Driving your car in Lebanon has never been so expensive. Neither has the government swallowed a more substantive share of the transportation budget from private households. Since the introduction of value-added tax in February 2002, the government’s revenue participation has reached and exceeded 50% on the amount a consumer spends on the purchase of a new car, even in the middle market segment of cars that cost $20,000 to $30,000 ex factory. Data from Lebanon’s ministry of finance (MoF) reveal that on the level of fiscal income, government revenue derived from the car sector has increased from 4.9% to 16% of total government revenues. These revenue streams are a combination of registration fees on cars, excise taxes on imported cars collected at customs, and excise taxes collected on fuel.

The most pronounced increase has impacted fuel costs, where the fiscal burden on Lebanon’s driving population ballooned from little over $50 million in 1998 to almost $465 million in 2002, or 12.02 % of the government’s total revenue of $3.95 billion. Often summarily called customs duties in conversations by tax-weary citizens, excise taxes on new and used cars imported to Lebanon also brought a massive boost to government revenue, reaching $100 million in 2002. From a fiscal perspective, the only dent in recent revenue optimization from the car sector was that excise tax collection from car imports, which last year registered a 21% decrease over 2001, from roughly $126 million to $100 million. This decline in car imports (from $619 million in 2001 to $558 million in 2002) is widely accepted to be a result of the implementation of VAT. However, if last year saw no decrease in the government’s revenue from car imports, it was because of VAT. Of over $500 million, which the government collected from VAT on imported goods in 2002, $127.5 million (25%) were levies on mineral products, fuel mostly, and $58.5 million (12%) on transport equipment, mostly cars. Adding these amounts to the $620 million which the government-generated from excises and registration fees on cars and fuel, the fiscal revenue linked to automotive sales and car usage reached a cool $806 million, 20% of the MoF’s total revenue generation for 2002. Not forgetting of course the vehicle maintenance fees, or MECHANIQUE, which added nearly $86 million to the purse. Driving license fees netted the government over $8.5 million.

The government rationale behind increasing the taxation of fuel consumption and car purchases was, quite evidently, revenue optimization, Chadi Abou Chakra, a tax analyst at the ministry of finance, confirmed to EXECUTIVE. It did not include obvious components aiming at controlling the number of vehicles on the road or reduce fuel consumption out of environmental concerns. “The perspective of the government is to generate revenue,” he said, “by taxing people who make more money than others.” Some of the fees charged car owners in Lebanon, such as the MECHANIQUE fee, are quite low in comparison to other countries, Abou Chakra added, but he could not say if the car sector was generally overtaxed because the MoF has not yet undertaken a study of the automotive sector and related economic activities. For consumers, the most inescapable tax dues in the entire transportation scenario were evidently the petrol taxes. Here, taxation rates differ by fuel type. According to Abou Chakra, the rates also fluctuate frequently because the ministry of energy adjusts them in response to the ups and downs of the oil price to maintain the stability of the respective mandated gasoline prices at the pumps. As a combination of excise tax on fuel and VAT, however, the share of government revenue from each liter of gasoline sold at the service station pump is roundabout 75%, or LL15,000 out of a LL20,000 gas tank filling, the MoF analyst said.

Driving being perceived as daily need by at least two thirds of Lebanese households, the fairly consistent levels of government revenue from petrol taxes suggest that citizens, however grudgingly, paid the increasing charges on gasoline consumption without radically changing their driving patterns. They did not, however, renew their vehicles at the rate of earlier years, as evidenced in the 2002 contraction of the value of total car imports by almost 10 %, after VAT introduction altered the whole equation of buying.

The reason is simple enough to compute. The combination of customs duty, value-added tax and registration fees racked up the cost counter radically. Car dealers say they have to calculate 20 % in customs charges for the first LL 20 million of new car value. On the remaining value of the vehicle above LL20 million, the duty is 50%. Above a base charge of LL5 million in customs duty and excise taxes on used vehicles valued up to LL20 million, the duties on a used car are also 50% on the amount of its value that exceeds LL20 million. Although handsome, the fiscal revenue participation does not stop here. After the dealer has added his margin, the customer has to pay 10% VAT on the car’s value, which now includes both customs duties and dealer margin. As icing on the automotive revenue cake, the buyer faces an additional fee of 6% to 7% for registration – calculated not based on the car’s factory price but the transaction value between dealer and consumer that already includes two hefty tax components.

Based on a dealer markup of 5% – which local dealers say is barely enough to sustain their business – the price for a new sedan that left an American or European factory with a $20,000 dealer invoice thus will have jumped to more than a $32,000 acquisition cost to the Lebanese customer. If the car’s base price was $30,000, the driver here will have shelled out more than $50,000 by the time he turns the ignition. For a car that left the Ferrari workshop in Modena or the Mercedes factory in Sindelfingen with a sticker price of $150,000, one can liberally add 80% as surcharge of that original cost to see the fancy wheels spin in Beirut or Beckfaya. The regime of overlapping taxes has wiped the smiles of the faces of many a car dealer in Lebanon. From over 22,000 new cars that were sold in Lebanon in 1998, the sales dropped to some 14,000 units in 2002, according to figures published by the Automobile Importers Association (AIA). Dealers say an annual sales level of 12,000 to 12,500 units is today realistic in the new car market, and some describe the business as reaching the point where it starts to look unfeasible. It is beyond question that the high taxation of car imports has a strong negative effect on the automotive sector in Lebanon, even as it cannot be assessed with exactitude how much this field contributes to the Lebanese economy. According to Samir Homsi, president of the car dealers’ association, the country’s 35 car agents with official distributor contracts from international manufacturers employ about 2,500 persons directly. Adding to that the importers of spare parts and automotive supplies, plus a vast number of independent small car repair and service workshops would bring the number of people living in one form or another from the sale and servicing of motor vehicles to easily more than 10,000 employees or self-employed individuals and their families.

Other than in car manufacturing countries, the automotive sector in Lebanon is organized only to a very small degree, and even fundamental data on car usage are often broad estimates.

The Lebanese government’s policies of automotive taxes and taxation of fuel consumption, based on the country’s dire need for fiscal revenue, cannot be expected to change fundamentally. But evidence from the fiscal revenue evolution supports the claim of AIA president Homsi that the reduction of the government revenue share in the cost of newly bought cars would not harm the fiscal revenue stream. In an interview with EXECUTIVE, Homsi named the tax and fee burden as one of the main reasons why sales figures of AIA members have contracted. “I believe that if the taxes went down, the volume could go up. Then the government will be happy and the consumer would be happier, because he would be able to renew his old vehicle, which is now polluting the country and creating hazardous transportation conditions through the use of very old vehicles.”
 

We are living in a brave new auto world. Still fairly early into the automobile’s second century, fuel economy and safety features of modern cars have reached levels that make automotive technology appear close to the point of quasi-perfection, where further improvements, short of reinventing the wheel, seem hardly worth the additional effort. A look at the latest auto salon, or report, by professional car testers is enough to prove the point. Up to 10 airbags, traction control and electronic anti-skid devices, on-board computers and self-diagnosing engines, all the way to rain sensors and distance alarms, manufacturers have developed more means than ever before to take the human risk out of the daily driving grind.

At the same time, the choice of designs, brands, and philosophies has reached a degree of diversity against which all earlier epochs in car making pale in comparison and car dealers certainly have the means and profits to make these dream machines available. But even if the painful taxes were taken out of the equation, it appears that between meeting customer demands, the need for continuous improvement of their services and the necessity to develop the Lebanese automotive culture, local dealers are facing a sufficient load of challenges when promoting the sales of their cars. In many ways these challenges are related to the evolution of the car. While the global automotive culture, as set by the small group of advanced primary car-manufacturing countries in Europe, North America and the Far East, has achieved immense progress, it has also undergone significant changes. Lebanon has kept up with many trends but has yet to catch up with many others. Take for example manufacturers, who build cars that are primed for high-tech servicing. With more electronics under their hood than your average home PC, these cars require specialized equipment and technical knowledge that car mechanics of earlier generations did not need. To provide professional service and qualified repair jobs on an ever-larger share of models, mechanics need manufacturer supervised training and regular updating of their knowledge, and workshops have to acquire expensive diagnostic equipment and tools. These make their repair centers look like veritable automotive clinics, but also make it almost prohibitively expensive for small independent mechanics to service contemporary cars.

Lebanese car agents have in recent years made substantial investments to upgrade their workshops and provide the service level mandated by the brands they sell. At large distributors such as Impex, Gargour and Kettaneh, these investments ranged from several hundred thousand dollars to more than $1 million. It is obvious that these investments have to be recouped over years, and some dealers admitted that they still have much ground to cover in educating drivers about service schedules and additional service concepts, such as full-care options where the sales contract covers all maintenance for up to two or three years. Besides the expansion of workshops, distributors need to follow the marketing development of the manufacturer they represent. Numerous agents in Lebanon recently faced the need to invest heavily into new showrooms to comply with the presentation strategy of the respective automakers. Impex is an example of a distributor that just embarked on a $300,000 showroom expansion and refurbishment to accommodate the General Motors strategy of separating Chevrolet presentation facilities and representing both GM luxury brands, Cadillac and Hummer. A related inherent burden for every brand dealer is the dependency on manufacturer policies. Whatever the marque, the agent has to go with product policies determined elsewhere. This can require adjusting to changes of the brand or waiting out periods when an automaker does not supply a model that fits the taste of a particular market if the distributor cannot generate interest in the vehicle through localized marketing and advertising. A brand such as Isuzu has been fairly dormant in the Lebanese marke because the image of its Trooper decreased with the ageing of the model. The rejuvenation of models by Swedish manufacturer Volvo could give the brand a boost in the Lebanese market, said Sleiman Khoury, sales manger at importers Gabriel Abou Adal. But he noted that the new target group of younger customers first has to be convinced of the new sporty identity of what used to be regarded as a boxy, conservative vehicle, known primarily for its workmanship and safety. On top of brand policies and perceptions, there are the relationships between local agent and manufacturer or his regional office to be managed. As Volvo was integrated into the Ford management structure, the channel of relationship switched from a direct link with Sweden to an American connection by way of a regional headquarters located in Turkey. According to Khoury, this arrangement impacted the dynamics of the relationship, when, for instance, it came to pricing policies. “In Lebanon, you cannot erase the human factor and personal contact,” he said, “with the Americans, you feel as if you are losing this human touch.” Dealing with two manufacturers revealed different business and communications cultures, observed also the marketing manager for the Renault brand at Bassoul Heneine, Philippe Leclerq. In his experience, communicating with the French manufacturer was sometimes easier than relating to the Dubai regional headquarters of BMW – a brand also represented by Heneine – because managers in Dubai tended to view Lebanon as they did other Arab markets and did not take into consideration their differences. On the financial side, recent exchange rate volatility between the euro and US dollar has been one major cost booster and factor of uncertainty for importers of European cars. Agents tried to absorb the exchange rate increases as best they could and some reached special agreements with their European suppliers to have prices based on the US dollar, but many importers were forced to switch to pricing their cars in euro.

The market for new heavy truck sales was hit particularly harshly by the euro factor, dealers said. In addition, they cited lower demand for lorries here after the government mandated closure of many sand quarries. “It is a very bad market,” said one importer, “people who want to buy trucks cannot pay for them and banks are very reluctant to provide loans for financing a truck purchase because they fear borrowers will default on their payments.”

Financing options for car purchases are more accessible and have progressed over the past few years, but consumers still do not encounter arrangements that are as appealing as distributors sometimes advertise. With interest rates for a new car loan, based on a 20% down payment, standing in the 4% to 5% bracket as a flat interest calculated on the finance amount and charged at that height for each year of the contract, these car loans may still require a bit of development. Especially in this area of financing, however, a cancellation of registration fees and/or reduction of entry duties for new cars could go a long ways towards improving the attractiveness and feasibility of packages. On a car with a factory price in the $20,000 range, for instance, a political decision for limiting excise tax to 20% and annulling registration fees would easily bring down monthly payments by $100 for a buyer with a five-year finance contract. All things considered, car agents in Lebanon face what one could call a double reality. The infatuation of the Lebanese with their cars is instantly recognizable. However, it may not be quite as inimitable as the international business magazine, THE ECONOMIST, suggested in its 2003 fact book. The publication placed Lebanon on top of the world for its population’s rate car ownership, at 773 cars per 1,000 inhabitants. The assessment appears to be primarily an indicator that even the most reputed business magazines and their researchers are not infallible in economic and business matters. While there are no recent census figures on the number of actual roadworthy and circulating motor vehicles on our roads, Lebanese ministries and planners commonly assume a stock of between 800,000 and 1.1 million vehicles, including trucks and buses, a number that is nowhere near a global record in relation to the size of the population. The last available representative survey of households, undertaken by the Central Administration for Statistics in 1997, found that 62.4 % of the nation’s approximately one million households owned one car, including 15.4% owning two or more. Furthermore, 83.8% of the cars under ownership by the Lebanese were at least seven years old, including 12% with more than 20 years on their chassis. The over aged stock of substandard cars on Lebanese roads will gradually have to be pulled out of circulation if the country does not want to ruin some of its most important assets – namely, the health of the population and its appeal as a vacation target. On the positive side, both the demand and supply should in the long term be encouraging to Lebanese car dealers. Indeed, more than one agency has already shown in recent years that it succeeded in improving its presentation, service quality and even sales. The market here is small but it definitely appreciates cars, and the social environment favors even expenditures that most European societies would frown on. Lebanon’s wealthy – and sometimes the not so wealthy – display a fascination with classy automotive appearances and large engines that seems to know no restraint. And although many manufacturers nowadays have their regional distribution centers in the Gulf, new car distributors here still like to speak of Lebanon as the automobile showroom of the Middle East.

On the other hand, the relationship between the Lebanese and their wheels still requires a lot of improvement. From education of drivers to enforcement of traffic rules, society has not yet left driving attitudes behind which work only in a very small and informal frame. Respect of others on the highway and in city traffic, proper care for cars and adequate disposal of unusable vehicles and the regular pollutants resulting from driving, humane urban planning and clean public transportation are all hallmarks of advanced automobile cultures, and improvements are warranted here in each realm. Regulations and business standards that protect people against fraudulent roadside importers of cars with undocumented problems are as much in the interest of society as of the official car agents. But car buyers and interest groups also deserve to enjoy a market where fair competition is ensured for large and small players. The public have a right to be informed of industry developments, attempts by agents to change customs rates or governmental fee structures, and the real costs of owning and operating cars in this country.

Regarding these issues, the industry concerns of professionally structured automobile importation businesses and auxiliary suppliers and service companies coincide with the interests of their stakeholders, which in the matter of autos clearly comprise the majority of the population. Meeting these industry concerns would also work towards an automotive culture where the pleasures of ownership and driving tie in with the responsibilities of care and respect for driving etiquette, traffic rules and for the environment. The possibilities are here and car agents, like Volvo’s Khoury, obviously agree. “Lebanese car dealers are nice people.”

As weak demand in the Lebanese car market has taken its toll on dealer profitability, new opportunities emerged through several automotive brands that had been under-represented in Lebanon, or are new to the country. To address niches, distributors played their strengths, and some opted to mobilize synergies that they might not otherwise have utilized. In reviewing distributor strategies for compact, mid-sized and luxurious automobiles, EXECUTIVE talked to distributors of cars that range from the very new to the legendary, asking them about their experiences, alliances and expectations.

Think small, think smart

In the small car segment, the latest marque to enter the Lebanese market is ambitious and daring, while building upon a huge name and innovative technology. Smart cars are a division of Daimler Chrysler and a tremendous success story in Europe. Lebanon’s Mercedes importers, Toufic Gargour & Fils (TGF), believe that the Smart concept will work here as well and they have committed to a substantial investment to position the car in the local market.

“After five weeks on the market, sales are already up to our expectations, and a bit more,” said Cesar Aoun, Smart brand manager at Gargour. “We are really optimistic about the trend that we will create with Smart cars.”

If Smart has a beginner’s handicap in the Lebanese market, its main challenge lies in the misperception that a small car is neither powerful nor safe, Aoun said. In his opinion, Lebanese customers had an incorrect first impression of the Smart car, because gray market importers had been bringing the vehicle into the country for about one year without communicating the brand identity. Some people mistook it for an electric car.

In reality, the current second generation base model of Smart – a 2.5 meter short two-seater with high seating profile and plenty of visibility – is powered by a Mercedes Benz manufactured engine that has been prepped up after the first generation achieved remarkable sales results and reviews. TGF’s first priority after launching sales in mid September was to present the brand value of Smart, as a car that is safe and performs.

Official entry of the brand to the Lebanese market was somewhat delayed due to factors the importer would not specify. However, the late start brings the benefit that the Smart range has in the meanwhile increased to the Smart roadster and roadster-coupe, very sportive versions of the Smart concept. And TGF is expecting Smart to really climb in local sales with the introduction of a four-seat version in April of next year and a four-wheel drive Smart in 2005. With these latter models, the distributor aims to also break into a market share held presently by some compact cars, and with the complete palette of Smart vehicles, TGF want to conquer a handsome share of new car sales in Lebanon – at least 5% by early 2006, Aoun said. For the moment, however, the manager is treading with a certain restraint on the marketing front. For instance, he is reluctant to widely discuss the price of the vehicles until consumers have become familiar with the value that the Smart offers for the purchase amount. TGF is constructing a new showroom in the Beirut Central District to sell Smart where its main market is: the city. The facility is not large but in a key location at the portside Saifi entrance of the BCD and represents a substantial investment, the exact height of which the manager did not want to disclose before the project’s completion. The showroom will be dedicated exclusively to Smart cars.

Until the new showroom opens at the end of the year, Smart cars reside in a temporary and slightly unusual cohabitation with Mercedes vehicles in the main Dora showroom of Gargour. The arrangement is extraordinary because worldwide and in Lebanon, Smart and Mercedes are careful to maintain separate brand identities. “The image of Smart is totally independent from Mercedes Benz,” Aoun said, and TGF therefore developed a distinct Smart team that will present the make to customers. The brand separation does not extend to the back office and maintenance, however. As the three-cylinder engine of the Smart is a Mercedes product, the two brands share much of the same diagnostic equipment, and the Smart team here also wants to emphasize that drivers of these cars benefit from the after sales service at TGF, which has become a benchmark for service quality in the region. Economical, practical and innovative fun, are the three markers, which Aoun is attempting to set for the identity of smart in the Lebanese market, first to individual clients. However, the company also harbors a number of ideas for bringing Smart cars and Lebanese companies together.

Middle of the road

The segment of middle-of-the-road sized vehicles with their sedan, hatchback and station wagon varieties is especially crowded with contenders. The new competitor here is Skoda. The brand is no stranger to the Lebanese market but the name has been up for rebirth after the Czech car manufacturer was taken over by Volkswagen. The chance of introducing the new flair of Skoda to the local market enticed two of Lebanon’s big car agents to launch a joint venture, VW/Audi/Porsche importers Kettaneh and Mercedes/Maybach dealers Gargour. Since beginning of this year, the partners operate a Skoda Showroom on the Damascus Highway in Hazmieh, under the joint venture name Kettaneh-Gargour Automotive.

The objective of the Skoda dealership is to replicate the success that the automaker has had elsewhere since VW took the reigns at the Eastern European company. “The Skoda today is a well-sold car in many markets,” the joint venture’s marketing manager, Gergi Murr, told EXECUTIVE. “In Lebanon, the brand is also promising. However, we should give it some time.”

The distributor started to approach the local market seven months ago. This first year, it imported the Skoda Fabia and Octavia models in well equipped configurations with wide sales appeal. The priciest Skoda model, Prestige, is yet to be introduced to Lebanon, but will probably be available next year. The manager declined to provide sales figures for the first half year of sales of the brand.

“When I think about Skoda, I think about a car that offers highly regarded VW technology and at the same time, benefits from the Skoda image of being a good deal,” said Murr, describing the marketing message of the brand. He was quick to ascertain that the distributor first imported a stock of spare parts even before bringing the cars into the country, to counter an image of difficulty in making spare parts available that Skoda had been stuck with in the past.

As equal partners in the Skoda distributorship, Kettaneh and Gargour could utilize their joint expertise to develop a strategy that would position Skoda cars in a cost-efficient, step-by-step development of the dealership and gradual marketing investments. Presently, the direct team at the sales outlet is relatively small, with six members in all. But because of its access to market studies and expertise at the parent companies, the Skoda dealership benefits from a much larger pool of resources without additional staff costs.

The advantages also register on the service side. For the start-up phase, cars sold at the Skoda dealership are being serviced at the facilities of Kettaneh automobiles with their specialization in maintenance of VW automobiles, to which the new Skodas are closely related. With time, plans are to establish an after-sales service facility at the dealership equipped for standard maintenance and small repairs. But for all major works on body or engine, the Kettaneh workshop will remain to be the brand’s service address. In realizing their joint venture as, in Murr’s words, “a heavy deal between two heavy dealers,” Kettaneh-Gargour Automotive took a road that could prove viable for establishing Skoda in the Lebanese market, even in times of tough competition and difficult market conditions. As for Murr, he sees no problems on the road ahead. “There is no obstacle,” he said, “just a lot of work to position this good product.”

Dream rides

At the top end of automobile dream lists comes Ferrari – the Italian marque with cult status – which is doing well in Lebanon only because manufacturer allocations are proportional to the market size. Beirut Ferrari dealer, GA Bazerji, is one of only 40 Ferrari distributors worldwide. “Considering that our country is a small market, our allocation is small,” said the company’s managing director, Nabil Bazerji. “We are succeeding in selling our allocation because it is really small.”

Out of Ferrari’s annual production of 3,500 road racers, the Italian company earmarks four to five vehicles for Lebanon, where there is an established clientele of 70 plus individuals with the necessary means to own them. For Maserati, the other premier sports car brand sold by Bazerji, the number of vehicles sold wavers around 10 cars per year. As to the reasons why a customer will buy a Ferrari or Maserati, there are few surprises. The owner of the Ferrari will relish in the excitement of hearing that throaty roar of the engine, and he also cherishes the “pleasure of driving the world’s best sports car,” Bazerji said, but leaves no doubt that the main reason is image. “It is first of all a status symbol.” The importer has held the Ferrari dealership for three years and the Maserati agency since 1968, in addition to long-standing agency contracts for Lancia and Suzuki. Marketing the super luxury sports cars is a different endeavor from marketing the latter makes, which generally follow the advertising and communications strategies for automotive sales. The market approach with Maserati is selective, through the media targeting of high net worth individuals, along with event sponsorship and measures to build brand awareness. With Ferrari, the image is pretty much preset as that of a Formula 1 racing stable that builds cars mainly to finance its existence on the circuit. The manufacturer handles much of their communications directly, and Bazerji participates through being present in motor shows and organizing the occasional event for Ferrari owners, such as a dinner or a cultural rally.

There is no denying that buyers of a luxury sports car must be wealthy, but it is a misconception that they would dismiss their sense of cost scrutiny when it comes to pursuing their penchant. And that means that the super luxury sports car segment is no less dampened by the current taxation regime than other new car sales. While the country professes adhering to free market principles, Lebanon’s taxation system leans toward socialist style indiscriminate penalization of people who can afford to buy luxury products, Bazerji said, calling this approach “not correct.”

According to the dealer, the massive taxation resulting in an 80% surcharge on the factory price of your average Ferrari has made Lebanese buyers reluctant or unable to pay these charges even if they can afford an expensive car. These customers consequently reach for a vehicle residing one or two price tiers below what they would choose without the high taxation.

But Bazerji claims that in the luxury car segment, a further huge loss of opportunities lies in the erosion of sales to wealthy part-time residents. Arabs who own summer homes in Lebanon are deterred from buying cars locally and keeping them here because of the high annual vehicle registration fees. It is cheaper for them to have their luxury cars shipped in from their home country and drive them with foreign license plates, said Bazerji. “Hundreds of units are imported and re-exported every year, and the Lebanese government gets no revenue from these cars.” Not to mention that local dealers lose out on the chance to sell sports cars to this summer clientele. They do not even gain income from servicing these cars because they are shipped back to their stables in the Gulf.
 

The story of Wael Hafez, the 21-year-old car dealer who fled Lebanon with reported debts of around $20 million, is a supreme HISTOIRE DE NOS TEMPS. Not only is it a story of personal greed, it also offers an insight into how the “used” luxury car market has become a magnet for those who seek glamour and a quick return on their money. Although nothing more than a insignificant footnote in history, it is a typical Lebanese story: bankers, cars dealers and private investors were all burned by a young man barely out of school, blinded by the shallow dividends that make up the modern Lebanese dream.

A scion of a respectable and wealthy family, Wael Hafez was elevated from small-time businessman to selling luxury cars bought mainly from disgraced banker Ibrahim Abou Ayache. In order to finance the purchase of these $50,000 to $250,000 dream machines, Hafez offered investors outrageous return on short-term loans.

“If you loaned him $100,000 he would immediately write you two post-dated checks for $60,000,” said one ex-associate. “He was offering the best interest rates on the planet.”

The system, essentially the final stages of an international money laundering operation, was straightforward. According to insiders, all of whom refused to be named (“These are powerful and dangerous people,” one said), Hafez would buy a car, worth say $100,000, for $75,000 from Abou Ayache, who had brought it from a dealer in Germany with money from Al Madina Bank. He would sell it at a shade under market value, take his cut and repay the loan. During its brief incarnation, Hafez’s Link Motors sold 500 between January and May 2003. “That is nearly as much as is sold by all the authorized dealers in Lebanon in a month,” said one insider. When Abou Ayache’s Al Madina bank went into receivership in Spring 2003, the boy who began his career by selling cars over the phone found himself facing millions of dollars worth of debts. In order to keep creditors at bay, Hafez resorted to check fraud. This desperate stopgap strategy, (Hafez thought his luck would turn), only delayed the inevitable. After he fled the country, his many creditors besieged the Hafez family home in Verdun demanding their dues, but his father, who is allegedly in regular contact with his fugitive son, has offered all the debtors approximately 20% of their claims. Despite the uproar from many who say they have lost their entire life savings or inheritances, many of those close to Hafez have little sympathy for those who claim they were ripped off.

“A lot of people made serious money out of Wael. If they lost on some of the final deals, so what,” shrugged one. “Anyway they were all grown up and they knew what they were doing and no one put a gun to their heads. No borrower gives those rates if there is no risk.”

Wael Hafez was born in 1982 into a respectable Beiruti family of Syrian origin. Educated initially at the International College, he later changed schools and was sent to the more conservative Al-Bayader High School. Those who know him say the move was for religious reasons, while others suggest he failed to make the grade at the hugely competitive IC and that Al-Bayader was the only school that would take him.

The family was very wealthy; reputed to be worth around $300 million, a fortune built up from the manufacturing of household appliances, refrigerators, ovens and washing machines. Life for young Wael was carefree. The family was initially liberal (Wael’s mother drove an open-top Mercedes) but in his teens the family became increasingly conservative. This new prohibition brought with it a new set of rules: no movies, no going out, and no girlfriends. However, at 17, Hafez fell in love with Zein Hrake, a 15-year-old, “open-minded” girl. Early marriage was nothing new to the Hafez family and when Wael turned 18, his mother agreed to the union.

Hafez briefly enrolled at LAU but never completed his first semester. Those who knew him then and know him now, remember him for his charm and charisma. “Wael is a genius,” said one fellow student. “Everything seems so easy for him. He is very positive and not afraid of anything.” The good news for Hafez was that his marriage meant freedom. He no longer lived with his parents and his monthly allowance had increased from $4,000 to $10,000. Leaving his by-now-veiled wife at home, he started going out at night with his friends.

According to many of those friends, Hafez found security and a sense of camaraderie in their presence, a welcome antidote to the conservatism of home life. At the height of his “reign,” he invited around a dozen friends on an all expenses paid trip to Dubai, where they stayed at the Burj El-Arab. “He paid for the lot,” said one ex-associate. “The food the booze and even the girls.” Those who were around him at this time, remember Hafez asked his friends to call him “the Prince” (IL BRINZ) and then surrounded himself with four bodyguards. He was styling himself and his lifestyle on that of Taha Qoleilat, the local businessman who seemingly came from nowhere to own five star hotels, restaurants, and luxury car dealerships. In fact, Hafez’s weakness was cars. “He was a car nerd,” said one friend. “He could dismantle and put back together any model you could name. He knew where every little nut and bolt went.”

Not surprisingly therefore, for a young man who would change his car up to four times a month, he began to get an understanding of how the car market worked, buying and selling cars. By September 2002, Hafez had established a cellular phone shop and two months later opened Savoy Café on Raouche, the motto of which was “Where friends become brothers.” Hafez would buy his cars from Highway Motors, owned by Fouad Kahwaji, who sourced luxury vehicles from Abou Ayache. In 2002, Hafez was introduced to Mohammed Doughan, Abou Ayache’s trusted fixer.

Abou Ayache needed a new outlet for his cars. Both Highway and Quatro Motors (owned by Taha Qoleilat) were beginning to raise eyebrows. He needed a front man who was young, ambitious, wealthy, and above reproach. Wael Hafez fitted the bill and in March 2003 Link Motors was established at the UNESCO intersection on an already established car lot rented from Abdel Salam Al Wazzan, whom Hafez would later rip off for $400,000. Hafez sought investors to finance the purchase of the cars. With the kind of returns he was offering, they were queuing up to give him their savings or inheritance.

One car dealer recounted how Wael once walked in his showroom carrying a paper bag filled with money. Emptying the bag on the floor, Hafez counted the bills, the total of which came to $500,000. He then called Tarek Issa, his Kurdish office boy, who came on a moped, threw the bag in his face and told him to go and deposit the money at the bank. Without a receipt, the boy put the bag between his legs and zigzagged his way through the traffic.

These vulgar displays of wealth convinced investors that Hafez was somehow connected with a money-laundering ring. “We assumed that he was well-protected, that’s why we trusted him with our savings and the savings of our relatives,” said one investor.

Hafez was a one-man money machine. Sitting in his office he would go through a checkbook in less than half an hour. This impressive movement of funds did not escape the attention of the Al Ahli International Bank, which by now had identified Hafez as a blue chip client.

In late April 2003, with the indictment of Abou Ayache, Hafez’s mini empire began to crumble. “The cars dried up and there were loans to be paid back,” said one associate. “He had been overspending, which didn’t help matters.” He certainly had. In the fine tradition of Lebanese excess, Hafez had displayed rare vulgarity. On one occasion, he ordered four Quads worth $12,000 each from Itani, and which were only used once and then given away. On another, after his morning jog, he went into Aïshti in Verdun, where none of the sales staff paid him much attention. Hafez, presumably irked at the lack of respect, proceeded to spend $17,000 and ordered the shop manager to carry the bags up to his apartment.

But by now the chickens had come home to roost. As a stopgap Hafez resorted to check kiting, a process whereby a person with accounts in two banks can create an illusion of money in his account. A check drawn on the first bank is deposited with the second bank and before the check reaches the first bank for payment, a check drawn on the second bank is deposited to the first bank. If that bank is willing to give immediate credit in the interim, the person can use the bank’s money without first providing collateral and without paying interest. This scheme can go on as long as the person keeps depositing checks in both banks and both banks believe there is money behind the checks. However, instead of using two banks Hafez is alleged to have used two accounts in the same branch, a claim that casts doubt on the bank’s later contention that it was unaware of his activities. Using this method, Hafez was able to hold off creditors. The bank, which until that point had been satisfied with the millions that he allegedly passed through his account, was presumably cutting its star client some slack. During this period he was able to generate enough money, thorough gullible investors, to pay the alleged $20 million dollars he is thought to have owed Abou Ayache. By this time, the checks to his investors were being broken down into smaller amounts and post-dated over longer periods. In the last weeks Hafez was working long hours and living on Red Bull, while staying at the presidential suite at the Mövenpick Hotel. Friends said that he was looking stressed and tired. Then, when the checks started to bounce and with only the clothes on his back, he and his wife fled the country on June 2. “His family told him to go,” said one close friend. “They need time to sort out his affairs and this is why they are handling his debtors”

The fallout has been considerable. The Al Ahli International Bank, with whom Hafez deposited up to $45 million over a period of less than six months, were quick to place any knowledge of Hafez’s check kiting scams on the shoulders of its branch manager Samir Tutunji. For his part Tutunji claims that the incriminating bounced checks found in his possession were given to him by the bank to follow up on and that the Hafez account was handled from the head office in Bab Idriss. Either way, the bank appears to have been negligent in its surveillance of Hafez’s banking activities.

Hafez’s brief incarnation as a small time tycoon had come to an end. Those of his debtors who have not accepted the 20% pay-off are seeking, through the Lebanese courts, an international arrest warrant to be issued. Khaled Dairaki, one of Hafez’s two trusted associates (the other was Tarek Issa the office boy), was approached by the family to retrieve the post-dated checks. The family promised that all monies owed to Dairaki – a reported $600,000 – would be honored. The well-connected Dairaki was able to get back a reported $11 million worth of checks but is reported to have been given the runaround by the Hafez family when it came to his own debts. Finally Dairaki’s patience ran out and, through his lawyers, issued seven writs against Hafez, one of which led to the sealing of his apartment and the selling off of assets. A nation’s moral compass can be gauged by the caliber of its heroes. In more developed nations, heroes set the benchmark for those to come. They may have suffered for a cause, encouraged the underprivileged, set new standards of sporting excellence, pushed back artistic boundaries or simply demonstrated such distinction in their individual fields as to have left us gasping and inspired at their accomplishments. In Lebanon, it seems that our heroes can be crooked, corrupt and downright nasty, just as long as they are rich.

The Automobile Importers Association teams up all local car agents who hold distributor contracts with international auto manufacturers. Avidly working to represent the interests of these primary agents, the AIA emphasizes a unified presentation of official importer concerns to the media and Lebanese public. EXECUTIVE talked to the president of the AIA, Samir Homzi.

E: What are the association’s main concerns?

SH: Our aim is to make new cars available to all people of all budgets. New car dealers are today making vehicles available in a price range that starts at around $5,000 to $6,000. These are economical, trouble-free new cars that consume very little unleaded gasoline. They are sold with manufacturer warranties and with payment arrangements over five years that make for monthly payments of $100 or $125 to families with a lower income.

E: How long does it take before new models are available in the local market?

SH: Sometimes new cars are launched in Lebanon prior to Geneva, Frankfurt, and Paris and in some instances, new cars have been launched in Lebanon for the Middle East and for the whole world. In many instances, new models are launched in Europe prior to being introduced to the Middle East. This is for technical reasons, whereby the manufacturer would like to optimize the vehicle for this area.

E: Turning to recent developments of automotive sales, is it correct that the association has observed a decrease of new car sales by 50% or more when comparing annual sales in 2002 with those in 1997 or 1998?

SH: The figures definitely went down. They went down first of all because of all the taxation. Vehicles are overtaxed in Lebanon. We are paying high customs duties in Lebanon, on top of which we are paying VAT, on top of which we are paying registration fees.A country like Lebanon deserves to have much lighter taxes.

E: Does the AIA have a figure for how many cars are operating in Lebanon today?

SH: To be really honest, the only way to get to this number would be to go to the traffic department and look at their data. They are getting better and better under the minister of the interior and have made great improvements. We prefer to keep track of only our own auto figures, which means each dealer provides his figures to the association and at the end of the day we calculate these figures as those of new car sales in Lebanon.

E: A study in the late 1990s placed the average age of cars circulating on Lebanese roads at about 14 years. Do you have any update or opinion on the current age of the country’s fleet of cars?

SH: I don’t think my figures would be far from that. But I won’t venture to give out figures because we don’t have the mechanism to determine what is the average age of the cars here. However, when you drive around, you can see that the age is quite high.

E: Can you comment on the mechanique fee schedule that does not advantage new or environmentally sound cars but is cheaper for the oldest cars?

SH: We worked on that issue but unfortunately we did not get what we wanted. We believe that the mechanique should stimulate people to renew the car stock in Lebanon. We are seeing every day cars on the road that nobody would accept in other countries. We would like to see these cars slowly replaced by new cars, and we are working seriously to have the government first of all cancel the registration fees and lower customs duties. Once the mechanique becomes a technical inspection in January 2004, we would like to see these cars pulled out of circulation because not only their appearance is less than exciting but also because they are a danger for people using the roads of Lebanon.

E: Without the high taxation levels, and under a favorable environment for financing of car purchases, how many new cars could the Lebanese market absorb annually?

SH: The total market today is about 12,000 units per year, distributed over 35 dealers. By contrast, in some neighboring countries, one dealer sells about 10,000 cars each year. We are not calling for elimination of customs but ask for their reduction and complete cancellation of registration fees, in order to encourage people to replace their old vehicles with new ones.

E: In a macro-economic context, how important is the contribution of automotive sector to fiscal income?

SH: Customs duties on vehicles and petrol tax and so forth make a very big contribution to the government income. But we believe that if registration fees are cancelled completely and customs duties are reduced, we will sell more vehicles. The government will benefit more from the taxes we just mentioned, and we would have cleaner air from cars that produce less pollution. We would have safer cars on the road, and more pleasant cars to look at for this country and its image as a tourism destination. On all fronts, we would be better off if we decrease the taxes.

E: How much does the automotive sector contribute to Lebanon’s GDP?

SH: Today we don’t have such a figure and I don’t want to jump and give a figure off the top of my head. We do contribute to the economy in various ways, to the banks and the insurance companies for example, where car loans and the motor insurance are important businesses.

E: How can the cost burden of car ownership be distributed more equally and fairly?

SH: If we dealers would take our profit margin up from 4% or 5% and put it at 25%, we would be selling a quarter of what we are selling today. That is not the case at all. As I said, competition is very high among the dealers and profit margins are very tight. But I am saying that with its tax burden, the government is trying to milk this cow to its limits. Asking too much from the cow and taking all eggs from the chicken is killing the chicken and killing the cow.

E: Would a change in taxation of cars not put the government under additional financial pressure?

SH: Sales of new cars should increase for three reasons: economic, safety and fiscal. The whole set of taxes today is too high. If it is lower, the fiscal power of Lebanon will be the first to enjoy a better situation. One point is that our invoices come from the biggest car manufacturers and there is no chance of them being tampered with. Importation of used vehicles happens not through a manufacturer but through a dealer or a roadside trader, who can deliver an invoice that does not reflect the value of the vehicle. If we can stop the importation of used cars, or at least limit it to vehicles of two years of age, plus have a flexible taxation, the government will be the first to benefit and the country will definitely be winning.

E: Do you have any information on the number of used car dealers in Lebanon?

SH: We have no relationship with used car importers. We have relationship with used car dealers with whom we exchange the vehicles that we receive from our customers. They take these cars from us and recondition them. These were cars that have run in Lebanon and were used in Lebanon. But we have no relation with importers of used cars. I have personally no contact with importers of used cars.

E: It seems that you view the activity of used car imports not very favorably.

SH: I said from the beginning that I wish to see the importation of used cars stop, or if that is not feasible, to limit it to the acceptance of vehicles two years of age. I believe that trashy cars, which were refused in Europe and should have gone to the junkyard, ended up here.

E: Apart from lower taxes, do you see ways in which people could reduce their cost of car ownership?

SH: Wherever you look here, you see that most cars only have one driver. When I was in the United States, I experienced car-pooling. In a company, three or four people who share the same office hours agree to travel together to and from the office, and each car owner has to use his car only four one week a month. In this country, we have invented the service taxi. It is a Lebanese philosophy. Why don’t car owners do more ride-sharing in Lebanon?

E: When you say you are looking for the best, what defines ‘the best’?

RM: A quality that I especially like to see it is the passion to make an impact on the world that goes beyond making individual gains. It begins with developing the professional side and the personal side and then reaching out to the community, in terms of giving back to society.

E: How do you spot these special qualities in applicants?

RM: They have that drive, that energy, that special electricity. When you see it, you know it.

E: Was it in any way a political or economic decision for the school to intensify your presence here?

RM: Not necessarily. We started in the Middle East about five years ago. Then all the disruptions occurred and we just pulled back. I feel the disruptions in the region will continue for quite some time, but I decided that it is time to come back, regardless, and be part of an answer to some of the problems instead of leaving things stay as they are.

E: Wharton does not have a shortage of student applications. What is the average academic level for students who gain admission?

RM: We use the GMAT score, and the average score is 714. But I think the range is much more important. It is from 640 to 780. You don’t have to have the highest score. It is everything else that really makes the candidate stand out.

E: Can people easily recoup their investment if they attend Wharton, which is an expensive program?

RM: The MBA is a long-term investment. In light of that, Wharton has created a number of programs for financing your MBA that help student to gain access immediately, through loans given to students based on their needs. We hope that students come with a contribution of some small percentage, 10% or 20 %. But if a student can’t do that, it really is the responsibility of the school to provide grants. Students might face short-term pain in terms of servicing loans. But longer term, they will be fine. The gains to society, themselves, and their company will greatly outweigh the short-term pain of those first initial years of loan repayment.

E: But in order to be able to pay back those loans, they almost automatically will have to take a job with an American or multinational corporation?

RM: There is an advantage in working in a different nation for a year or two in order to broaden the experience of the MBA. If a Lebanese student would opt for working in London or Paris to gain diverse experience in the first years, and then come back, usually the salaries and bonuses from those first years do a lot towards paying back the loan.

E: Do you have the impression that anti-American bias has grown in the target group that you approach?

RM: There is no anti-American sentiment when it comes to education.

E: How about visa?

RM: This last year, I had no problems getting visa for my students from the Middle East. They went through an additional screening process but they had no problems because they did things correctly.

E: It is then safe to assume that people coming to Wharton from the Arab world will not experience an anti-Arab bias stateside?

RM: Not at Wharton. After 9-11 and the whole student body was very protective of our Arab students.

E: How many Arab students does Wharton have at present?

RM: Probably 1 to 1.5 %; that is something I’d like to increase.

E: How high is the percentage of non-acceptance of applications?

RM: If we have about 7,000 to 8,000 applications and a class of 800, there is a lot of it. We use a structure where we view the application first and then evaluate these twice, dividing them into two groups, one of about 40 % whom we want to interview and another group whom we don’t want to interview and will deny at that point. We then weed the first group down. It works out fairly well.

E: But you would advocate Wharton as offering a better opportunity than a local school?

RM: Students, who really have aspirations to create value and provide leadership, need to get abroad. The MBA is much more than a functional skill at learning. It is an experience of other cultures, worlds. It is the intensity of the experience. But some people just want to be functional experts that don’t want to leave. There are those who want to make money and therefore are interested in taking the credentials. To them I would say, stay, don’t take that risk; don’t spend the money. It really depends on the needs.