Vehicle dealers RYMCO (Rasamny Younes Motor Company) employ nearly 180 people and rank at the top of Lebanon’s automotive sector. Number one in units sold last year and number two in 2004 to date, they are also the only firm to represent the automotive sector on the Beirut Stock Exchange. In 2003, RYMCO opened a new main showroom and overhauled their communications infrastructure, installing a new corporate website. But more changes are around the corner. Inquiring about RYMCO’s new moves in products and management, Executive talked to sales general manager Fayez Rasamny Jr. and to chief operating officer, Abdo Sweidan.

To start with, please outline the range of your makes and the models you sell.

Fayez Rasamny Jr.: We represent three makes, Nissan, GMC, and Infiniti. For Nissan, we have the Sunny, Pathfinder, the new Murano, 350Z, Micra, and many models to come. For GMC, we have two trucks, Envoy and Yukon. For Infiniti, our main topic is the new showroom, which will open by late October or early November in downtown Beirut; that is in the new residential area of luxury buildings on the seafront strip.

Does it pay off to invest into big new showrooms in Lebanon?

FR: If we want to invest into Infiniti, we have to open a new showroom. This is the branding strategy and we have done our homework. It is profitable, perhaps not over two or three years but to launch a luxury make you have either to invest or not bring it to market.

Would you tell us how much you are investing into the showroom and how much it will cost you to develop the Infiniti brand in Lebanon?

FR: It is an investment of $400,000 in tangible assets and $300,000 in intangibles.

Does the manufacturer give you special incentives supporting that brand introduction?

FR: To be honest, no. We took the initiative to open a new showroom and differentiate Infiniti before Nissan told us to do it. In the future, they will contribute to advertising but this startup investment is 100% RYMCO.

Is the image of Nissan, your main selling make, changing in Lebanon?

FR: Before Carlos Ghosn, Nissan was really a volume seller, except for the SUVs, but now the brand is moving up segment. The brand Nissan is changing, absolutely.

Does the fact that Nissan CEO Carlos Ghosn is of Lebanese descent give you an added advantage in the local market?

FR: Yes, in the upper segment. Mr. Ghosn’s reputation doesn’t really affect the customer who wants to buy a Sunny for a company car. But individuals, who stay on top of the news, have heard many things about the new developments at Nissan that Mr. Ghosn has created over the years.

Can you tell us something about the composition of your sales by customer groups and price range?

FR: Of all sales, 40% are fleet sales and 60% individual customers. In terms of price, 60% is below $16,000. In fleet sales, the margins are really very low. SUVs and upper segment cars have better margins but of course less volume. It makes a balance.

Who are the fleet customers in Lebanon?

FR: Most of them are rental cars.

How does that impact the image of your brand?

FR: That is an important question. One of the reasons why we are not really concentrating on being number one is that we are trying to build a certain brand. That is why, with the new models, we will not sell all of them to rental car companies.

Do you think that this sets you apart from the rest of the industry?

FR: Of course, no one thinks now like we do. I am quite sure of that. Everyone wants to sell cars. We want to set the benchmark. 

Do you consider yourself still as part family-driven or as fully institutional in terms of your corporate culture?

FR: As of this year, I consider our company to be fully institutional but we still have to see the results. The family used to have all the management positions in the company. Six months ago, the company hired a new COO [Sweidan] who was chosen for his capabilities and his experience. This COO can hire and fire according to the results and qualifications, even me, if I am not competitive enough and not doing my job. In any major decisions involved in contractual agreements for the company, he will refer to an executive committee or the board of directors. Our main focus is to see our shares appreciating and this company making more profits each year.

You are also the only automotive dealer in Lebanon to be a publicly traded company. Was this a good move?

FR: When you are a family business, you have a ceiling. Now, we don’t have a ceiling. We can grow much faster; we can take professional decisions, not taking into consideration the family. It is a big plus for this company.

Abdo Sweidan: The benefits of going public are immense, through first opening of capital; second appetite from our partners to participate in the buildup of the company as far as capital investment, audit and growth; and third, the ability of this company to be run by corporate interests. Taking all of these together, you find that the uniqueness of RYMCO in this position is its sustainable advantage today over other car dealers.

Aren’t some of these advantages, particularly in attracting capital, at this stage mostly theoretical?

AS: No, they are real. Going public is only a vehicle for us to prove that we can attract more capital and this year, we are attracting fresh capital not only in car trading but also in car financing and other related services.

Some car manufacturers make more money from financing than from manufacturing. Are you planning to introduce something new to the Lebanese market in this respect?

AS: I can tell you one thing: in three years, car dealers who are not financial dealers will not be able to cope. We have to become financial dealers that work with partners to develop products – finance, insurance – that we can add up to our cars for the rest of the dealers.  

How many car dealers do you see as surviving in this market three or four years from now?

AS: Seven

FR: I was going to say eight

What will decide which dealers will survival?

AS: It is a matter of putting up the capital today. When I say seven, I have in mind only the seven dealers that are willing to inject capital into their businesses – but not too many dealers are willing to do that. Trading alone is not sustaining the branding requirements of the manufacturers. All dealers are today under corporate identity guidelines. This is an expense.

Are you on a tight leash from the manufacturers?

AS: We are today more like partners than anything else. We share processes.

But Lebanon, even as it is a trend market, is very marginal in size. How much of a chance do you have to influence things such as product policies, service policies, or image campaigns?

AS: Here, our [small] size kills us. We don’t belong to a region. In Lebanon, the only thing that we can build upon is being a trendsetter.

FR: We have models that are not imported to Europe and models that are not imported to the GCC; that’s why we have a lot of models.

But each model has its associated cost base; you need trained technicians and so forth. How much does this situation push your overheads and weigh on your profitability?

AS: That is the $1 million question. I wish we had the answer.

FR: For example, even though we know that we will not sell a lot of them in Lebanon, we have to import models such as the Micra and 350 Z, to prove that Nissan is not only about Sunnys and Pathfinders. It is a question of branding and we are not really looking at the overheads.

But in the long run, you expect to reap returns on these investments because you see yourself as one of the dealers surviving in the market?

AS: It is a basic question that we have to ask ourselves every day. Narrow product lineup, i.e. cash cow, i.e. proper unit separation, i.e. very small market share, or, basket of products, i.e. investment into spare parts, technicians, training, product launch expenses. 

The funny thing about it is that there is no in-between solution. The most dangerous thing is to be dependent on one model. After long deliberations, we have started to invest in the future. The future is branding of RYMCO, branding of Nissan, spinning off of Infiniti as a separate brand.

Does the GMC make still figure in your future?

FR: We went to Dubai three months ago and sat with the GMC regional management there. We agreed on a target that is much more than 100% up on our sales from last year and we hired a new brand manager who is only responsible for the GMC sales. Also, like we did with Infiniti, we hired a new communications department only for GMC to study the market for the luxury SUV, which is not large. We are investing in GMC and think we can take a big portion of this segment, especially as we will target fleet sales with the GMC Envoy.

How much does dealership loyalty count versus brand loyalty?

AS: There is a major conflict on how to brand first. Car manufacturers would like to brand their product, of course, for mutual benefit. But we know that in underdeveloped countries the strength of the name of the dealer is what plays a role in the credibility. Especially when we are talking about capital goods, what matters is the continuity, reputation and the credibility of the dealer and his ability to service. And this is what we are trying to create.

How much did you invest in building RYMCO as a brand?

FR: We really invested a lot, in sweat and tears and dollar wise. Over the years, RYMCO was at times number one, then number two, then again number one. There are a lot of intruders. They lowered their prices, dumped cars in the market, then they become number one for a year or two, and then RYMCO comes again. We are going after steady growth.

How vulnerable are you to rumors such as regarding alleged disagreements among the members of the families that built RYMCO?

AS: We are vulnerable, yes, but the vulnerability is lessened because of the nature of shareholding. Had we been strictly family business, then we would have been as vulnerable as any family-owned business. But this company is owned by investors.

Is the distribution of shares today wide or narrow?

FR: It is not concentrated. We have many investors, including financial institutions. 48% of the shares are owned by investors, and out of the 48% more than 50% are held by people who own 1% or more, the rest are scattered.

Mr. Sweidan, do you see yourself as a troubleshooter, entering RYMCO in some parallel way to Carlos Ghosn coming to Nissan?

AS: It is the same analogy, of coming in to reform, restructure, and put the company on the right platform.

What are your expectations in terms of profits? Do you produce future earnings projections to provide to your shareholders?

AS: We have to submit quarterly results and we have a plan for 2004 and the next two years. This plan has three elements, one is margins, two is to reduce debt and three is to increase sales to cash customers.

FR: Our plan is 20-6-60: this means the company plans for 20% market share, 6% operating margin and 60% cash sales, meaning cash and banks. 

Despite legal action taken against importers and dealers, the trade in fake spare parts is flourishing in Lebanon, eating into as much as 30% of official dealership businesses. It also represents a serious threat to driver safety.

“When fake car parts first hit the Lebanese market a few years ago, we could see they were fake from miles away,” said Camille Aoun, parts manager of T. Gargour & Fils, DaimlerChrysler’s exclusive agent for Mercedes car and car parts in Lebanon. “However, with every consecutive shipment the quality improved. Today, even we have difficulty spotting the difference between fake and genuine, so imagine how hard it is for the consumer.”

Aoun demonstrated by showing a box, complete with the Mercedes hologram, which once contained a fake water pump. “The only way we can tell that this box is fake,” Aoun explained, “is because the font of the letters Q and G is slightly different, while the color of the hologram and the pump itself are slightly darker. That’s it.”

Quality, as always, has its price. At first, the retail price of fake car parts in Lebanon was a mere 10% to 20% of the price of the genuine product. Today it’s about 40% to 50%. The vast majority of fakes stems from China, Turkey and Syria. Not surprisingly in that order, as China is the world’s undisputed king of counterfeit products. From the latest Italian designer clothes and Real Madrid football shirts to medication and Rolex watches: you name it, they fake it. There used to be two factories in Lebanon, which mainly produced oil filters, but both were closed earlier this year.

Though fake parts for other brands are produced, Mercedes and BMW are especially targeted. “It is a simple law of economics,” said one mechanic in Dora. “They are popular but expensive brands, so the importer makes a good profit. The parts of Japanese or French brands are much cheaper, while the market for say Porsche parts is just not big enough.”

“Last year, some 50 containers with fake BMW parts entered the market,” said George Assaf, BMW parts manager at Bassoul Heneine, official agent of BMW, Renault and Alfa Romeo. He was not able, however, to estimate the effect on annual turnover. “Most people, especially when the car is over four years old, buy second hand spare parts, which cost about 10% to 20% the price of new ones. Secondly, many people buy alternative brands like Bosch, which generally are up to 25% cheaper. Only people with a relatively new car buy new and real parts, which represent perhaps 10% of our annual turnover.”

According to Aoun, the trade in fake parts cost Gargour an estimated 20% to 40% in sales of genuine parts in 2003, a year in which Lebanon and the Middle East were flooded with fake parts. “That’s without the cost of legal procedures and lawyers,” he added. Mercedes spare parts dealer Khoury Ets, estimated a loss of 20% in sales over 2003.

According to Aoun, counterfeiters mainly produce Mercedes brake pads, oil filters, air filters, water pumps, windscreens, electronic devices, and even engine oil and brake fluid. “Fake engine oil can be very damaging for the engine,” Aoun said, “while fake brake pads are extremely dangerous. We tested them in one of our employees’ cars and within a month, parts of it were burnt.”

To reduce the risk of buying fake spare parts, one should be better off buying directly from Gargour or one of its 15 official dealers in Lebanon. Yet that’s easier said than done, as dealers, in turn, sell to many smaller shops and mechanics. Currently, there are hundreds of points of sale in Lebanon, many of which illegally advertise with a (fake) Mercedes logo, and so in the end, the consumer does not know who is a legitimate dealer. The situation for BMW is similar.

It should be noted however, that many of the smaller shops are perfectly reliable, while there have been instances of official dealers selling fake parts. In fact, two years ago, one of the Mercedes dealers was caught selling fake parts and Gargour immediately stripped him of his license.

“He was a big dealer,” Aoun said, “and came in crying like a child, saying he would never do it again. But for us, there was just too much at stake. In the end, he damaged our name and reputation. So, we appointed a new agent almost next to him.”

The characteristics of the parallel market in fake products are remarkably similar to the “official” one: an importer places an order at the Chinese factory for fake Mercedes electronic devices or BMW brake parts, which arrive eight weeks later at Beirut port. If all goes well at the port, the importer will collect his goods (with the help of a little gift here and there) and send a representative to approach dealers and mechanics to sell the products.

At the end of last 2003, Gargour started a campaign among dealers, custom agents and consumers to inform them about the problem of fake spare parts, which ended, according to Aoun, with success. “We haven’t been able to stop the practice yet,” he said, “but the problem is clearly much smaller now. Last month, customs seized some 600 to 800 boxes at the port and we know of another shipment arriving.”

Not everyone is convinced, however, that the trade in fake parts is declining. Compare it to the trade in counterfeit computer programs and games, which amounts in Lebanon to a whopping 70% of the overall market. Despite annual tough talk from importers and producers, the black market has remained at a steady 70% for years.

The market in fake spare parts is not fully comparable to the one in fake software – spare parts are more difficult to copy and, unlike the market for computer programs, Lebanon is not a main producer. On the other hand, Turkey and Syria are big manufacturers and they are very close by. What’s more, the market in fake products has the same bottom line as any other market: where there’s demand, there will be supply.

According to The Economist, in the 1960s it was Japan, in the 1970s Hong Kong, followed by Taiwan in the 1980s, and now it’s China. Each reproduced imitation goods until they had built up an industry that needed protection itself. Sooner or later, China will follow their example. Or will it? “The Chinese are very ingenious at imitation,” said 17^th century Spanish priest Domingo Navarette. “They have imitated to perfection whatsoever they have seen brought out of Europe.” BOX
It’s not just Lebanon that has to deal with the problem of fake parts: as early as 1997, Al Habtoor Motors emphasized the issue of fake parts and safety in the UAE. Last year, AC Delco, the auto maintenance and accessories subsidiary of General Motors, announced that the overall fake parts market in the Middle East is worth an estimated $200 million. In Saudi Arabia, AC Delco filed no less than 2,000 complaints against dealers in fake car parts. While the World Health Organization estimates some 5% to 7% of all pharmaceuticals may be fake, The Economist concluded that “as hazardous to public health, is the trade in counterfeit car parts, which may account for as much as 10% of the spare parts sold in Europe. Even more worrying is the thriving trade in reconditioned aircraft components, passed off as genuine along with fake certificates of authentication.” The Counterfeiting Intelligence Bureau (CIB), part of the International Chamber of Commerce, estimates that no less than 7% to 9% of all world trad

The bi-annual multi-million dollar Motor Show is becoming a regular fixture on the Beirut exhibition calendar. Taking place from 12 to 22 November, it is gearing up to beat its previous attendance record of over 100,000 visitors with more brands and models exhibited over a longer period and a bigger space. In the face of a wintry economic climate and soaring fuel prices, organizers and car dealers appear confident in the show’s ability to sustain interest, boost sales and keep the Lebanese dreaming of newer, better cars.

The biggest show of all time

Held at Beirut International Exhibition and Leisure (BIEL) center for the second year in a row, the Lebanon Motor Show has grown to become the country’s biggest exhibition over the years. And the organizers want more. Expanding the exhibition space by over 60% from last year’s show, the 2004 salon will be a sprawling 25,000 square meter auto extravaganza, catering for every product tied to the industry, ranging from the cars themselves to accessories, insurances and bank credits.

“This year will be a really big show,” said Nabil Baz, the director of Promofair, who is organizing the event with the Lebanon Association of Car Importers (LACI) for the second time in a row. “The Lebanon Association of Car Importers announced that they wanted the show to be bigger, spread out over a larger area, so as to measure up to the major international car shows elsewhere in the world. We hesitated to increase the exhibition area by this much initially, especially taking into consideration the current economic situation, which is not one prone to investment, but in the end we chose to take that risk, because we really wanted to have a spectacular show.”

Encouraged by the high turnout of the 2002 exhibit, which was hailed by car dealers as providing a major boost to their sales, the organizers set their targets high: to bring in more car dealers and make the Lebanon Motor Show the biggest car show of the region.

“We have been alternating our show with the one held in Dubai, whilst doing our best to push for the participation of all the representatives of the major automobile producers, and I think we have succeeded,” saiad Georges Tabet, vice chairman of the Lebanese Motor Show Association and a member of the Motor Show 2004 committee. “We are becoming bigger than the Dubai show.”

You have to be there

Now regrouping all the car dealers in Lebanon, the Association was able to ensure the participation of each one of its 34 members, which together will exhibit 50 brands in total. The event has become a mandatory one for anyone involved in the Lebanese auto business. “Everybody is participating, without exception, which is a first in Lebanon,” boasted Baz. “Last year, 15 to 16 brands were missing.”

Thanks to the added exhibition area, all the agents were granted the space they requested.  This year’s car show is set to display between 300 to 400 cars, ranging from sport cars, to SUVs, economy cars to luxury vehicles.

“We attend the motor show because everybody attends it,” said Nathalie Khalife, marketing manager at Bassoul-Hneine & Co, which represents BMW, Mini, Renault, Dacia and Alfa. “We have to attend it, whether we like it or not. A motor show that goes on for 11 days is an event in this country. Everyone wants to come and see what other brands are displaying. It’s also an opportunity to make people more aware of our product, what kind of models we have, our prices etc.”

A testimony to the growing importance of the car show in the eyes of the automobile industry is the attention paid to the stands themselves by the car dealers. State of the art equipment is brought in to make the display as esthetically pleasing and eye-grabbing as possible. “Some car dealers set up beautiful stands,” noted Baz. “Many of them bring in ready-made stands from abroad, which can be worth as much as $200,000 to $300,000. Among the most impressive stands at the 2002 motor show was that of Volkswagen, which was entirely made out of wood and had a mezzanine. They had a whole team of German engineers that came in to set it up. It was really impressive to watch.”

A multi-million dollar concern

In its quest for improvement, the Lebanon Motor Show has grown into a multi-million dollar enterprise, launching a massive promotion campaign, investing in a third hall of 6,500 square meters, and juggling a bigger team of workers to cope with the myriad of additional rules, regulations and organizational requirements that came along with its growth. Reluctant to reveal the magnitude of the show’s budget, deemed to be somewhat inappropriate at a time of economic recession, Tabet admits simply to a project worth “several hundreds of millions of dollars.”

“Just to give you an idea of the scale of the expenses,” added Baz, “I can tell you that the 6,500 square meters we added this year to the exhibition area cost us $1.5 million. The budget for this is enormous.”

Yet the organizers remain confident that it will be worthwhile, arguing that both the location and the timing of the event is set to maximize the number of visitors. “BIEL presents a whole number of advantages: it has spacious parking areas, it’s located right in downtown Beirut, thereby being easily accessible,” Baz explained. “Furthermore, this year, the show will last 11 days, seven or eight of which are holidays – two week-ends, Ramadan and the national independence day. As we’re neither overlapping with the beach season nor the ski season, these additional days of holiday ought to bring in a lot of extra people.”

Set at a token LL5,000, the entry fee is intended to be low enough to enable anyone with an interest in cars to attend, whereas simultaneously deterring people to simply “stroll through on their Sunday walk,” as Baz put it.

Something old, something new

Bringing people to the show is merely winning half the battle, however. Ultimately, the name of the game is generating sales and building customer loyalty. Taking into consideration the economic depression, this is no small feat.

LACI is waging a battle against the growing tendency to purchase second-hand cars in the country and hopes that the show will help promote the benefits of buying new automobiles. For some dealers, this poses less of a challenge than to others. Khalife remains relatively unconcerned by the effect of the economic recession on the sales of BMW. “In all honesty, 17% of the population of Lebanon has all the money and these people are our clients,” she said. “They don’t care whether the fuel prices are going up or down, whether there is an economic recession or not. They just want to buy cars and be trendsetters.”

Others, however, are feeling the heat more, and are hoping the motor show will help boost sales. “The economic recession and the hike in fuel prices is affecting our company a lot because all our cars have big engines and this is a problem,” admitted Nada Sfeir, marketing manager for Faouzi Khoury and Sons Co. Sarl, which represents Chrysler, Dodge and Jeep. “So we are hoping the motor show will be an opportunity to increase sales.”

Tabet expects many dealers to be exhibiting more fuel efficient cars with smaller engines, in addition to safe and environmentally friendly vehicles. Yet conversely, a number of SUV’s are also expected to be on display, further promoting the global obsession with the gas guzzling vehicles. Not forgetting the Lebanese soft spot for all things luxurious, the exhibition will also include dream vehicles such as the Porsche Cayenne.

“There is a trend towards luxury SUVs,” said Fadi Kumbarji, purchasing manager of Rasamny Younes Motor Co sal. “Many are shifting, even Porsche now has an SUV – the Porsche Cayenne. They are all coming out with SUVs, and it is becoming very popular in Lebanon.”

With their taste for the new and the luxurious, the Lebanese do not seem ready to let the car industry down just yet. “The Lebanese dream of cars,” Tabet said. “The market for cars in Lebanon will keep on growing.”

The local luxury car market is all but paralyzed in Lebanon, thanks to the sky-high customs duties implemented 10 years ago have. Taxes on upper high-end cars like Maybach, SLR, Ferrari, Maserati, Aston Martin, Lamborghini, Bentley or Rolls Royce run at close to 50% of the car’s base value, and that’s not including the 10% VAT and 8% registration costs. The result? Luxury vehicle buyers in Lebanon pay between 60% and 80% of the car’s base value in tax – so, a Maybach or SLR will set you back around $700,000, and a limited edition Ferrari costs more than $1 million. Even for wealthy Lebanese, prices like that are prohibitive, especially during a recession, and even free-spending Gulf Arabs recoil at the prospect of paying so much tax for a summer hotrod. With no reduction of customs on the horizon, some distributors are considering closing up shop altogether while many are selling cheaper models to make up for the loss. Others plan to continue offering exorbitantly-priced vehicles because they bolster overall brand image.

“There is practically no market for high-end luxury vehicles in Lebanon because of the taxes imposed on these kinds of cars,” declared Samir Homsi, president of the auto importers’ association. “The only way to solve the problem is to get rid of the registration fees and bring the duties down to at least 30%.”

Overall sales of high-end luxury vehicles in Lebanon do not exceed 30 a year. Aston Martin distributors, Mana Automotive, expect to sell five cars this year; last year they sold two. As for the Bentleys, they have been selling, on average, one a year since the high customs duties were implemented. The Maybach, distributed by Mercedes dealers Gargour & Fils, went on sale last year and only two have been sold so far, with no more sales expected by the dealers for the rest of 2004. The MacLaren SLR, also distributed by Gargour, debuted this year and two have been sold, with one more sale expected before the end of the year.  Faring slightly better are Ferrari and Maserati, distributed by Bazerji & Sons, which expect to sell eight and 11 vehicles, respectively, by the year’s end.

For Roll Royce, the news is even grimmer: distributors Saad & Trad haven’t sold one of the prized automobiles since 2002. Prior to that, they were selling about one or two a year. The drop in Lebanon Rolls Royce sales is of such a concern to the Rolls Royce mother company that they are sending over a representative to discuss the possibility of suspending Rolls Royce sales in Lebanon altogether. Also the agents for Bentley, Saad & Trad added the Lamborghini franchise to their roster this year, but have not sold any of the cars to date.

To perk up slumping sales, Saad & Trad, along with other distributors, are beginning to offer somewhat less-expensive, but nonetheless still pricey, models. The Bentley Continental GT, for example, costs around $90,000 less than the average classic model and the distributors expect to sell between five and seven cars a year. “The customer says to himself: it’s cheaper and it’s still a Bentley. But it’s not as though we’re going to sell 10 or 12,” noted Michel Trad, Saad & Trad director.

For their part, Mana Automotive expects to begin selling a cheaper version of the Aston Martin some time in 2005. Excluding VAT and registration fees, it will cost roughly $150,000, which is about $100,000 less than the current cheapest model.  “More and more car manufacturers are targeting what we call the Porsche niche,” explained Alex Samaha, Mana Automotive general manager. “They are developing cars that will sell at about the price of a Porsche Carrera. If we had an Aston Martin like that, then instead of selling four to six Aston Martins a year we might sell 15 to 20.”

Other brands, however, will not be offering lower-priced models. Mercedes will continue selling the steeply priced Maybach and offer the equally expensive MacLaren SLR because although almost no sales are expected, the two luxury models will bolster the Mercedes brand as a whole, buttressing sales of other Mercedes models. “It’s not the money we make out of it,” said Negib Debs, the Mercedes-Benz sales manager. “It’s done for prestige. Plus, Mercedes doesn’t want to leave the upscale segment in the hands of Bentley and Rolls Royce.”

Mana Automotive has an additional motivation for plodding away at its unprofitable luxury vehicle business. “Traditionally, strong distributors need a luxury brand,” said Samaha. “For the moment, the investment in the premises, tools, training, and parts that it takes to sell these kinds of cars, and the margins we make, make it a losing – at best a break-even – business.”

To further boost the company’s sales, Mana Automotive is set to add the Ford owned Jaguar and Volvo to its already existing portfolio – which includes Ford’s Aston Martin and the Land Rover – when the distribution of all four brands is consolidated in Lebanon.  “We will be well positioned to be the company under which such a consolidation would take place, since we already have two of their brands, and are selling the Range Rover well,” Samaha said.

For the rest of high-end car distributors, though, their saving grace remains the reduction of the government customs duties, which would increase sales dramatically. The government would actually benefit more from a rise in sales than it does from the customs duties it imposes on the few high-end luxury cars that are currently sold in Lebanon.

Homsi asserted that if customs duties were reduced the number of luxury high-end vehicles sold in Lebanon would jump from not more than thirty to well over 200.

Notably, he said, Gulf Arabs who for the moment ship their plush cars over for the summer, would begin buying cars here. Customs duties on luxury cars in Dubai, for example, run at about 5%. The Bentley dealer in Dubai sells over 20 cars a year.

Fadi Makki, director-general of the ministry of economy, said he agreed that a reduction in taxes would help the situation, but added that only the finance ministry could decide the matter. A spokesperson for the finance ministry, meanwhile, said only the finance minister was in a position to comment on whether or not the present customs policy was economically sound, but he was unavailable for comment as a result of the 21 October resignation of the cabinet. Market observers, however, say the situation is unlikely to change any time soon, as the people benefiting from customs duties are not the same as those who would benefit from increased sales taxes. The former have no desire to relinquish their source of income.

Some importers suggest that if customs are reduced, and Lebanon really establishes itself again as the playground of rich Gulf Arabs, the latter would account for the vast majority of increased luxury car sales. For the moment, they make up a negligible portion because although they can buy cars in Lebanon customs tax-free if they take the cars back to the Gulf, most want to keep the car in Lebanon as a summer toy. To do so, they would have to pay customs. It costs less to ship cars in from the Gulf.

Even if the government did reduce customs duties, other impediments to the sale of high-end luxury cars in Lebanon would remain, said some industry observers. First, since the war, and particularly since the beginning of the country’s economic downturn, a number of the Lebanese who can afford high-end vehicles don’t want to be seen in them. This is particularly apparent in the case of stately cars like the Maybach. Although drivers are less hesitant about showing off in a luxury sports care, Lebanon has no roads on which to race a Ferrari, Lamborghini or SLR.

Other industry insiders, though, counter that with the renaissance of downtown Beirut as a hub for the wealthy, well-off Lebanese are rediscovering their taste for top-end cars. And those – both Lebanese and Gulf Arabs – who buy the sports cars, are, they maintain, more interested in exhibiting them than in racing them. “The majority want to show off,” stated Trad of Saad &Trad.

Importers say the few buyers who can afford high-end luxury vehicles fall into two distinct categories: those with established wealth in the family – the bourgeoisie – and those whose wealth is newly-acquired – the ‘nouveaux riches.’ It is the latter, one importer said, who seek to aggressively flaunt their riches, to shove it in people’s faces, to provoke. They often buy several luxury cars. The former want simply to satisfy their egos. Their attitude is: “I can afford it, so I’ll buy it,” said one importer. “Of course the ‘see what I’m driving’ attitude is also present. But it’s in the background.”

This division is also apparent in the choice of brands. “I see a chairman of a bank in a Jaguar,” said Ferrari distributor Bazerji. “But a ‘golden boy’ from the stock exchange I see more in a Ferrari or Maserati. The Ferrari is a show-off car, for people who want to show they have achieved something.”

Distributors agreed that most luxury car buyers attach enormous value to after-sales service and personalized treatment. They want to be pampered by dealers, both during and after any purchase. And they want to be sure that the car will be looked after and properly maintained. Distributors have to establish a reputation. “We show them what we’ve got, the tools. We even let buyers meet the engineers. Marketing is by word of mouth,” said Samaha. “We don’t rely on advertising. People who are interested in this category of car know where to find them.”

Box

Aston Martin Vanquish S: $350,000 (incl. 20% customs duty on the first $13,300 of the car’s CIF value + 50% on the remaining value) + 10% VAT + 8% registration fees

MacLaren SLR: $706,100 (incl. 20% customs duty on the first $13,300 of the car’s CIF value + 50% on the remaining value) + 10% VAT + 8% registration fees

Maybach (short wheel base): $658,900 (incl. 20% customs duty on the first $13,300 of the car’s CIF value + 50% on the remaining value)

Lamborghini Gallardo: $254,900 (incl. 20% customs duty on the first $13,300 of the car’s CIF value + 50% on the remaining value) + 10% VAT + 8% registration fees

Rolls Royce: $602,000 (incl. 20% customs duty on the first $13,300 of the car’s CIF value + 50% on the remaining value) + 10% VAT + 8% registration fees

Bentley Arnage RL: $229,400 (incl. 20% customs duty on the first $13,300 of the car’s CIF value + 50% on the remaining value

Ferrari Enzo Limited Edition: $1,179,700 (incl. 20% customs duty on the first $13,300 of the car’s CIF value + 50% on the remaining value) + VAT + 8% registration fees

Maserati Quattro Porte: $150,000 (incl. 20% customs duty on the first $13,300 of the car’s CIF value + 50% on the remaining value) + 10% VAT + 8% registration fees

Some gadgets in the arsenals of today’s automotive designers and engineers will not befit the Lebanese market. Take for example one device that aims to improve the road safety of the new Citroen models C4 and C5, which had their world premiere this autumn at the Mondiale de Automobile in Paris and will be debuting next month in Beirut.

The cars have a system capable of monitoring lane-separating guidance lines on the road. Infrared sensors under the car trace these lines and trigger an alarm if the driver leaves his lane at a speed of more than 80km/h without setting a direction light. An alarm hits daydreaming/sleepy drivers in form of vibrations in his car seat, shaking them to attention where they might feel it most, although waggish motoring journalists immediately ventured that some drivers might now cruise in deliberate serpentine patterns along the highways, so as to enjoy a massage to their bottoms.

While Citroen’s new optional lane-crossing alert might not make it anywhere into the catalogue of standard equipment required by safety codes, investment into the system would definitely be wasted on Lebanese roads. Apart from reasons rooted in driving habits here, road conditions – beginning with uneven lane markings – simply wouldn’t be suitable.

This puts the device in the same league as some of the proximity alarms in big luxury cars, through which manufacturers wanted to protect their clientele from the experience of denting their fenders when scraping too close to other cars. In wheel-to-wheel Beirut traffic, some drivers had their alarm beep every second minute of normal maneuvering.

The serious reality underlying such amusing discrepancies between international and local driving cultures is that the global car industry is today dealing with issues that sometimes seem light years apart from the awareness of a market like Lebanon whose annual adoption of new vehicles would even in ideal scenarios be a split atom compared to current worldwide output of 60 million cars. But for having any chance to integrate this country into the much-discussed future of the automobile, the policy makers, auto importers and consumers of Lebanon must stay in touch and often catch up with these developments. 

It starts with the industry’s fundamental economic and operational concerns. The big car producers today encounter decreasing demand growth in their European, American and Japanese markets. Their mega-plants with daily output capacities of 700 or more vehicles per day are regarded increasingly as inflexible and past their prime and are challenged by leaner competitors with more modern plants and/or lower labor costs. As the most recent capacity reduction plans and intense disputes between labor and management in the European General Motors factories illustrated ever so clearly, these problems greatly burden manufacturers as well as society at large and put planning abilities of industry strategists to the test.

Analysts specialized on the automotive industry have suggested recently that the next big thing in car manufacturing will be in sourcing components globally from low-wage manufacturing locations and decentralized production of built-to-order vehicles in small factories very close to their markets. Studies indicated furthermore that the road to new profits for an automotive brand in a decade or so could be to turn itself into a mobility provider, a company that satisfies driving needs through not only in producing cars but employs a business model to maintain ownership of the vehicles and lease them to customers in several cycles. This would allow producers to realize their profits throughout the entire life of the vehicle from provision of financing and insurance services, along with revenue from after-sales maintenance and repairs.

 

Killing us softly

Could such fundamental changes in the auto industry be harnessed to the advantage of Lebanon? It may be a daring thought, even though the impact of such eminent changes in manufacturing and brand management on the local auto sector appears undeniable. However, in the car industry and among public sector planners here, only a rather limited number of forward-thinking minds seem today concerned with the evolution of mass mobility and long-term issues.

Besides automotive manufacturing and economics, these vital questions also regard technological changes mandated by the negative aspects of the century-old gasoline burning combustion engine. The depletion of fossil fuels – a concern exacerbated by growing demand for cars in new markets such as China, where sales of locally produced cars reached 1.51 million units in the first eight months of 2004 – is bound to resurge as the auto’s global economic bogeyman, illuminated scarily by projections of ever-rising oil prices.

Energy consumption and the health and climatic impact associated with the automobile are issues that societies ignore only at their own peril. Commitments to pollution avoidance, energy conservation and environmental care are understood today as guiding necessities for the survival of the global automotive culture. These commitments have already resulted in massive improvements in lowering fuel consumption and reducing harmful emissions, but they also require responsible decision making from national levels.

In these regards, Lebanon has a colossal untapped potential for improvements through policy making. Current taxation of motor vehicles is heaviest on new and most lenient on technically obsolete cars. As such, the policy incorporates a certain component of social concern for transportation needs of lower earners but runs very much counter to all ambitions of making traffic safer and cleaner.

If Lebanese lawmakers could envision a tax model capable of encouraging citizens to scrap over-aged cars and acquire new, energy-efficient ones – for example by allowing a limited-time transfer of the tax rate due on a very old car if it is replaced with a new, efficient model – they could create incentives for rejuvenating the national car stock with positive impulses for national health, safety and economy. Action is also mandated urgently in respect to controls of pollution levels and creation of mechanisms enabling authorities to interfere when public health is endangered. By not addressing issues such as the need to halt traffic during pollution emergencies, legislators here further widen the distance between the global and local automotive cultures.

Positive signs of assimilation of the Lebanese driving standards into global best practices came this year through the progressing implementation of the mandatory car insurance requirements and road worthiness inspections or mecanique. On the insurance front, the numbers of vehicles with third-party-liability insurance is increasing for both, bodily injury and material damage covers. This is thanks to the fact that well reputed insurers offer the bodily injury policy only in conjunction with a policy on material damage.

The combining of the two covers offers insurers a better chance for keeping their motor portfolios viable and enlarges the range of protection for society. Such policies are available at $100 to $120 from leading providers. This, insiders point, is still a bargain price and would probably need to increase by 50% to make the business of TPL motor insurance profitable for sector companies.    

The process of having motor vehicles undergo a technical inspection before issuing them with Mecanique stickers, in force since the beginning of the year, is also moving towards becoming a fixture in local driving culture. According to Amjad Hamzeh, claims manager and administrator at the Hadath inspection station, the facility processes about 2,500 cars per day, or half its technical capacity. Inspections involve a checklist of 156 points with direct impact on road worthiness, Hamzeh said, which are completed in about 20 minutes of checking per vehicle. The Hadath facility is the largest of four inspection stations in Lebanon, which are staffed with a total of 300 personnel.

At present, the number of cars failing to pass the unfamiliar test on the first attempt is relatively high, at 50%, but the inspectors anticipate those figures to drop in the future as drivers get more alert to the preparations they need to make for the new mecanique. Most defects are minor, with problems like malfunctioning headlights, direction signals or seatbelts, Hamzeh noted, and can be fixed easily.

The number one cause for sending drivers back is not even technical and stems from discrepancies between the vehicle chassis number and the number recorded in the car registration. The manager advised that drivers should check their headlights, seatbelts and especially compare the chassis numbers of the vehicles to their registration papers, to avoid having to re-visit.  

While he acknowledged that the stations had been confronted with complaints and had to battle various ways of attempting to bypass the inspection procedure, Hamzeh emphasized that controls against abuse were in place and functioning. The inspectors had heard about alleged dangerous practices of exchanging faulty parts only temporarily for the mecanique visits but never encountered evidence, he said and warned, “People should not trust third parties who take their money under the pretense that they could make their cars pass the mecanique without testing. That doesn’t work.”

There are many more aspects to modern mobility-driven civilization. A bit more to the sidelines of the issue of a better driving culture is the concept of keeping cars shining way beyond their age. A new local franchise enterprise scheduled to open at the end of this month has set its mind to do exactly this and create the Lebanese market for car detailing as well as protection of interior and bodywork.

Businessmen Walid Yazbeck and Simon Barakat acquired the franchise of internationally leading automotive services firm, Ziebart. They invested sizeable amounts into building a modern facility on the northern entrance of Beirut where cars can receive a fundamental cleaning and polish plus protection against stains on the upholstery, fading dashboards, and minor exterior dents. With a range of service packages priced from $90 to over $300, the company aspires to triple their expected initial turnover within five to six years, even as the entrepreneurs assume that they have to raise their clientele from a currently very low level of awareness. “The market needs to be educated and expanded,” Yazbeck said. “We will create the need.”

This leaves the thorny issue of driving mores and attitudes. The way in which this society looks at the car betrays a mixture of three widespread attitudes: infatuation with a symbol of alleged potency or attractiveness; use of the vehicle as a handy outlet for frustrations; and informality of road etiquette.  

All this isolates the Lebanese from the cutting edge in automotive culture. Whether sitting behind the wheel, co-driving or discussing it over a cup of coffee, many Lebanese readily concur that this country is rife with lousy driving – and seem frighteningly content to do nothing about it. But if Lebanese living abroad can function well in their adopted automotive environments (and are dismayed over the road behavior they witness when visiting home) and if an up-and-coming Brazilian race car driver by name of Anthony Kanaan can win the US IndyCar Series this year as the first pilot to complete all 3304 laps of the races – then at least the problem does not seem to be genetic. 

In the first nine months of 2004, Lebanon’s dealers sold nearly 15,000 new vehicles, nearly 17% more than in all 2002, the year in which the recession and introduction of the Value-Added-Tax had severely depressed the market for the country’s automotive dealers. Expectations are that by year end 2004, well over 18,000 new vehicles – an improvement of around 50% over 2002 – will have been bought by individual owners and fleet buyers.

These results are, however, only from dealers of new cars. While buyers can find some late-model, good looking vehicles on the lots of used car importers, these traders are not part of the dealership organization. Their overwhelmingly primitive presentation facilities and operations contribute nothing towards improving the state of the automotive sector in Lebanon in terms of business sophistication or customer service. In this respect, used car dealers and the army of small vehicle workshops scattered around the country are equally unproductive, maintaining the problematic status quo of an automotive care industry without universal standards on quality or safety, not to mention a high margin of fraud.

In the private sector, registered dealerships are the only ones with the realistic potential to spearhead the creation of a domestic auto sector fit to meet the growing needs for vehicular safety and reliability, energy efficiency and environmental responsibility. A good handful of official dealers have in the past two to three years already invested six-figure amounts into new showrooms and/or, more importantly, after-sales facilities and car maintenance workshops that satisfy the requirements of the international manufacturers they partner with.  

The sector is also more transparent than it was a few years ago. Albeit not conclusive in every detail, figures on sales provided by the importers’ association today allow analysts and interested public to gain insights into the business anatomy and market trends of Lebanon’s automotive sector. As industry and public planners still have nothing but vague estimates to rely on in assessing the size, age and composition of the national vehicle stock, the car importers’ data are highly relevant for better understanding the sector’s economic contribution and issues it has to face.

Looking at the stats

As the data for the current year reveal, European makes defended their position as the preferred choice of drivers in Lebanon. They accounted for 47% of units sold in the first eight months of 2004, even as the exchange rate between the euro and dollar (as well as pound sterling and dollar) continued to weigh against imports from Europe.

In a year-to-date comparison, European makes gained 31% in their sales over the same period last year, bringing their market share from 46% in 2003 to 47% in 2004. In 2002, Europeans had accounted for roughly half the cars sold in Lebanon. Japanese makes are the second main choice of Lebanese car buyers, even though the increasing popularity of Korean brands has eaten into their market share. Car makers like Hyundai, Kia and Samsung enjoyed a market share increase from 7% to 8% in 2002 and 2003 to 11% in 2004, corresponding to the lessening of the Japanese automotive grip, which has experienced a decrease in market share from 43% in 2003 to about 38% in the first eight months of 2004.

In fact, Korean cars, along with American makes, comprise the two strongest regions in terms of sales increases this year. US brands achieved the strongest percentage gains, their 575 units sold in the first eight months being more than double of what the US brand importers did from January until August 2003. However, in perspective to 2002, the market share of US brands edged up by 1.5 % to just below 5% of the total Lebanese car market.

The US increase over 2003 is partly a result of a temporary absence of the Ford brand from the statistics, whose reported jump from one to 58 sold units in a year-to-date comparison stuck out in the statistics as a stellar ratio. However, improvements for all brands of main GM dealers Impex (one of the dealers who invested substantial amounts into new showrooms and upgraded service facilities) certainly indicated a strong performance of American vehicles in the sector’s short-term evolution.

Pepper and shellfish

Looking at vehicle types, the markets for trucks and commercial vehicles remained slow. By contrast to the passenger car segment, sales in this segment continued to be dominated by the Far Eastern brands, with nearly 70% of the market, because of the cost advantage in comparison to European and American vehicles. Among subcategories of the passenger segment, Sports Utility Vehicles captured a 17% share of vehicles purchased from January to August.

When analyzing positions for this profitable segment, the Japanese beat their competition by claiming almost two thirds of the market between January and August, followed by the Europeans (19%) and the US (9%). Porsche’s venture into the SUV segment seems to have paid off for their local dealers, as sales for the Cayenne were almost double of those for their regular models. The Hummer found enough takers to confirm that the Lebanese macho toy niche is alive and kicking. 

While car sales are looking up on the whole, the picture is far from uniform on the level of the various brands. The super luxury marques struggled in particular (see story on page xX) but on the budget end, products from south-east Asia couldn’t score with buyers and the Eastern European Lada shrunk to a very marginal market share.

In the “merely expensive” section, things looked decent. The Japanese luxury brands Infiniti and Lexus appeared able to secure increasing favor with the up-market audience but German oberklasse stalwarts Mercedes also improved by over 40% vis-à-vis the first eight months of 2003. BMW and Britain’s Jaguar held their grounds with certainty and US nobles Cadillac more than doubled their sales.

Outstanding results on the middle rungs of the price ladder came from Peugeot, which leapt to the top of sales this year, followed by Nissan, Renault, and Toyota. The latter two improved their position relative to last year while Nissan sales contracted slightly in a year-to-date comparison. Between them, these four makes ruled the scene in volume with over 46% of all new car sales between January and August of 2004.

Traditional mainstream manufacturers with a midfield position in terms of local market positions were Honda and Volkswagen, improving their sales by 41% and 64%, respectively. Ranked between them in terms of units, Korea’s Hyundai nearly doubled their sales. Kia, Chevrolet and Seat advanced solidly in percentage terms. Two newcomers, the re-vitalized Skoda and the urban-life specialist Smart found friends.

A total of 23 brands enjoyed a plus sign in the statistics, but a significant number of car makers were not as lucky. From Aston Martin to Tavria, the association’s official records for the first eight months of 2004 showed no single sale for about 20% of the brands on its list.

In addition to these makes, 17 manufacturers registered drops in sales ranging between 5% and 77%. Those in decline included some well-known and long established names, from Alfa Romeo and Volvo to Citroen and Opel, as well as the single-model manufacturer, Mini, which had initially ridden into town quite strongly on the back of its youthful image.

As major and smaller dealers of mainstream brands agree, price is the leading element in customer buying decisions, followed by model appeal and after-sales service quality. In the first two points, local dealers depend much on the manufacturers. But in service quality and, an additional factor of substantial importance, local reputation, dealer performance strongly influences the market perception of a brand.

German make Opel – which once enjoyed a strong Lebanese market position – is an example of a brand that has suffered as a result of years of bad agency representation. According to current dealers Techno Cars, Opel had been well represented before the conflict years, selling 4,000 cars per year. But during the war, the dealership was vacant for a long period and the dealer did not offer any services, driving down the brand’s local reputation and resale value, Techno Cars manager Nadim Hakim told Executive.

To create a viable dealership, Hakim’s company started out by first importing a large supply of spare parts and rebuilding the car’s image. After 10 years of selling the brand, Techno is now on a solid footing regarding the resale value of Opel models, Hakim said. Here, however, the importance of the manufacturer’s awareness comes in. However, Opel’s inflexible pricing policy – the manufacturer did not adjust its offers to cushion the impact of the euro rise – kept the sales potential of the make stunted. It was only after regional dealers managed to gain the attention of the general manager at Opel’s Dubai office that factory prices for Opel cars were decreased for dealers in the Middle East. At the Beirut Motor Show this month, Techno Cars will be presenting the new Opel Astra and other models, from which the importer expects an upwards push for their sales.

With cost being such a decisive consideration in the local market, aggressive pricing is a tool that many dealers here employ in their battle for market share. This was recently reflected by a whole bunch of makes being advertised in wholly price-driven billboard advertising campaigns, which included quotations for some European models that were offered at up to $1,000 below their net price in key EU markets.

The aggressive pricing may well be held responsible for the fluctuation in sales of certain makes, giving some dealers a market share advantage over more conservative competitors. However, although such pricing strategy may result in the increase in sales, the low costs do not necessarily lead to an increase in profitability, which is especially true in the significant fleet car deals, which show very subdued profit margins. It is worth noting that many members of the car sector admitted to EXECUTIVE that in light of this situation, they expect a radical contraction in dealer numbers over the next few years.

The reality remains that even with an increase to more than 18,000 new cars sold this year, the Lebanese market for cars is not only naturally restricted in size, it is also beset with unnecessary obstacles and fiscal burdens that suppress sales of new cars. In this regard, nothing has yet improved during the past 12 months.