Kassatly

The international ready-to-drink (RTD) alcoholic beverages Bacardi Breezer and Smirnoff Ice, have become a global phenomenon with annual sales of over $1.5 billion. In Lebanon, the multi-flavored alco-pops have carved out a $3 million niche market that is growing by 15%. They are the drink of choice of the lucrative 20-30 year old demographic, who, in the last four years, have embraced them on the wave of beach and club culture, egged on by Lebanon’s modest tourism boom, and aggressive marketing campaigns.

Three years ago Kassatly Chtaura recognized that they may not have the international pizzazz, nor the brand equity of either Smirnoff or Bacardi, but what they did have was the ability to produce their own RTD, Buzz, and compete on price. Three years on, Buzz can lay claim to a 30% share of the local market. It has been a war fought on two fronts – with Bacardi and Smirnoff winning the battle for the pubs and clubs, while Buzz has found willing consumers in supermarkets, where it has been able to undercut its sexier rivals by as much as 40%. “They have so much financial clout in terms of their ability to promote their labels. We cannot realistically compete, but in the shops we can hold our own,” says Akram Kassatly, chairman of Kassatly Chtaura, sitting in his office surrounded by the dozens of bottles that make up the Kassatly Chtaura drinks catalogue – liqueurs, juice, arak and RTDs. Buzz sells 50,000 cases a year, more than enough for Kassatly to justify the $2 million he invested in the bottling machinery needed to manufacture Buzz. “It wasn’t a huge gamble. The plant we bought can also be used to make beer, juice sparkling wine and RTDs,” he says.

However, the multinationals are responding to the impact of locally made products, by cutting their prices by as much 20%. “They can afford to sell at a loss just to get us out of the market,” says Kassatly, who believes that the government is quite happy to see Lebanese industry reduced to its knees, if it means an open market. “The end result will be a bigger burden on the state if these companies go out of business,” he says. “With the costs we have to endure, we are practically competing with multinationals. These guys can spend a million on an advertising campaign without blinking, If we do this, we go out of business.”

Still, attack is the best form of defense. In anticipation of what he hopes will be a bumper summer, Kassatly has now revamped the original Buzz design and is preparing to launch a non-alcoholic RTD. This latest foray into the beverage market is aimed at teetotal customers (including no doubt the many GCC tourists), and even young teenagers, who still want to feel part of Lebanon’s endless party.

Kassatly says his decision to launch the range was a gut instinct on what he perceives the Arab tourist will want, and is based solely on the power of image. What he is essentially selling is a carbonated fruit juice disguised as an alco-pop. “If they can be seen holding a fashionable drink that won’t compromise their beliefs, or get them into trouble, it might just take off,” he says.

His initial run of non-alcoholic RTDs will be 20,000 cases, and despite his confidence in the habits of his target consumers, Kassatly admits he is stepping into the unknown. “We might have sales of $200,000, we might have more. Tourism is a significant contributor to the economy, and the feeling is that we are making a product that that will reflect this growth and encourage consumption within this sector,” he says.

Kassatly has never taken his eye off the export market, where his goods maintain strong brand loyalty among expatriate Lebanese: “We export 15% or our RTDs and 40% of our overall products, especially to countries with a strong Diaspora, such as Africa, Jordan, Sweden and France.” No doubt in response to a wintry local market, Kassatly hopes to increase exports by 50% in the next two years. For the time being he is prepared to soldier on. “All we can do is what we have always done, and that is to innovate within our know-how,” he says.

UNICERAMIC

The latest strategic move in the planning of Chtaura tile manufacturer Uniceramic, is worth more than a precursory glance for industrial Lebanon. The company has placed a bid for leasing manufacturing facilities in Iraq, and according to Uniceramic’s general manager Nabil Ghorra, the company is one of three finalists out of 129 bidders. Uniceramic’s Iraqi gambit would bring three new manufacturing units into the company’s fold, two tile and one sanitary ware factory. If their bid were accepted by the US Coalition Provisional Authority in Baghdad, the Lebanese company, together with joint venture partners, would aim “to invest in very fast expansion in Iraq,” says Ghorra. The three factories are equipped with the latest technology and would be perfectly complimentary to Uniceramic’s existing capacities, he says.

This corporate decision is highly noteworthy, not least because the move entails an investment value of some $10 million over three years. As a shift in strategic planning, it involves icing a $17 million project for building a sanitary ware factory in Syria, in exchange for a much larger entry into the challenging, but highly promising field of manufacturing in Iraq. In the long run, it would also increase pressure within the company to completely refocus production at the Chtaura plant on higher quality tiles.

The move comes on the back of a pivotal year in Uniceramic’s 30-year existence. For 2003, the company could report record sales both domestically and internationally. In terms of volume, the firm recorded a 55% increase in domestic sales last year, compared to 2002. In terms of dollar value, the increase was 37%.

Several factors contributed to making 2003 a record year and quite the opposite of what the firm’s management had thought would be a very difficult year. Anticipating a protracted military conflict in Iraq, Uniceramic had expected this war to cut into Iraqi sales of competing regional tile manufacturers, and saw danger in that these competitors might try to flood the Lebanese market with their surplus stock. In a preemptive move to ward off such competition and counter weakened demand, which they expected because of the economic fallout from the regional situation, Uniceramic’s board of directors at the beginning of 2003 decided to lower prices by 10% and slow production to 40% of capacity, during 10 weeks in the summer. As the year progressed however, the manufacturer found itself in a domestic market where demand for ceramic tiles had increased by a surprising 20% overall. And in the absence of strong price pressure from regional competitors, their tiles were suddenly the market’s best buy. Yet the record year did not pass without a sting. When some cost factors moved against their predictions, the locked-in reduced prices on products meant that the firm wrote a loss for the year. The reduction of output in the summer meant that for the first time in its corporate history, the tile maker could not satisfy demand for some product types. However, what matters above all else for the Uniceramic management, is that the company increased its share in its key domestic market, beyond its wildest dreams. “For us, it was really hard to think that one could gain that much market share,” Ghorra says. They may have been surprised by the size of their success, but Uniceramic has been investing consistently in modernizing and automating their factory over the past six or seven years, improving product quality and design and developing their showrooms. Rather than utilizing aggressive pricing alone, Ghorra could thus plausibly attribute the manufacturer’s domestic sales successes to structural improvements in product policies, brand building and marketing. And even as they are correcting prices upwards for this year, the company has high confidence in being able to consolidate their new strong position in a reinvigorated Lebanese construction market.

For Uniceramic’s international activities, Ghorra is optimistic about expansion in the world’s two largest import markets for ceramic tiles, the US and Germany. Following rewarding forays into smaller European markets such as Norway, the company now sees its opening for supplying premium quality tiles to those demanding Western markets. It is also aiming for a stronger role in the high-end sales of tiles in Arab markets, where a new showroom in Amman has produced encouraging results. As for future steps in the company’s strategy, much depends on Iraq. If the aim to operate the three Iraqi factories comes into fruition, the company would seek to produce all its lower priced tiles there. “It is a tremendous window of opportunity,” says Ghorra. “Iraq is the China of the Middle East.”

For the Chtaura factory, where Uniceramic has a well-established record of asserting job security, even when implementing automation in recent years, this would mean an increased need to emphasize production of high-value added premium tiles, increasing their share of production way beyond the 30% achieved today. “In two to three years, we would like to have only premium production in Lebanon,” Ghorra says. In any case, shareholders in Uniceramic have already agreed upon a $5 million capital increase for corporate expansion. The company also has a positive track record with financiers of previous investments in the Chtaura factory, including the International Finance Corporation. On the basis of a successful deal and the assumption of operations in Iraq, even the sleepy Uniceramic stock on the Beirut Stock Exchange could find new appreciation.

Nobody should think that you can’t teach an old tile maker new tricks.

DEBBAS

Cesar Debbas & Sons have been manufacturing lighting fittings, metallic suspended ceilings and panel boards in Lebanon since 1967. Debbas says it is Lebanon’s biggest such manufacturing company, and is equipped with the most advanced technology. It sells around 150,000 lighting units, and 40,000 square meters of false ceiling a year. It also owns manufacturing companies in Saudi Arabia, Abu Dhabi, and France. In Lebanon, it employs around 85 staff. Debbas exports between 20% and 50% of its products, depending on contracts. The company says its market share lies somewhere between 40% and 60% – most probably above 50% with revenues of some $5 million a year.

In 2000, Debbas experienced its worst-ever year since the bleakest periods of the country’s civil war, and since then things have got only marginally better. Revenues grew by less than 10% in 2003 over 2002 and were still 30% lower than in 1997 – Debbas’ best-ever year. Production costs continue to constitute close to 100% of revenues.

“We are running at 50% to 60% of capacity,” laments Debbas’ general manager, Samir Tabbal. “We would have to go above 70% to 75% of capacity to start making real profit.”

Debbas’ woes have been aggravated by the diminutive size of Lebanon’s industrial market, as well as inordinately high manufacturing costs, says Tabbal. “Our costs are increasing day by day. There are a lot of hidden costs and inefficiencies in the Lebanese system. For instance, sending a container from here to the port and putting it on a ship costs twice as much as shipping it from Beirut to anywhere in Europe,” he says. The high cost of electricity for manufacturers in Lebanon only adds to the problem.

Also of concern to industrialists is the general inefficiency of the Lebanese worker. This phenomenon stems from a lack of an industrial tradition and a sense of responsibility or seriousness, but is ultimately a consequence of the low salaries they receive. “At our plant in France, the worker generates twice the turnover he generates here, with the same technology,” says Tabbal.

If Lebanon’s industrial sector is to be kick started, markets must be identified through a joint effort on the part of industrialists. It is not enough though, to simply pen inter-governmental agreements – the accords must actually be implemented. One such agreement between Lebanon and Egypt has been respected only on the Lebanese side, says Tabbal. In Egypt, shipments are held up in ports and payment is delayed. In addition, Lebanese industrial companies must no longer be excluded from profitable projects in Lebanon, simply because they are not foreign, even when they are better suited to the task than the foreign companies that are selected. “To not accept us just because we are Lebanese is unacceptable,” Tabbal says. Further costs must also be reduced, Tabbal says. This, he suggests, is the responsibility of the government and the chamber of commerce. “But it’s extremely complicated. The system is so unresponsive and inflexible. The public sector is working at between 20% and 50% [of] efficiency,” he adds.

He believes worker efficiency will only be increased if Lebanese labor laws are overhauled. “If we change the labor rules, we will be able to force the worker to do what is required – while respecting his rights,” says Tabbal. “Most workers in Lebanon are underpaid. Here, you cannot force a worker to work overtime.” Tabbal nonetheless says that he doesn’t think labor law reform will happen any time soon: “I don’t think the industrialists are aware of its importance, and I don’t think members of parliament consider this issue a top priority.”

In the absence of any impetus for official change, Debbas is holding seminars for its workers during which the importance of worker responsibility and productivity is explained. Debbas’ overall current strategy – given Lebanon’s gloomy economic climate and the industrial sector’s panoply of woes – is to focus on ‘high added value’ products. Only with such products does the company feel it can compete with its European competitors.

At the lower end, “no one can beat the Chinese,” says Tabbal. “That’s why we try to avoid all competition with Chinese products and focus on the medium to high-end products where the competitors are European.”

It is by concentrating on the high-end, in particular on technical research, that Lebanese industry can carve a niche for itself in the global industrial order. “Maybe we cannot beat the Europeans or the Americans or the Japanese technologically on a systematic basis, but we can achieve breakthroughs where we have a product that is equal to, or even a little bit better than its European or American equivalent. We have to exploit this niche. This is where we can be competitive – not in large-scale production, not in standardized items, not in items manufactured by the Chinese or the Koreans,” says Tabbal.

SIOM

Formed in 1967, SIOM produces high-quality silverware for small, niche outlets. Started as a family business, it has since grown to rank, according to managing partner, Antoine Baroud: “among the top five high-end silverware producers in the world.”

The company employs about 70 staff, and has five outlets in Lebanon with annual revenues of $10 million. It produces about 3,000 different silverware items. “We have one of the widest ranges of silverware in the industry,” Baroud says. SIOM exports over 80% of its products, of which roughly 30% go to North America, about 30% to Europe, 10% to Africa, and the remaining 30% to the rest of the Arab world. “The local market, of which we have a 65% to 70% share, is small and shrinking,” admits Baroud. This doesn’t help Lebanon’s struggling industrial sector. According to Baroud, if the sector is to remain efficient, competitive and able to survive – Lebanese industries need to team up with European companies, so they are not left behind in the global age. In this way, SIOM is attempting to stay ahead of the game in such difficult times, by forming strategic alliances with European companies. In doing so, SIOM feels it will more effectively secure the foreign markets it needs to survive. “You cannot survive as an industrial base if your market is Lebanon,” Baroud says.

Growth over the next five, six or seven years can only be accomplished if the government imposes restrictions on “dumping,” reduces costs related to communication, electricity, raw materials and import duties, and establishes more incentives for producers. “Here in Lebanon we don’t have a long-term survival vision for the industrial sector,” he says, adding that for Lebanon’s industrialists, raw material costs run 20% higher than in Europe. “The cost of communication is also prohibitive. It is among the highest in the world, as is the cost of electricity.”

The SIOM manager argued that the government should develop tax incentives to help producers. “This is done all over the industrialized world. Anytime you export, they reduce your taxes and give you a 10% tax incentive. You can deduct these 10% from the cost of shipping,” he says. Overall, he explains that a tax break for exports could translate into a 15% reduction of costs. The funds freed up could then be used to improve productivity. “Production goes up. Sales go up. You expand your production facilities. You employ more people. This is much healthier,” he said. The government could also help increase Lebanon’s notoriously low worker productivity by not taxing salary bonuses for strong worker performance, Baroud says: “In Sweden, you can pay workers an additional 50% of their salaries as an incentive. So if a worker makes $1,000, you can pay him a $500 incentive without being taxed. In Lebanon, incentives are taxed. This is terrible. It means workers don’t care, because they don’t get any benefits if they are more productive.” Low-interest loans would also be beneficial, says Baroud. All these measures would allow Lebanese industry to be more competitive within the foreign market, while bolstering the growth of the sector domestically, he believes.

As of yet, these incentives have not yet been introduced, “because we don’t have an efficient government. If we had an efficient government with a long-term vision, things would be much easier,” says Baroud. The country is in need of across-the-board reform, to help revive the economic sector as a whole – which would in turn bolster the industrial sector. “We need labor reform, social security reform, health reform and tax reform,” he says.

Employment and unemployment are two words that politicians love to use. They understand that an economy is equal to consumption, which entails income, which in turn entails a salary and yes, a salary requires a job. Politicians are thus duty-bound to maximize employment and develop human resources, to achieve optimum productivity.

The same cannot be said however, for politicians in Lebanon, where the issues of human development and job creation remain entirely marginal topics. This would seem a reckless policy, when unemployment stands at anywhere between 10% and 19%. That’s quite a range. In the US, a move of 0.5% sends the government running for cover. That’s how important jobs are to an economy.

“The Lebanese labor market is in a state of ‘dis-equilibrium,’ away from the effective allocation of labor,” said Zafiris Tzannatos, economist and internationally renowned human development specialist. Previously the manager for the Middle East and North Africa at the World Bank, and the author of several books – he joined the American University of Beirut (AUB) last year as chairman in the department of economics. The country’s civil war and other regional factors are heavily to blame for the labor market’s troubled state, Tzannatos said. “These factors cannot be ignored. No economic policy can be rational until it realizes the constraints of local factors and politics.” Under the present circumstances, any review of the national human development situation is more a report on glaring problems and inadequacies, rather than an inventory of achievements. For starters, human development specialists are a rare breed in the Lebanese economy, be it as human resources managers in the private sector or public sector policy makers. More importantly, policy making on human development seems to constitute a non-event in our national government. The files on human development and job creation appear to slumber in the bottom drawers of the public administration.

Even if such condemnation were exaggerated, it is the bigger picture that matters, and how it is perceived by Lebanese opinion makers and society as a whole. The general consensus is that the government is doing “absolutely nothing” for human resource development. “There is no government support whatsoever in human resource development,” said Nadia Shuayto, a professor at AUB. “I don’t see it anywhere.”

According to Shuayto, the lack of public support extends to both the realms of elementary and secondary education and to the absence of continued education opportunities for adults through community colleges.

The malaise is hardly less pronounced in the private sector. “Even within corporate organizations, I don’t think that they invest heavily in human resources development,” Shuayto said. “I worked on our human resources benchmarking study, comparing Lebanon to the US and Europe. Unfortunately, we are not up to par with international standards on the aspect of managing human resources in our companies.”

Due to the structure of the Lebanese economy with its vast number of small and very small enterprises of less than 15 employees, these corporate advisors see it as entirely unfeasible to expect the private sector to undertake research into factors such as labor productivity and short- and medium-term labor supply and demand. This responsibility belongs to the public sector, they say. This is the point where the National Employment Office (NEO) attached to the ministry of labor comes in, or where it should come in. The NEO has four departments, for labor statistics, studies and planning, guidance and vocational training and employment. The mandate of its activities includes the assessment of short-term labor market demand, long-term trends, and the training and matching of job seekers with local and international companies active in Lebanon. However, the agency has not published any recent labor market statistics as of late, and since its director general went into retirement last year (after 25 years in the same position), nobody at the NEO has the authority to release information on the number of registered job seekers, or how many positions the agency has helped fill. Private sector job market experts say that the NEO does not coordinate with companies involved in the research of corporate labor needs, and that a law regulating the activity of commercial job matching and head-hunting firms is missing. These critics also decry the absence of any governmental initiative to investigate the structure of the Lebanese labor force and say that it is probably all too convenient for Syria, if data on the Lebanese labor market remains opaque. The ministry of labor in Beirut is traditionally headed by an office holder with close affiliations to Damascus, which undisputedly benefits from the absorption of a good share of its labor force in Lebanon. Under the status quo, analysts believe that immediate measures need to be taken to secure the quality of education and the initiation of labor market research. Measures on the former must be government driven. With the latter, significant initiatives can originate from outside the public sector.

But how important is labor market research data in facilitating labor market development? Adequate and timely information as well as analysis are “prerequisite factors,” Tzannatos explained, for effective policies in increasing development. Three critical elements, are first and foremost employment opportunities by increases in production and more general economic growth; secondly, the ability of individuals in the labor market to capitalize on these opportunities; and thirdly, institutional factors such as the interaction between government entities and labor market participants, in addressing private sector development and social policies. He is at pains to emphasize that he is not out to play the role of the proverbial new broom, or level wholesale criticism on the deficiencies of existing researchers. He rather wants to contribute to remedying the problem. “It is important to introduce modern economic analysis on the labor market in Lebanon,” Tzannatos told Executive. While other aspects of the Lebanese labor market situation are also in urgent need of attention – data collection would go a long way towards mending the worst deficiencies in organizing the labor market here, which is fundamentally of a well-manageable size.

Attempting to instigate artificial or protectionist measures against the influx or outflow of labor, would not be good for a country that has a long history of labor mobility. “As an economist, I support the free movement of both capital and labor,” Tzannatos said. “I would see Lebanon with optimism, partly because historically it is a society that has made it, continuously, and largely successfully since Phoenician times, and partly because potentially the country has a tremendous social capital, at home and in the Diaspora. The important things for Lebanon are to articulate a (economic and social) development agenda and to apply sound macro-economic policies.” A healing of the fiscal coffers and subsequent allocation of fresh resources would certainly bear well for the NEO, which is currently woefully understaffed. According to an official at the institution, the NEO will soon undertake a full re-engineering process that will leave it with a functioning statistics collection, an interactive website and active employment mediation services. Lebanon’s immediate concern however, is how to integrate the country’s 905,445 school-age students (helped by its 84,409 teachers) into the global economy over the coming 15 years. Lebanon has the teachers, the curricula and the schools to produce top students, but the system needs to be geared to the demands of the labor market. Instead, the politicians see new schools as nothing more than convenient bribes at election time. Over half of today’s students are girls, and the country would loose out if it failed to open new avenues to women for achieving careers. The failure to achieve human development would seriously endanger the Lebanese economy by eliminating its main edge in the global market place – vibrant human capital.

In early December 2003, a Pentagon decision outraged a number of American allies. US Deputy Defense Secretary Paul Wolfowitz issued a memo stating that several countries that had opposed America’s war in Iraq, including France, Germany, Canada, Russia and Mexico, would be barred from bidding for $18.6 billion in US-financed Iraqi reconstruction contracts. By January, the Bush administration’s mood had changed. It became clear that the stated rationale for the decision, namely that it would protect “the essential security interests of the United States”, somehow implied that countries historically close to the US, somehow threatened its national security. This was a bit too much even for noteworthy Bush administration unilateralists. At the Summit of the America’s in January, President George W. Bush rescinded the ban on Canadian companies, amid signs from the Defense Department that three or four states in all might be removed from the list of proscribed nations. If that’s the case, then it’s good news, because aside from the fact that the move was no more than petty payback, it undermined one of the key things that Bush and his acolytes claim to be trying to spread in Iraq: the benefits of the free market.

Writing in the New York Times, Nancy Birdsall and Todd Moss of the Center for Global Development in Washington noted: “All the fuss must seem rather strange to the more than four billion people in the developing world. After all, restricting overseas development contracts to domestic bidders – so called ‘tied aid’ – has been standard practice in the aid world for the past 40 years.” However, the authors didn’t defend the habit; they argued it led to one of the main problems in current aid spending practice -and in the Bush administration’s decision to bar non-American competitors: restricting bidders increases costs by limiting competition.

As Birdsall and Moss observed: “Advocates of improving aid effectiveness have long argued to eliminate the practice of tied aid – which, according to one economic study, reduces its value by 15% to 30%. Untying aid would allow poor countries to purchase the most efficient and cost-effective goods and services necessary for their development projects. That makes sense because the real point of aid is to help people escape from poverty. But old habits die hard.”

That may not matter much if American companies, particularly ones financing presidential election campaigns, benefit. However, as the post-war situation in Iraq has dragged on, and as American taxpayers have been compelled to pay tens of billions of dollars for Iraqi reconstruction, the matter of financial transparency has become highly sensitive politically. Very simply, voters are not keen to fatten the accounts of American multinationals like Halliburton, which recently overcharged the Pentagon by $61 million through a competition-free contract, even if the prevailing, and fallacious, wisdom in the administration is that what is good for American companies is good for America.

As writer Matt Welch observed in Beirut’s Daily Star, conflating companies with countries is “a marriage which the trade liberalization project has long been trying to de-couple.” The problem is that “where large companies are so intertwined with the identity of their countries […] their governments won’t allow them to fail.” This means that the pathologies of private firms instead of being filtered out by market forces are enhanced by them, so that mismanaged or corrupt companies survive.

A second problem is that it makes no sense to peddle the advantages of free minds and free markets to the Iraqis, if half of that equation (or indeed all of it) is ignored. From the outset, the American-led reconstruction process in Iraq has been dipped in controversy, some of it unjustified. And in a country like Iraq, where animosity to the U.S. presence is rising and where unemployment may be as high as 50 percent, according to a UN-World Bank report (including an estimated 400,000 soldiers), even the semblance of financial impropriety can be politically disastrous.

It is to avoid this that, for example, George Soros’ Open Society Institute instituted the Iraq Revenue Watch (IRW) project, to “monitor Iraq’s oil industry to ensure that it is managed with the highest standards of transparency and that the benefits of national oil wealth flow to the people of Iraq.” As IRW remarked on its website, implicitly linking transparency and political stability: “In many parts of the world, the lack of proper stewardship over oil resources has resulted in corruption, the continued impoverishment of populations, and abuses of political power… If Iraq is to become an open, democratic society it will need to develop transparent accountable institutions for ensuring honest management of oil revenues.”

Economic policies born of pique are rarely profitable, and the Pentagon’s intervention in limiting participants in Iraqi reconstruction was surely an example. The Bush administration has backtracked, and might console itself by recognizing that there are two beneficiaries: American taxpayers, who will get more aid for their money; and Iraqi citizens, who will get more money for their aid.

Michael Young is a contributing editor at Reason magazine in the US.