lining of crisis

by Yasser Akkaoui
written by Yasser Akkaoui

It’s that time of year again, but this time the party hats and horns are being distributed with a bit more caution than in previous years. Depending on who you listen to, the world is sinking into an economic crisis that could match the great depression that followed the Wall Street crash of 1929.

Certainly as I sit here in Dubai, writing this last editorial for 2008, the buzzword is restructuring. Every company is doing it in preparation for a 2009 that is yielding little in terms of economic and financial outlook. This was an economic crisis that began in America and it is the ripples of this crisis that are now beginning to lap the shores of the Arabian Gulf. Whether it becomes a tidal wave remains to be seen but cautious businessmen and financiers are battening down the hatches nonetheless.

This current restructuring will be accompanied by the inevitable layoffs that will see the departure of many skilled people from countries — Lebanon, Jordan and India — with a tradition of exporting human talent, depriving those economies of much needed remittances.

The potential upside to this rather dark development is that they will no doubt eventually be deployed to areas of fresh opportunity, such as Iraq, a nation that Executive has earmarked for considerable growth in 2009. It is a country rich with oil, minerals, agriculture and an educated workforce. It is high risk, but high-risk means high reward. As companies in the Gulf try to speculate by how much revenues will drop in 2009 – 10%, 20% or even 50% — such opportunities cannot be scoffed at.

Executive knows a bit about crises. It knows that publishing is not just about the good times when the ad revenues come in thick and fast. We stood by our readers during the 2006 Lebanon war and now we do not flinch in standing by our loyal subscribers across the Levant, the Gulf, Sudan and the Maghreb in this latest test of will and character.

Executive reiterates its commitment to the private sector, be it, banking, real estate development or trade and encourages the tireless pursuit of sustainable development. It is in these areas that we will channel our own energy; for the passion of those with the vision to achieve new goals will outlast even the gloomiest economic downturn.

Yasser Akkaoui Editor-in- chief

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