Remember a few months ago?
You’re in the shower when the
power fails (courtesy of the Israeli
air force) and you have to dash for the generator
with a towel wrapped around you.
Generator sales must have boomed, right?
Wrong, actually.

In fact many of those in the generator
business are complaining that these are
their darkest days. The majority of those
who require a generator bought one in the
early 1990s, when wallets were thicker and
power cuts more frequent. With the country
already saturated with generators, the air
strikes barely registered on the market. And
with construction at a standstill, sales
of generators have decreased from $40 million
in 1997 to $23 million in 1999 – a
43% decrease. At the same time, imports
have decreased from $35 million in 1997 to
just $20 million in 1999. Everyone is feeling
the pinch.

M. Ezzat Jallad, the exclusive agent for
Caterpillar in Lebanon, Syria and Jordan,
saw local sales of generators decline from $5
million in 1998 to $4.28 million last year.
Sales for Saccal Power Engineering
decreased from $3.45 million to $2.33 million,
a drop of over 32% (see “Trying to
buck the downtrend,” December 1999).

Jubaili Bros., the number one retail seller
of generators in Lebanon with just over
$20 million in global revenues last year, is
also suffering. Local sales, 70% of which are
from generator sets, have tumbled by 60%
since 1995, from $15 million to about $6 million last year. Time to pack up and call
the bankruptcy lawyer? No way.

Surprisingly, overall revenues actually
increased during that period, from $18 million
to $20.2 million in 1999.

How did they do it? With the domestic
economy stagnant, the company has been
boosting its exports. “Unlike the local market,
there is much more room to grow
abroad,” says Maher Jubaili, the firm’s
director. Jubaili started shipping generators,
most directly from the FG Wilson factory
in the UK, to Nigeria and the UAE in
1996. Both countries have an erratic supply
of electricity. Today these two markets represent
about 70% of the company’s revenue.

In Nigeria alone. Jubaili currently
controls 15% of the retail and wholesale
markets for generators. It was the first
Lebanese company to enter this untapped
market. Ghaddar Machinery, a competing
retailer of generators, arrived on the scene
more recently. But unlike Ghaddar, which
works through a local agent. Jubaili markets
and sells its generators directly there. This
gives the company an edge, says Jubaili.

The firm has entered other African countries           
as well. In 1998, Jubaili spotted an
opening in Ghana, where there were only two
hours of power a day. In that year, the company
sold $2 million worth of generators in
the Ghanaian market, pushing Jubaili’s overall revenues up to $22 million. Most of
the exports were shipped directly from the
UK, but $800,000 worth were sent from
Jubaili’s Tripoli outlet, increasing the
branch’s sales from $900,000 in 1997 to
$1.7 million in 1998. But in 1999, Ghana’s
power problem was solved and sales to
that market stopped, leading to a slight
decrease in revenues last year.

Jubaili is now eyeing the Iraqi market,
another country suffering from power shortages.
But here, the company is a bit of a latecomer.
Ghaddar recently signed his third
contract in Iraq, a deal involving the sale of
250 60KVA generators for about $2 million.
Sacca!, which deals only in wholesale,
sent $4 million worth of generators there in
1999, and the latest deal was a $732,000 contract
with the Iraqi ministry of agriculture.

Despite Ghaddar’s success, Maher Saccal,
CEO of Sacca!, feels that Iraq is not a market
for retailers. “Iraq deals with public tenders
and you need to have the skills and the
know-how to succeed,” he says.

Although Jubaili has been focusing largely
on foreign markets, the firm hasn’t given
up hope that local business will improve**;** if
not now, then maybe in the long run. This has
prompted a diversification of its products in
an attempt to stimulate domestic sales. So
far, results have been mixed.

Jubaili is making a decent income from
renting out electricity. The company
recently landed some big projects, including
a $500,000 contract to provide
Bouygues, a French company in Solidere,
with 2,700 KVA of electricity for 20
months. Other successes include contracts
to provide Mannesmann in Abu Dhabi
with 2,500 KVA, and a Darwish Group
company in Qatar with 1,500 KVA.

Soundproof canopies, which Jubaili
assembles at its Sidon plant, have also
been selling briskly, accounting for
$540,000, or 9%, of local revenue in 1999.
“This is very profitable for us,” says
Jubaili, “because these days very few people
buy generators without canopies.” For
each locally assembled $5,400 27KVA
generator, Jubaili sells a $1,500 canopy.

But many new products have not paid off.
After Jallad’s sales of heavy construction
equipment declined from $7 million in
1998 to $600,000 last year, Jubaili started
selling light construction equipment. But, as
a result of the government’s budgetary policy,
construction never picked up. Jubaili
also tried selling air conditioning units, but
the added revenues were minor. “With so
many competitors in the field and too
many credit facilities, it hasn’t been a success,”
says Jubaili. The company also
earns money from after-sales services,
charging $35 for a routine checkup.
“Although 24-hour after-sales generates a
certain revenue, it barely covers our
employees’ salaries,” he says. Both Sacca!
and Ghaddar concur. With the market
depressed, profit margins are low for those
in the generator business. “We should have
a 10% profit margin,” says Ghaddar, “but it
is much less than this, even though we
have different products and services.”

As if all this wasn’t enough, the company
may soon face a challenge to its exclusive
agency rights for FG Wilson generators.
Caterpillar recently purchased FG Wilson
and Jallad is now selling the same generators
as Jubaili but under the name
Olympian. But Jubaili is not worried that the
two sides will come to blows.

“Caterpillar’s sales focus on a range of
higher-end generators,” he says.

The company has had disputes with
other competitors. Not long ago, Jubaili
began importing Perkins engines, manufactured
by FG Wilson, and assembling
them here. That prompted Ghaddar, who is
the local distributor for Perkins products, to
take Jubaili to court. “We have a right to a
percentage from the sales coming from
Perkins,” says Ghaddar. After an acrimonious
dispute, the two sides came to an
agreement. Jubaili was given full rights to
continue importing Perkins engines, as
long as they were assembled locally and
sold under a different name.

These problems have been a headache for
Jubaili, but they are minor compared to the
slowdown in the economy. Jubaili has
stayed afloat by focusing on markets
abroad, but exports will probably just keep
the company alive. If revenues are really to
grow, a turnaround is needed in the domestic
market. By leaving no stone unturned
locally, Jubaili has played his cards right.
When business in Lebanon hits an
upswing, he will be prepared.

Last year was tough for Sidem. Having long dominated the market for aluminum profiles, the company barely managed to break even. “We have reached a critical stage,” says Andre Kurdy, commercial manager at Sidem. That follows half a century of turning profits, leaving management perplexed as to how to turn its fortunes around. “In our industry, Sidem is a trademark,” says Rafik Azrak, CEO of Folda, which manufactures and supplies aluminum-based products and had a turnover of $8.4 million in 1999. “They’ve enjoyed a monopoly for so long. They didn’t feel the day-to-day competition and may have inherited a heavy structure.”

Sidem, an extruder of aluminum profiles (extrusion involves pushing aluminum cylinders through pre-shaped molds to create architectural profiles of different shapes and sizes) used in the manufacturing of doors, windows and curtain walls, dictated prices until 1995. But cheaper imports, the arrival of local competitors and reduced tariffs with Arab countries combined to push prices into a further decline, a trend that had already begun in 1990. Having operations at full capacity, high exports and about $55 million in annual sales have not been enough to secure profits.

The local demand today is an estimated 12-14,000 tons. Already that’s not enough to absorb Sidem’s production of 16,000 tons. In fact, local sales dropped from 10,200 tons in 1995 to 8,500 in 1999. Now the two newcomers, Aluxal and Alutex, are competing for a chunk of the market. Having started production in 1994, Aluxal churns out some 4,000 tons a year. It sells to the retail market, which also accounts for 75% of Sidem’s sales.

The local market is further crowded by some 2500 tons of imported aluminum profiles, largely from Syria, Jordan, Saudi Arabia and Greece. That figure could have been much higher, had Sidem not systematically reduced prices to keep imports at bay. The company was protected by 20% customs duties on imports from Arab countries three years ago. However, the Arab free trade agreement has brought the tariff down to 14%, to be followed by a drop to about 12% next year, while the bilateral agreement with Syria has cut the duty to 10%.

With the Lebanese market so competitive, Sidem has increased sales abroad, sending half of its production to Europe. But exports are not a money-maker. “The purpose of exports is to keep our factory working at full capacity, which reduces our cost per unit, creating an indirect saving rather than profits on the product itself,” says Kurdy.

The main factor for the decrease in local sales is the stagnant real estate market, bloated with 7000 empty units and a 60% drop in construction permits. Folda, which bought an average of 545 tons a year before 1999, says its purchases have dropped significantly.

As a result prices have been slashed from $4,000 to about $3200 per ton in the local market today. Imports cost $2600 per ton, but many local clients say they still prefer to deal with Sidem because of its proximity to the market, its reliable quality and service. Many imports are below standard specifications. The downturn is difficult to swallow for a company that was the region’s first to specialize in aluminum extrusion, even if it is still the dominant player on the market.

Sidem began in the early 1950s with rolling mills producing aluminum sheets. In the early 1960s, it entered a joint-venture with Pechiney, the world’s second largest producer of aluminum, which purchased an 80% share. Also a manufacturer of extruded profiles, Pechiney sold its stake to the current Sidem shareholders in 1980 because of the war. Since then Sidem has remained fully Lebanese-owned and worked in aluminum extrusion. Believing the war was reaching an end and anticipating a construction boom, Sidem in 1982 embarked on a $10 million investment to double its capacity.

By 1986 the company found itself with three presses and production capacity of 16,000 tons and a country still at war. The short-lived solution was to send 60% of its production to the region. By the mid-80s, customs barriers were fully erected due to rapid regional factories, and the only alternative for Sidem was to go to Europe, a market of some 2 million tons yearly.

Though no longer partners with Pechiney, Sidem was able to take advantage of the earlier association to gain credibility. Additionally, Sidem won the right to manufacture Technal designs under license in 1980. France’s Technal is among the top five extruders of window profiles in the world. “It was our main entry break into Europe, because it means we’re producing under high specifications using the highest of technologies,” says Kurdy. Starting in Italy, the company expanded operations into France, Germany, Holland and the UK. Exports to Europe grew from 2000 tons in 1990 to about 7500 tons today, and Sidem stays competitive by investing $500,000 to $1.5 million yearly to upgrade machinery and install new technologies.

But how will Sidem manage to make money again if its local margins continue to be squeezed and exports aren’t profitable? Sidem cannot compete in the Arab world; energy and labor costs are half what they are here, and governments provide subsidies to encourage exports. Here the government is full of promises but rarely comes through. Additionally, other governments assist industries in recycling or disposing of their waste. There are no such solutions for Sidem.

Sidem, Folda and others have been asking the government to at least restrict the import of cheap products that don’t meet specifications, such as a 4mm thick window profile, which will bend easily in normal wind conditions. “This is not allowed anywhere in Europe or even as close as Syria, but anyone can import those into Lebanon,” says Azrak, adding that since aluminum is priced by weight, the thinner the product the lower the price.

If Sidem was thinking of expanding operations in preparation for the Arab free trade zone, it will find itself at a disadvantage to other factories. “We have a plan to move our operations from our 55,000m² area to a 200,000m² area, where we could increase capacity to 25,000 tons, but we don’t see the right conditions to proceed [with the $40 million investment],” says Kurdy. Sidem might be able to increase margins by streamlining operations and reducing its staff of 500. So far there are no indications that the company is contemplating that option. Sidem is feeling the heat. It will have to make some tough decisions soon if it’s not to go from a year of zero profits to one of losses.

No trucks, no warehouses, not even a single forklift. Just three rooms, two desks, one secretary and a couple of phones. Not much more can be found on the premises of Arab Traders. That’s bare bone facilities for a trading company that generated $6 million in revenues last year, but keeping business simple is one of the reasons for its success. Arab Traders deals primarily in supplies for the oil and gas sector as well as aluminum, steel and power generation units. Its revenues have shot up from just $200,000 in 1996, when the company was founded. How did it do it?

Arab Traders acts strictly as a middleman, placing orders only after closing a deal with a buyer. It avoids tying up its own funds in goods that might sit idle in a warehouse. Once both parties have signed a contract, Arab Traders opens a letter of credit, has the supplies shipped and pockets a commission. The company has built up a working partnership with over 30 suppliers worldwide, including companies in the US, UK and the Czech Republic. It actively markets their products in the Middle East, Central Asia and North Africa. “When we receive inquiries for equipment and we don’t have a supplier, we find one,” says Wissam El-Solh, general manager of Arab Traders. “We also search for new suppliers or manufacturers producing new technologies that will give us an edge.”

Arab Traders’ international reach is a big plus. The company is headquartered in Lebanon with branch offices in the UAE and Syria, but it’s not dependent on any particular country. Unlike traders who are captive to the ups and downs of the domestic market, Arab Traders will fill an order as far away as West Africa or Central Asia. It also has the advantage of being able to search worldwide for the most competitively priced suppliers, giving it an edge on tenders.

The supply of oil field equipment, including metal casings, plastic tubing and pipes, is Arab Traders’ main money-spinner, representing about 65% of total sales, or $4.2 million in 1999. Big markets include Syria, Dubai, Iran and a number of countries in North Africa. Recent oil price hikes have been particularly beneficial. “It was harder at first when oil prices were down. But with prices going up, the governments are more willing to spend money on new equipment and we are selling more,” says El-Solh. “Governments usually set a budget for projects, a certain amount for each barrel [of oil] sold,” says Fred Habeishi, chairman and CEO of C.A.T., a contracting company, which has laid down oil pipelines in Kuwait, Saudi Arabia, Abu Dhabi and Qatar. “When prices go down, they reduce that budget, but when they rise, they tend to spend more.”

But the oil business is also very competitive. Whenever Arab Traders wants to participate in a tender, it has to pre-qualify; references have to be submitted and the company’s track record established. Being a relatively newcomer to the market, Arab Traders often has to resort to offering quotes at cost in order to get its foot in the door. In many countries, Arab Traders has developed a list of contacts that are familiar with the quirks and characteristics of the market and can assist companies in gaining access to the right people. “Just about every other family in the Gulf deals in oil field supplies,” says El-Solh. “It takes a lot of fancy footwork to get in.”

About 16% of Arab Traders’ business comes from local sales of aluminum, supplying wholesalers and workshops with mill-finished sheets, coils and circles. Abiding by its strategy of importing only on order, Arab Traders avoids selling retail altogether. In 1996, aluminum represented 100% of its revenue. By 1999, this segment of business had grown to about $1 million in sales. Even with the real-estate market in a slump, business has been steady. “There isn’t that much going on,” says Toufic Bawab, a dealer in aluminum profiles. “Business has become very stagnant, but the manufacturers have to keep making the frames and stocking up, because with their overheads, it would cost them more to stop operating altogether.”

Arab Traders has been able to counter this problem by concentrating on the import of mill-finished aluminum, which, many in the business claim, is in higher demand than other kinds of aluminum. “It’s a modern product, it’s practical, light and long lasting,” says Fady Khairallah, managing director of Edmond Khairallah Est., a firm whose activities include aluminum wall cladding, partitioning and false ceilings. “The market for the product is always going up,” says Habib Kehdi, technical coordinator for Alumco, a company specializing in aluminum and glass contracting. “Everybody is switching to the use of aluminum in place of other materials.”

Arab Traders has also been adding new products to its line, among them pre-fabricated parts made of aluminum that are used to set up storage facilities and other light structures. “We do look for new products and try to stay ahead, but we don’t want to be a jack-of-all trades,” claims El-Solh.

But there is a downside to the firm’s methods. Though importing back-to-back avoids many of the risks that accompany the stocking of goods, safety has its price. “The margin is about 3% to 4%,” says El-Solh. “If we were to buy the goods ourselves, the margin would jump up to 25% or 30%.” The problem with doing that, says El-Solh, is that the demand for products is neither large enough nor regular enough to make such a commitment worthwhile. If Arab Traders were to have to sit on stock until it were sold, the loss in interest would be considerable.\

The company is also encountering barriers to its growth. “Although we’re selling over $4 million in oil field supplies, we don’t expect to sell much more because the markets tend to get saturated with competitors,” says El-Solh. To counter this trend, Arab Traders has been breaking new ground in the Caucasus and Central Asia of the former Soviet Union. “They will start drilling eventually,” says El-Solh. “We want to be one of the first there when they do.” Another possible new frontier for Arab Traders is Libya. “With the lifting of the embargo, it’s becoming a booming market,” says El-Solh. Are his expectations justified? Habeishi seems to think so. “We are looking for projects in some of these newly emerging countries,” he says. But new markets pose risks. “We faced a lot of problems in Iran,” says El-Solh. “After we opened letters of credit and shipped the goods, they took so long to pay us that we had to sell the LCs off at a discount just to get our money back.”

Increasing revenues from $200,000 to $6 million in four years with nothing but the bare necessities is certainly an accomplishment. But a company can only grow so big when operating on a shoestring. Further expansion may mean taking the giant leap from being a mere middleman to becoming the seller itself. And that would mean taking on new risks. Maybe Arab Traders should be shopping for a warehouse and a couple of forklifts.