Initiating the deliberations on the real economy stalwart sectors of manufacturing industry and the food-processing and agro-industrial enterprises, Yasser Akkaoui, Executive Magazine’s editor-in-chief, outlines the session’s structural design as one that combines a first part of qualifying and quantifying the size and economic impact of industrial manufacturing in Lebanon with participants’ proposals for solutions and builds towards an action plan for development of manufacturing as industry and for individual enterprises. “De-risking industries and manufacturing today is not an easy task especially when we’re doing this in the absence of any government,” he acknowledges the roundtable’s challenge.
As a preamble, Thomas Schellen, Executive Magazine’s editor-at-large, cites two quotes, the first from a paper by the Trade and Investment Facilitation initiative that is affiliated with the United States Agency for International Development (USAID), emphasizing that “manufacturing is in position to push creativity by developing innovative products.” From the Executive Magazine’s brief on manufacturing, the moderator further paraphrases a quote saying that development of manufacturing industries is crucial for growing employment, growing productivity, fixed capital formation, and for improving exports and overall GDP of Lebanon. “In this spirit I invite you to give us your views if manufacturing is the glass which is half full or the glass that is almost empty but has a lot of room to be filled,” he says.
Paul Abi Nasr, board member in the Association of Lebanese Industrialists (ALI), and CEO of an industrial company: cites well-known challenges of past 15 years including bad infrastructure and deficient legal framework but adds that a special challenge for manufacturers was the subsidization of imports by way of the dollar peg. “When you subsidize your imports it makes it much harder for your local manufacturing to pick up,” he explains. Many weaker players are forced to withdraw from the market and only a few champions of manufacturing who could by innovation to make up for the additional cost created by subsidization of imports, by the lack of ecosystem, and the lack of infrastructure.
Manufacturing has a very high multiplier effect in terms of jobs, adds financial expert Maya Dada, by creating direct jobs in the sector but also indirect jobs that support the sector and induced jobs from the growth and value added that manufacturing contributes to the economy the economic model in Lebanon. This makes it very important to enhance the manufacturing industry, she emphasizes: “[we have to] think how we can improve and focus on the sector, recreate, redesign, and support it in all ways possible.”
Opportunities or not?
Adding that he experiences economic realities from the diverse sides of being a private equity manager, investor, shareholder as well as board member of several Lebanese banks, Romen Mathieu zooms in on the role of finance. “Industries need funding in order to grow, and the question of finance in Lebanon today its dual,” he says, highlighting that the presence of lollars and dollars which manufacturers need both translates into local and external funding requirements. Although political barriers stand against the inflow of foreign investments until there is a political solution in the country, some 70 billion lollars could be deployed as investments into manufacturing industries, notwithstanding current discounts on lollar values, and used for purposes such as paying down old debt or purchasing local manufacturing inputs. “Bankers are looking to [keep] this money and depositors want to take it out of banks. So I think the best thing today is to focus on finding solutions on how to remove part or all of these billions,” he says.
Different stakeholders in the manufacturing industry, including associations, are in agreement on many needs, such as creating new export promotion channels but are not engaged in active collaborations, explains Halim Choueiry, who has been involved with USAID’s Trade and Investment Financing (TIF) project research. “What really struck me is that there is no collaboration between the people. Everyone is in his own cocoon. They all come up with great ideas but they don’t fully divide those efforts, in order to really come up with something that really can work,” he says. This means that vast knowledge of long-standing problems and prudent solutions exists in the industry circles but the open question remains on who will carry those solutions onward, Choueiri points out.
Investing lollars into industrial projects would be prudent, Nada Rizkallah, vice president of the board of bank Credit Libanais, concurs with Mathieu in returning to the finance problem. Investor participation in financially distressed small and medium enterprises could bring win-win solutions for investors and SMEs but will require “more governance, [and] more transparency,” she points out. Getting manufacturing industries of all sizes better prepared for environmental, social and governance (ESG) requirements by investors and international financial institutions such as the International Finance Corporation (IFC) and the European Bank for Reconstruction and Development (EBRD) would be a good start even before an eventual political solution in form of a trustworthy government will come into play, she says.
As discussions continue to circle around the access to finance issue, Dada affirms that lollars can be activated for some needs of the manufacturing industry but that those industrial enterprises will still be in want of fresh investments. “Financing is a big challenge these days, but I look at it as an opportunity to explore other options, other channels,” she says in reference to alternatives to bank lending.
Following her remarks, Wissam Ghorra, manager at the Cedar Oxygen ESG Fund says that the young fund is indeed addressing many of the issues that had been under discussion at the roundtable until this moment. “So today, I’m happy to say that we have a partial solution, let’s be accurate, it’s a partial solution for Lebanese industrialists sourcing fresh funds facilities,” in the financing pillar of Cedar Oxygen, he says, in addition to which the fund is engaged with the organization of the first virtual fair of Lebanese industry in Europe, in partnership with the ALI and Investment Development Authority of Lebanon (IDAL).
Economic policy expert Rayane Dandache takes the discussion onto the territory of job creation and productivity by noting how manufacturing industry had on one hand been resilient in the many long years in which the past Lebanese rentier economic approaches had been detrimental and littered with public sector mistakes, but how this industry on the other hand has missed out on so many opportunities. The current opportunity to focus on according to Dandache is the temporary comparative advantage created by the depreciation of the Lebanese currency. “I want to hear from industrialists how they see us benefiting from this small window of opportunity,” she says.
Tech industrialist Fadi Daou responds to the question of missed or underused manufacturing opportunities by outlining his experience as a maker and exporter of ICT cloud infrastructure products that have next to local market at all. “We have survived the challenges and are still producing and exporting high-tech equipment that is designed in Lebanon. On a weekly basis, we ship four to five thousand high-tech items to China, Japan, US, and Europe,” he says.
Emphasizing that while one can build a business case for such a company in Lebanon as he did and succeed in with dedication and determination on an interesting personal journey as entrepreneur, access to finance and investment issues that manufacturers need to think about, relate fundamentally to the question if they are building products for the local economy or the global economy. If one aims to produce for the size-wise very limited local economy, one cannot be very innovative or build what can be considered an industry and scale production, Daou says, but if one wants to be innovative on industry level, an addressable global market is needed. Finance, according to him, is not the issue as much as the need to identify and build an industry that can address global markets and is suited to Lebanese knowledge-based economy and educated workforce.
“I believe what is happening globally today is a great opportunity, for building up the [Lebanese] industrial sector, especially with high-tech companies, and impacting the market,” Daou says but cautions that he sees the biggest problem standing against this industrial expansionism in “the system that we are in,” namely a system of corruption and weak laws. Thus the real opportunity for Lebanese industry according to him thus is to create a model that can operate outside the local jurisdiction, attract many international companies, and focus on multinational companies in high-value industry.
Dire financial straits
Wajih Bizri, industrialist in the chemical sector and head of the International Chamber of Commerce for Lebanon, in turn emphasizes the role of existing manufacturers and the many problems that they face. According to him, the majority of the manufacturers are facing problems and the need is to bring them together under one umbrella rather than having weak manufacturers with limited capacities.
“All manufacturers are facing basically financial problems. If they stay fragmented the way they are today, you will find most of them shutting down within a few years. Instead of waiting to see this happen, one of the ideas is to bring them [together], which is not easy, with the Lebanese mentality where everyone wants to be the president,” he notes.
For Lebanese SMEs which have been starting to export and participate in international markets, his experience has shown that they encounter difficulties when receiving follow-up orders, says Dani Elias, a manufacturing consultant specialized in SMEs. “When the second order comes, they have an issue in understanding and evaluating their capacity. So it’s not only about opening in your market; it’s about sustaining the levels of operation and managing them,” Elias says.
He concurs with the views saying that clustering, better or perhaps joint capacity utilization, and changes of ego mentalities are key needs of Lebanese manufacturers today, including SMEs. “It’s now the time for Lebanese industries to work together to sustain, build the system and deliver a more productive management system and product so that we can sustain our export markets,” he says.
In conclusion of the first round of deliberations, Nabil Makari, sections editor at Executive Magazine, offers his recapitulation and comments on what was said. In his tracking of arguments, the dominant issue in the discussion was the contradiction between manufacturing opportunities that are specific to the economic realities in Lebanon and the full absence of public sector reform.
Focus on development
In response to Akkaoui’s request for naming solutions, Mathieu emphasizes that in the environment of absent will for funding from foreign investors and after divesting of expectations for a quick government formation, private sector industries need to rely entirely on their own powers for resolving problems. “Let us find solutions; we can solve this among [ourselves],” he enthuses.
Specifically he proposes to return banking to an investment banking business model, saying this could be done very quickly. Doing this smartly would over time transform Lebanese banking dollars to real dollars with benefits for all involved. Expecting it to be difficult and time intensive to unite diverse industries under an institutional umbrella of mutual interests as proposed in the first part of the RT discussion, he suggest to prioritize a fast creation of private sector export agency. SMEs being hard pressed by cost of sending own marketing experts overseas, Mathieu says such an entity should serve both solely export-oriented Lebanese manufacturers and locally focused industries with small export ambitions.
The discussion, turning to the question which manufacturing industries are best for development, and what measures have been suggested by the ALI, Abi Nasr reiterates that the dollar peg was subsidizing cost for manufacturers who relied on imported inputs. He reminisces on his participation in numerous export promotion initiatives and says that export propositions have become stronger since the effectual end of the dollar peg but juxtaposes this recent advantage with longer time needs for unlocking specific export markets after many years when most Lebanese companies were not present there.
While agreeing that private actors can do many things together as they understand those needs, Abi Nasr also sees large needs that cannot be met by private sector initiatives, first among them creation of currency stability. He adds that lollar funding was seen as an option in 2020 but as the manufacturing sector was slow to act and not ready for it then, he currently does not see lollar funding as viable solution of investment needs in manufacturing. Maya Dada, who concurs with Abi Nasr that the use of lollar is not a universally strong value proposition for all manufacturing enterprises, tells manufacturer to look at sustainability and generally adopt a long view of seeking to compete internationally not on labor costs but on “quality and uniqueness and sophistication.”
Sharing images from a report and recommendations with his peers, TIF’s Choueiry says that a large need and solution for the manufacturing sector exists in the creation of research laboratories and centers. Countries that are leaders in product development show significant allocations to research, something that is missing in Lebanon.
Basing herself on observation of customs data, finance and ESG expert Nada Rizkallah points out large trade imbalances in areas such as prepared foodstuffs and live animals. These negative balances should be addressed by development of synergies between manufacturing and agricultural producers, as well as focuses on collaborations between manufacturing branches such as packaging and industrial manufacturing. Acknowledging that there has been loss of trust in the banking sector, she notes that with all the need to restructure banking and implement a full reform of the economy on all levels, in the end banks – which have provided much financing to industry before the current crisis – “have to retake their roles.”
According to Rayane Dandache the current search for solutions in manufacturing industry will prudently focus on quick wins but also prepare the stage for long-term gains. “We need to focus on the firms or the industries that were able to stay resilient despite all the crises, because the lessons learned from those industries are going to help us look into medium term and long term plans,” she argues.
Seeing that the Lebanese economic model of the past 30 years has not been conducive for fixed capital formation, the exact best path to the future will have to comply with the basic economic equation of achieving growth by ways of investments but will also be requisite of a government that can secure an enabling environment of a strong legal and regulatory framework, in addition to an agreement with the International Monetary Fund. In this regard, the government is not the only blameworthy party, she adds: “Talking bluntly, not only the government is corrupt; Lebanese people are corrupt as well. I’m not talking about everyone but about the majority, whether we like it or not.
Needs of manufacturing development mentioned in closing remarks of participants included adoption of lean manufacturing principles for improving competitiveness and productivity, preparing draft laws for addressing ESG priorities, and activation of research partnerships between industry and academia. In a concluding comment, Georges Frenn of USAID, complimented participants for their dynamic engagement with the roundtable, saying: “There is a great need to work together and this is exactly what we are trying to facilitate.”