The economic impact of the current phase of uncertainty is weighing differently on different sub sectors in the manufacturing industry. Overall, the toll on revenues, as far as it exists in the realm of industry, is just materializing, or will only emerge several months further into the year when current orders have been filled. This gives companies, fearful of their business prospects, a narrow window of about one quarter in which the country has to return to stability – otherwise they will face many difficulties.
Many industrialists, however, see a positive future for manufacturing in Lebanon, provided, of course, political developments go smoothly. The accomplishment of a wave of civil freedom has shown in many precedents to stimulate demand and liberate previously stifled growth potential in an economy. In an environment of respectful interdependence with its Arab neighbors, Lebanon could benefit exceptionally well from a democratic spring and peaceful reforms in the Levant, because of the private sector’s knowledge of markets, easy geographic access and business acumen.
When it comes to the industry sector, the main internal challenge is the nation’s ability to maintain a high level of civility and peace in the ongoing political disputes, especially during the upcoming elections. The securing of good working relations with Syria throughout the political review process poses the other big challenge. However, even assuming that all political processes proceed smoothly, it is becoming clear that a return to political stability in and by itself will not be enough to improve the lot of Lebanese industrial manufacturers.
In a number of respects, 2004 was a rather good year as industrial exports continued their rise in value from $1.44 billion for 2003 to $1.64 billion in 2004, an increase of 14.1%. In parallel, investments into production capacities, indicated by importation of industrial machinery, also increased from $109 million in 2003 to $142 million last year, a jump of almost 30%.
However, with a share of those increases attributable to the strong euro, growth of exports and investments into machinery are not necessarily indicative of a massive gain in industrial productivity, which remains a core need for the sector. Analysts and industry representatives also still see the target markets of Lebanon’s industrial exports as being in need of further diversification. Exports to Europe, with the exception of the, in economic terms, atypical exports of mostly jewelry to Switzerland, must still be regarded as a development goal rather than an achievement.
In exports to Middle Eastern countries, which have to be the main staple of expansion-minded local industrialists in lieu of a large domestic market, Lebanon faces a curious situation of having high production costs when compared to the region’s lower income countries with big populations but also to the much more affluent economies in the Gulf, even where their per capita GDP is several times that of Lebanon.
Both in terms of labor and energy costs, it is acknowledged that Lebanon is at a disadvantage when compared to other Arab manufacturing locations. Between these costs and the high cost of funding, the competitive position of Lebanese industry has seen no radical improvements for at least five years. The contribution of industry to the economy remains at about 20%, and a recently published 2005 overview by the Chambers of Commerce and Industry describes the sector’s situation very much in the same terms as it was in 2003.
Given that a big slice of last year’s real GDP growth of about 4% originated from tourism, including the consumption demand created by the foreign visitors, and that a foreign-nurtured construction surge accounted for another important portion of growth, the demand outlook for 2005 is muted and industry seems in no position to count on large domestic demand growth.
Officials at the chambers of commerce said however that it is too early to see the eventual effect of the February/March period on industrial revenues in Lebanon beyond the immediate damages of the 14/2 blast and seven lost days of production. According to chamber experts, exports of manufactured goods could continue at good levels, as there is reason for a slump in regional demand for Lebanese products resulting from the current crisis over the nation’s political future.
Industrial manufacturers working in collaboration with European firms have a distinct chance to further improve their position if they have a critical mass consisting of a regional distribution network, proven skills and ability to contribute capital to a joint venture, assured industry consultant Roger Dib.
However, a deterioration of relations with Syria could throw a huge monkey wrench into the gears of Lebanese manufacturing industry. Apart from being itself one of the largest markets for Lebanese exporters, “Syria is the gateway to anywhere,” Dib said.
The latest month for which reference numbers on exports are available is January 2005, with total exports of $125 million. Of six Middle Eastern countries that received about 47% of Lebanese exports in January of this year, Syria accounted for 11% ($13 million) and four others – the UAE, Saudi Arabia, Iraq and Kuwait – are land transport destinations via Syria. Turkey was the one major destination country in January, where land transit through Syria is not the only logical avenue for the bulk of exports. Thus, industrialists are of wide understanding that a closure of their borders with Lebanon by Syria would have a devastating impact on Lebanese trade.
In addition to Syria’s importance in reaching the export destinations most attractive to Lebanon, the sub sector of industry with the largest stake in easy-to-transport, high value-added exports harbors another massive fear over potentially devastating effects of domestic instability on regional business. This sub sector is the Information Technology industry with its high emphasis on delivering corporate software packages to customers in Arab countries.
As the manufacture of software products goes hand in hand with the provision of intensive after-sales services to corporate clients, regional decision makers would shy away from awarding contracts to Lebanese software manufacturers if political instability continued to cause any doubts over the ability of these companies to fulfill after-sales service contracts, the director of the Professional Computer Association, Nizar Zakka, told Executive. ”The people in our industry had a very bad month and everybody is worried about the future,” he said. “Today we don’t know where things will go. Our industry has a tolerance for fluctuating demand but if the cycle doesn’t accelerate after three to four months, the situation will be severe. It will become clear what the real effect is when the current contracts are fulfilled in a few months’ time.”
The pain that the information and communications technology sector is feeling over the current period is exacerbated by two exigent factors. Firstly, just a few days prior to 14/2, a joint venture of software multinational Computer Associates (CA) and Lebanese firm MDS Holding announced the opening of a call center in Beirut designed to serve CA clients throughout the Middle East with technical support.
Call centers, or contact centers, are today a huge economic phenomenon in serving corporations in technology, services, and manufacturing. In the past five years, the call center industry has grown exponentially in countries like India where the numbers of round-the-clock “seats” in contact center work places tallies at over 150,000. The Philippines, another leading growth country in the field, doubled their seats from 20,000 to 40,000 between 2003 and 2004, after achieving revenues of about $200 million in 2003.
At the launch of the CA – MDS joint venture for Lebanon’s first regional call center event, telecommunications minister Jean-Louis Qordahi announced that Lebanon was aiming to invite companies to establish call centers here and that the MOT had drafted specific “tariffication” to attract operators. He described the potential for such operations in Lebanon as “unlimited.” And although the new venture between CA and MDS started with only a handful of seats and qualifies initially as an inbound support center more than a contact center, the country satisfies important preconditions for developing a successful call center industry because of prevalent language skills, technical skills and service culture existing here.
The new positive climate for private sector initiatives in ICT was also expressed in a recent survey on key IT trends in Lebanon’s PC penetration and internet usage. According to analysts SRI, who conducted the survey, “65% of Lebanon’s urban population has some level of use of computers”, and internet access is “in the ‘take-off’ stage with nearly one quarter of internet users getting their exposure to the technology in the last year alone.“
Such findings had heartened ICT companies in their expectations of renewed business growth for 2005 and beyond. The country’s sudden shift to political uncertainty hit the sector thus ever harder, by endangering fledgling opportunities and causing worries about a new slump in business in exports and at home. The latter concern is due to the fact that most corporate ICT customers in Lebanon consider investments into information technology as tool to enhance their business only when the need arises under favorable revenue developments.
The second element is that this sector has been lambasted more than others by failures of the public sector to create a favorable environment for their operations. Based on the administration’s inability to institute the Telecommunications Regulatory Authority (TRA), reduce costs for internet connectivity and general communication by a meaningful margin, and establish an Information Technology zone, the PCA would not expect any new government to succeed in assisting the ICT industry. “We don’t believe that the next government will create the TRA. It will not create a tech zone,” said Zakka. “They are transforming an issue of prosperity into an issue of power. It’s a pie of which everybody wants a slice, and this won’t work. We don’t want them to help. The best way for them to help is really to leave us alone.”
With such fundamental distrust in the ability of any administration to instigate positive change, the question acquires urgency whether the next government of Lebanon will be able to address the need to make manufacturing in Lebanon more feasible and provide meaningful incentives to industry. Reduction of the price industry has to pay for electricity and other measures to lower the cost of production here have been long standing demands by the Association of Lebanese Industrialists. Irrespective of its composition, any new government tasked with the responsibility of steering the country after the upcoming elections will have to face the multiple challenges of improving public sector performance in support of economic growth, earning the trust of industry, and of carrying out a difficult reform process to remedy problems that have long plagued the country and put a strain on socio-economic relations.
One of the issues looming large on the horizon is to make further progress in adapting Lebanon to European and WTO standards for industrial production, another is the need to devise and implement a strategy for ensuring the environmental compatibility of industry, including the relocation of manufacturing companies from irregular industrial zones to proper ones, better treatment of industrial wastes, and safeguarding of air and water quality.
In recent weeks, the issue of Syrian labor has been highlighted in many discussions. However, while numbers about the relations between Lebanon and Syria have been floated in the debate, these calculations appeared driven by political objectives and not by the desire to assess the real size and balance of gains or losses that the Lebanese and Syrian economies incurred from their relationship over the past decade.
In this debate, the issue of Syrian labor has been used to muddle the picture stir public opinion, using vague estimates and misstating the role of remittances by Syrian workers while neglecting to also account for example for the – far more weighty – importance of remittances from Lebanese expatriate workers in other countries for the Lebanese economy. Finding a solution for the presence of Syrian labor in Lebanon without replicating the erratic status quo where these workers are neither monitored in numbers nor covered by any social services will be a big challenge to any administration in the process of reforming both the relations with Syria and the shadowy aspects of the Lebanese economy.
In the meanwhile, however, Syrian labor remains important to Lebanese agriculture and construction but also to other sectors. As many industrialists assert, hiring of Syrian workers has a tradition here that precedes the presence of Syrian armed forces. Construction companies and suppliers of construction materials are among the first companies that will see problems mount if the current political crisis in relations with Syria carries on into the summer.
