What’s big and yellow, rips up the ground, flattens the earth and breathes fire? Caterpillar, the world’s leading brand in construction equipment. Okay, it might not breathe fire, but it is one tough piece of machinery. The quality and endurance of the Caterpillar product line, which includes everything from excavators and loaders to trucks, tractors, forklifts and a diverse range of engines, are the reasons behind the success of the company and the record sales it has had for six consecutive years. Sales and revenues for 1998 totaled almost $21 billion worldwide, a record for the company, although the first nine months of 1999 showed a drop of almost 5.6% over the same period of 1998.

Business for M. Ezzat Jallad & Fils, the agents for Caterpillar in Lebanon, Syria and Jordan, has taken a much sharper turn for the worse. The company’s revenues from the Lebanese market had been rising steadily from $10.9 million in 1994 to $18 million in 1998, but 1999 was a disappointment. Business dropped 43% from the previous year, plummeting to $10.2 million. Even business in Syria and Jordan, both potentially far larger markets than Lebanon, has seen better days. So what has so dramatically affected Jallad’s sales?

In Lebanon, the weak economy and government deficit are the main factors that have hurt the company’s construction equipment side of business. While gross domestic product shrunk by 1% in 1999, according to the Economist Intelligence Unit, the government’s efforts to reduce the deficit included putting a freeze on most public construction projects. This forced contractors to focus more on private projects, such as building and renovation works, where heavy construction equipment is used less.

“The drop in demand is tremendous,” says Walid Tamari, general manager of Michel Sehnaoui and Sons Plant Division, which also deals in construction equipment. “As long as the government has funding problems, the slowdown will continue.”

Jallad’s revenues from sales of construction equipment, about $7 million and 39% of total revenues in 1998, nosedived by more than 90% to some $600,000, a mere 6% of 1999 revenues. And despite taking up a greater proportion of total revenues, from 28% in 1998 to 42% in 1999, total sales of generator sets dropped by almost 10%, down from $4.68 million in 1998 to $4.28 million in 1999.

Sales of generators have been adversely affected by the same factor that has hit the construction equipment side of business: projects in Lebanon are dead. On top of the smaller demand for generators, especially since the days of erratic supply of electricity seem to be behind us, there are more players taking a chunk of the $35 million-a-year business. One such firm is Saccal Power Engineering, a local assembler of generator sets that launched in 1987. By 1998 it had grabbed around 10% of the market with a turnover of $3.7 million. Jallad claims to have a 22% to 25% share of the market for generator sets.

The only side of Jallad’s business that is doing better is its product support. Here revenues climbed nearly 50% from $6.3 million in 1998 to $9.36 million in 1999. But this doesn’t come as a surprise. If contractors aren’t purchasing new equipment, they’re maintaining the ones they already have, and since maintenance requires the replacement or repair of parts, this boosts Jallad’s revenues from its product support department. “Without sales of new equipment,” says Omar Jallad, the company’s chairman and part owner, “even this will decrease eventually.”

In 1997, revenues from Jallad’s business in Jordan surpassed revenues from the local market, but 1999 was disappointing even abroad. The combined revenues from both Jordan and Syria barely equaled that of Lebanon, and an upturn isn’t expected soon. “As long as the Syrian government doesn’t receive funding for public construction projects,” says Jallad’s chairman, “we can’t expect business to pick up.” It’s a shame. The volume of business that Syria is capable of putting Jallad’s way could make that from the Lebanese market seem trivial.

The same goes for Jordan. Phosphate mining has not only become a major contributor to Jordan’s economy, but that same mining created the demand for Jallad’s products. Now, with Jordan’s economic slowdown, Jallad’s business there has also dropped significantly, especially after 1997.

But what can Jallad do to face this slowdown? It can’t really diversify. The most it can do in this regard is to push sales of related products such as forklifts, a strategy Sehnaoui is trying in order to offset the drop in demand for construction equipment. “We are turning our attention to warehouses that use products related to our existing line,” says Tamari. Although that might generate some income, it can hardly compensate for the lack of sales of heavier equipment.

Furthermore, competitors in generator sets such as Saccal, Jubaili, and Ghaddar have an option not open to Jallad. They can export. In fact, these companies have been able to increase their business dramatically through exports. Since April 1999, Saccal landed two contracts with the Iraqi government totaling $8.75 million, or about 240% of 1998’s turnover. Ahmad Rajah Jubaili, a local assembler for FG Wilson generators, has exported to Nigeria since 1997 and to Iraq since 1998.

Ghaddar, assembler of Perkins and Leroy Somer generators, has been present in the international market for ten years and has an annual turnover of over $5 million with contracts in Africa, Dubai, Iraq and Kuwait. But with around 200 agents worldwide with the exclusive representation for Caterpillar products, Jallad can’t market its goods anywhere besides Lebanon, Syria, and Jordan.

But Jallad does have some advantages going for it. Brand power has been instrumental, especially since Jallad is no longer the only supplier of heavy construction machinery. “What makes Jallad number one in generator project sales is branding,” says Maher Saccal, CEO of Saccal Power Engineering. “This makes a difference with clients.” Hasan Ghaddar, owner and CEO of Ghaddar, agrees. “We cannot compete against Jallad who has had the Caterpillar name for over 70 years.”

Some projects executed by Jallad include supplying the American University of Beirut, the Indevco power station, the Beirut International Airport, Ghandour Mills, Liban Cables, Pepsi Cola, Coca Cola, and Casino du Liban, with $11 million worth of business just from the first three.

Brand power helps give Caterpillar products an edge despite higher prices than competitors. “Caterpillar products are 20% to 100% more expensive than others in the market,” admits Emile Copty, Jallad’s general manager. Due to low operating and maintenance costs of the machines as well as a relatively high resale value, Caterpillar products are a good investment in spite of the hefty premiums. One example was a 25-year-old machine that was recently resold for $30,000; its original price tag was $50,000. A new one now costs about $250,000, so considering the machine’s age and the need for repairs, the resale value is good.

Nonetheless, Jallad has already taken steps to become more competitive on pricing for generators. For example, a 1,000 kVA generator, previously priced at $150,000, can now be purchased for $120,000, not much more than $110,000 for the same output product offered by Ghaddar. “Selling at the same price, and backed by discounts from the supplier, he will get the deal because he is Caterpillar,” says Ghaddar.

Today’s market requires different marketing tools. “Before we used to just negotiate the price with the client,” says Copty, “but the consumer is no longer satisfied with a standard product that he can just walk in and buy.” Jallad increasingly uses tools such as operating cost per hour, life cycle costing, and productivity to persuade a client to buy. Since many clients don’t know how to assess the requirements involved in obtaining the right tool for a project, they solicit the dealer’s recommendations.

And Jallad has been quick to integrate that service into its operations. “We now perform five studies for every ten projects as compared to before, when it was one for every ten,” continues Copty. The Indevco plant in Halat, which Jallad supplied with two Cat 3616 generators, each rated 4,200 kW at 1,000 rpm, required six months for study and installation. Caterpillar engines were chosen after studies by 18 different suppliers were considered.

Jallad ensures that stock of the most popular goods never falls below a minimum, 97% of most spare parts are now on hand. Even the stock of heavy construction equipment, though now reduced substantially, still includes the most popular machines ready for delivery. While Jallad also manufactures soundproof chambers and control boards for the power generators, not to mention all supporting equipment and installation, it’s not alone. Local manufacturers like Saccal do the same.

Basically Jallad is in still waters without a paddle. “We will have to suffer,” says Copty, “for the next few years.” All they can do is maintain a solid reputation, whilst taking as big a chunk of the generator market as possible. Having survived as Caterpillar’s Levant dealer for more than 70 years, Jallad should be able to hang on until things get better.

Global operations

Caterpillar Inc., the world’s largest manufacturer of construction and mining equipment, as well as diesel and gas engines, is a Fortune 500 company with $26.5 billion in assets at the end of the third quarter of 1999. Following record revenues of $20.98 billion in 1998 and profits of $1.51 billion, last year brought some slippage. At the end of the third quarter, revenues totaled $14.68 billion versus $15.57 billion for the same period of 1998, while profits were just $707 million, down from $1.2 billion. With a reputation for manufacturing rugged machines that set industry standards for performance, durability, quality and value, the Illinois-based firm, one of a handful of US companies that leads the industry, had clocked in record highs for six consecutive years.

In the past five years, Caterpillar added 88 facilities to its assets, such as warehouses and manufacturing plants, acquired 20 companies, and entered 17 joint ventures. In addition, it introduced 244 new or improved products, with 44 of them introduced in 1998, when revenues climbed by 46% and profits by 58%. Engine sales increased by 37%, a result of recent acquisitions, while the ensuing $6.5 billion in engine business accounted for a third of total sales.

Caterpillar records more than half its sales to overseas customers, with export sales of $6 billion in 1998. Its products are sold in nearly 200 countries through a network of 195 dealers, 131 of which are located outside the United States. Much of its success and reputation has resulted in customers that have remained loyal throughout the years, with 80% of the company’s sales coming from repeat customers.

So Lebanese industry has a checkered past; that doesn’t mean there are not some truly decent operations out there. Bassile Freres is one of them. From a tiny outlet in Hazmieh half a century ago, this modest binding company has become one of the major players in the local stationery manufacturing industry.

Bassile’s market is school and office supplies. It is so dominant in the latter that competitors such as Stationers, a school supplies importer, and Oriental Paper Products, a local school stationery manufacturer, call it a “monopoly.”

Milad Bassil, the company’s financial manager and one of the eight current owners, is more modest. “Though statistical data is lacking in our line of business, I can safely say that we have a fair market share in office supplies and we are a leader in some 50 to 60 items. But I wouldn’t call that a monopoly.”

Picture perfect? Unfortunately not. Since the early 1990s, Bassile’s local sales have been growing at around 15% annually, from about $2 million in 1993 to $4.4 million in 1998, with exports adding a respectable $3 million. That, however, is the catch. The export market used to represent 75% of Bassile’s sales during the war years, but has been in a steady annual decline of 5-8% for the last five years.

Cheap stationery imports from Indonesia and increasing industrialization in the region have exposed the uncompetitive operating conditions for Lebanese industry. Fadi Bekdash, for example, was once a part-owner of stationery manufacturer OPP but left five years ago to concentrate on importing from Indonesia. Now the general manager and part-owner of Stationers, Bekdash doesn’t miss the manufacturing side of the business. “The local manufacturing industry is not much appreciated by the government or the consumer,” he says. “Although equal in quality, people would rather buy imports.”

And now with the recession biting, Bassile’s total sales have dropped by 5% last year, $4 million, with a corresponding 3% drop in its net profits.

The timing wasn’t good. In 1997 it embarked on a $6.5 million investment strategy to solidify its position locally and compete regionally by adding 3,500 m² of warehousing space, renovating and increasing manufacturing capacity and expanding printing operations.

So while GDP growth slipped from around 4% in 1996 to an estimated -1% in 1999, Bassile’s new machinery came online in the first six months of last year. The result was stacks of inventory it could not sell. In 1998, Bassile’s stocks increased by a typical $400,000 between January and the end of September. But during the same period last year, inventory jumped $1 million in preparation for the school term and business.

To make matters worse, in the second half of the year last-minute buyers, who represent 10-20% of Bassile’s business, did not come through. That brought the company’s extra inventory to $400,000 near the end of 1999. Bassile froze its investment program with only two-thirds complete and cleared $130,000 worth of products at 20% of their market value, around $22,000.

Adapting to these conditions has meant big changes. Most importantly, Bassile introduced a whole new brand last year called Quest. “The best way to compete in these conditions,” says Bassil, “is to compete against yourself.” Although the new brand covers the company’s traditional product range such as files, indexes, account and office books, school notebooks and diaries, its target is different.

Instead of focusing on good quality items with standard specifications and constant prices for all his clients, Bassile will target the low-end buyer. Quest uses 60-gram paper instead of a good quality 80-gram paper, uses smaller-sized paper instead of A4 and lower quality binding and covers. “If people today cannot afford good quality stationery, I’m giving them a choice. We cut corners here and there and offer cheaper prices, even giving discounts for large orders,” says Bassil. “And since the product doesn’t carry our name we protect our image.” The brand now represents 8% of Bassile’s total sales.

And although Bassile’s investments did not come at the best time, they have helped it cut costs by improving on efficiency. In order to satisfy its yearly production of some 2,674 metric tons of products, an employee earning $300 and producing 4,000 items daily can now earn $500 and produce 10,000 items using the new machinery. Speed of production also goes towards better servicing of clients. For example, it used to take the company one month to produce 10,000 notebooks, but now an order of 10,000 privately labeled notebooks can be delivered within one week. Bassile’s competitors have not had that luxury for lack of serious investments in that type of machinery.

Bassile could go a step further by dropping unnecessary employees to compensate for overproduction or to cut costs even further, but it won’t. “We don’t have the heart to do what it takes, which is send a few employees home and stuff like that,” says Bassil.

Additionally, the company needs to compensate for the high hidden costs of storing raw materials and finished products, which run at 25-30% of the total cost. Bassile uses around 800 different types of raw materials, such as paper, plastics, glue, steel plates, just to name a few. Company suppliers have not been able to commit to just-in-time delivery, where the material gets used at the same time it is needed. So when looking at the aggregate between raw materials, storage and finished product stock, they end up with a 1.1 turnover ratio, ratio of goods sold over raw materials and finished goods in dollar value. “For us that ratio is too low, because the quality of some paper adhesive deteriorates, and paper products get damaged from moving equipment for lack of maneuvering space,” says Bassil.

OPP, on the other hand, is fully aware of cost cutting and has set out a plan to streamline operations and management to cut costs by 5% a year, even if it means reducing the labor force while trying to maintain the same efficiency.

OPP approached the economic slowdown differently. Instead of investing heavily in its core stationery manufacturing business, it put money into diversifying. It decided not to build more on producing seasonal goods that create a lag time, but rather move into year-round products. OPP invested $500,000 in 1997-98 to produce computer paper, using available space within its factory. It quickly grabbed about a 20% share of the market, competing with four other producers. It also invested in a sheeting and cutting business, which cuts reels of paper into standard-sized paper used, for example, for photocopying.

Bassile is still standing strong with a wide customer base of about 450 clients, mostly bookstore owners, but also small businesses, banks, insurance companies and other stationery wholesalers, both locally and abroad. It now distributes directly to its customers, doing away with the distributors it used to rely on. This came about partly because it could not reach some areas during the war. In order to maintain a constant price, the company used to take 2% out of its profits to compensate for the distribution costs, but not anymore.

Bassile has also done well in financing half of its investments. While 50% was self-financed, Bassile utilized the Arab Trade Finance Program (ATFP) to secure investment at an interest rate of Libor + 1.5%, now around 6.5%. By comparison, OPP resorted to local bank financing for its expansion program at rates of 8% or more. And for once, some outside forces were there to help Bassile’s business. After a five-year fight lobbying the government, customs on stationery imports went up by 50% last year.

If the economy improves, Bassile will benefit. The company is highly liquid, having the benefit of using the ATFP fund. This is a revolving credit line that finances the company in an amount equal to 80% of its export invoices any year it wants it. Still, OPP has a solid 40% market share in a business that grew with the generations of students using notebooks, note pads and school copybooks with OPP printed in bold.

It might be a good idea for Bassile to concentrate on its strengths in supplying office stationery. Will its ‘monopoly’ be broken up?

The last few years haven’t been easy for local industry. And the Lebanese Ceramic Industries Co., which is owned by the Garghour Group and Finland’s Sanitec, is no exception. A local manufacturer of sanitary ware and tiles, Lecico saw its profits go down the toilet in 1998, when it registered a net loss of $1.4 million, and barely managed to break even last year. Not the direction anyone wants to see their business take after a net profit of $3.5 million in 1995.

Output in tiles has remained steady at 1 million m², but Lecico decreased production in sanitary ware, which includes toilets, sinks and bidets, from 730,000 pieces in 1995 in order to off-load excess stock. Last year it produced 490,000 pieces. At the same time exports dropped from a level of 50% to 55% of production in the 1980s to about 25%.

In Egypt, where Lecico also has manufacturing facilities, it’s a different story. There the company has been dealt a royal flush. Lecico Egypt dwarfs its Lebanese cousin; though the company would not release exact figures for each year, its Egypt operations have generated yearly net profits of between $8 million and $11 million since 1995. Its annual production of sanitary ware increased from about 2.2 million pieces to 3 million last year, with export markets soaking up 800,000 to 1.1 million. About half is destined for England, where the firm claims to have a 7% to 8% market share. Last year the group’s revenues totaled almost $90 million, while Lebanese operations accounted for just $17.8 million.

So why has the company taken a turn for the worse in Lebanon despite having a 58% market share and being the sole local manufacturer of sanitary ware, while its Egyptian operations remain strong? “Lecico has definitely been affected by the freeze in construction activity in Lebanon and the lack of opportunity to develop new export markets in the Middle East,” says Georges Ghorayeb, general manager of Lecico Lebanon and the group’s technical manager. While exports to the region shrank with the economic downturn in the Gulf, Syria and Iraq have remained closed and low-cost manufacturers have wreaked havoc on Lecico’s market share, explains Ghorayeb.

To add insult to injury, industrial costs in Lebanon are high. Ghorayeb should know, being the beneficiary of low-cost production at Lecico Egypt. “There is no comparison at all between the structure of cost in sanitary ware manufacturing in Egypt and Lebanon,” says Ghorayeb. He estimates that direct industrial costs are 60% to 70% higher for energy and labor in Lebanon than Egypt.

Faced with such a drain on profits, Lecico has begun implementing a strategy to boost its local operations and reap greater rewards in Egypt. Staff in Lebanon have been reduced from 670 at the start of 1997 to 500. Further reductions will come through attrition. Last year, Lecico invested close to $900,000 to upgrade the tile-making facilities in Kfarchima. That is expected to reduce costs by 18% to 20% on energy and labor. It also allowed the company to introduce floor tiles to the market this year, having previously been restricted to wall tiles. “That should help diversify our market share, but on the other side it will make a more complementary product,” says Ghorayeb.

That’s an advantage that Uniceramic, the other local manufacturer, doesn’t have. Uniceramic, which is 39% owned by the Ghorra family, produces just floor and wall tiles at its factory in Chtaura. Nonetheless, it has the larger market share in tiles with about 30%, while Lecico claims 15%. Imports account for the rest of the estimated 8 million m² market. More importantly, Uniceramic is in a profitable position, with 1999 showing an increase of 15% over 1998’s net profit of $1.05 million, unless provisions are increased.

“Lecico’s going through restructuring and this is costing them a lot of money today … we had done that in the previous three years so we were a little bit ahead,” says Nabil Ghorra, the assistant general manager, explaining his company’s better fortunes despite the downturn. Joseph Ghorra was among the founders of Lecico, which held a 36% share in Uniceramic until two years ago. The $4 million raised was reinvested into Lecico.

At $7 to $8 per m², Uniceramic’s prices are comparable to Lecico’s $6 to $8.25 per m². But Ghorra insists he’s targeting the import market share. To that end, the company is monitoring trends in colors and designs from Europe and expanding its size variations from 11 to 15 by the end of 2000. Lecico counts three sizes and will increase that to four. Ghorayeb acknowledges that Lecico cannot compete with the sophisticated manufacturers from Italy and Spain. His strategy is to protect the company’s current share of the tile market, and target growth in sanitary ware.

In this connection, Lecico was given a boost by its joint venture with Sanitec, a Finnish manufacturer of sanitary ware, which has operations in Europe, Southeast Asia and the Middle East and recently acquired the Dutch company, Sphinx. Last year’s net sales of Sanitec and Sphinx combined are expected to total about $800 million. Sanitec purchased a 50% share of the controlling stake in Lecico in 1997. Sanitec’s Wolfgang Molitor came on as Lecico Group’s managing director, while Gilbert Garghour retained his position as president. Together they own 96% of the Lebanese operations and 76% of Lecico Egypt.

“Lecico is pushing more on the sanitary side because that is Sanitec policy, they’re not in the tile business at all,” says Ghorayeb. Now comes the move to modernize the local sanitary ware facilities, which will suck up a yearly investment of $600,000 to $700,000 over three years, and gradually return to full capacity.

In Egypt the company is undergoing expansion. With an investment of $21 million, Lecico opened a second plant. Starting with a production level of 1 million pieces a year, the factory’s output will gradually be increased to 4 million. That would bring Lecico group’s total production to 7 million if the Lebanese plant reaches its full capacity of 800,000.

Increasing production is one thing, but what’s the firm’s strategy to sell more? In 1997, Lecico began creating a greater presence by establishing an active marketing division and building showrooms. Currently at three, that number will be increased to five or six in three years. Through its technical agreement with Sanitec, Lecico will begin producing European models here, including brand-name items. Ghorayeb also hopes that the new Lebanese norms for sanitary ware, established in late 1999, will be enforced and keep poor quality products off the market. But for Mansour Ayoub, sanitary division manager of Abdulrahim Diab, agent of American Standard and Ideal Standard, it’s another bureaucratic nightmare, requiring certification with each shipment. He questions the timing and reasons behind Lecico’s push for norms.

Lecico is also pushing for an increase in customs duties, which are about 25%. Unless the government can decrease energy costs and assure fair bilateral agreements, Ghorayeb sees higher tariffs as the only way to save Lebanese industry from a certain death in the face of low-cost imports. Importers disagree, and say it goes against the trend of opening world markets.

“Customs duties have never been effective in protecting industry, because if you can’t compete you shouldn’t be there. It’s artificial competition,” says Mazen Zantout, managing director of Wafco, a local distributor of Spain’s Roca sanitary ware.

Nonetheless, neither Zantout nor Ayoub consider Lecico as direct competition. Targeting largely the medium to high-end market, they believe the local manufacturer could only soak up some of the higher quality portion of the low-end market if prices are bumped up with higher duties. A sanitary set, bath tub not included, from Abdulrahim Diab sells at a low of $400 and an average of $800 to $900, and for Roca the low end is $500 and average $650. Lecico says it can supply the low, medium and high end of the market with prices at $120 to $500, and claims a 58% share of the low-end and 59% of the mid- to high-end market. Importers aren’t having an easy time either. Abdulrahim Diab has seen its sales drop by 16.6% since 1995, though it staved off a worse fate by bringing in more medium to low-end products.

From Egypt, where Lecico has a 40% share in sanitary ware, the firm hopes to expand further into the European market. That will be given a boost through its partnership with Sanitec. Exports will also target the south of the Arabian peninsula. From here, Ghorayeb is eyeing the Syrian market, which he currently gauges at 700,000 to 750,000 pieces a year, and Iraq for 2001. Sanitary ware and tiles were included in the Lebanese-Syrian free trade agreement last fall. Lecico estimates it can supply 150,000-160,000 pieces, having already established a chain of dealers.

With that, Lecico would move back into the black for 2000. Ghorayeb has received confirmation from Lebanese officials that the Syrian market will be open to tiles and sanitary ware starting in February. “We hope it will be a good year,” he says. But trade between the two countries has declined in the past two years, while industrialists complain that red tape has kept the border from opening up. Lecico Lebanon will still have to fight hard not to sink further, while its Egyptian sister looks ready to clean up.