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Routes out of crisis

How the Lebanese logistics sector is handling – sometimes thriving from – trouble in Syria

by Executive Editors

Business is “flourishing.” It’s a rarely heard sentiment in Lebanon today given the war in neighboring Syria and unease at home. Despite these challenges, Mourad Aoun, Chief Executive Operator of logistics group Net Holding, claims his businesses are doing even better — far better — than they were last year. “For the express industry, it’s flourishing. … If we go to the shipping side, it’s been even better,” he says.

Aoun’s counterintuitive assessment is one of the bright spots in an otherwise moribund economy.  And data from the Customs Higher Council supports the claim: from January to May 2013 — the most recent available public data — total import values were off just a fraction of a percent from the same period a year prior, while exports were up more than 7 percent. These modest changes, however, mask big movements in how the logistics sector is operating, and where companies are making and losing money.

Veering off the road

Before the Syrian uprising erupted in March 2011, trucks were the cheapest way to transport goods between Lebanon and the Gulf. But as the crisis escalated, drivers and their cargo came under greater threat, pushing costs higher. Then in March of this year, Jordan closed its northern border — effectively ending ground transport as a viable option.

“When the border closed, we were obligated to take our cargo by sea,” explains Nour Ghandour, operations manager at Gifco, a Lebanese offshore logistics company. But, she says, taking cargo by sea “is more expensive and profitable. …We took advantage of this.” Gifco’s book shipping business has now shifted entirely from ground to sea transport. “In logistics, when one door closes, another opens,” she says.

Net Holding has witnessed a similar shift. “We’ve seen tremendous growth in ocean export. It’s been unusual,” says Aoun. There are two reasons for this. First, “people do not want to risk losing their cargo,” he explains. But more important is the uncertain transit time for the few truckers still willing to transit Syria and able, whether legally or illegally, to get through the borders. “The trip can take you 10 days … or 20 days to be in Saudi Arabia, whereas usually it would take four days.” For exporters who need to fill orders on time, this is unacceptable.

Net Holding and Gifco’s shift to sea traffic is part of a wider trend. Shipments of 20-foot-equivalent unit (TEU) containers averaged 56,103 per month from January through March of this year. In the five months since the Syrian–Jordanian border closed, TEU shipments have averaged 68,954 per month. This amounts to a 22.9 percent increase — larger than seasonal increases in 2011 and 2012 at 18.0 and 21.7 percent, respectively. The increased traffic has led to congestion at the port as it completes a project to expand capacity by some 60 percent. This expansion is due to be completed in November.

But while shipping through the port may work for goods that don’t need to be delivered quickly, it won’t suffice for time-sensitive orders. Before the border closing, Net Holding’s subsidiary TNT had an express trucking service that operated on a time-definite basis. TNT now ships these time-sensitive products by air. Since the trucking service was premium, the air alternative is only slightly more expensive, explains Aoun. “Instead of having a problem and saying, ‘Ah, we don’t have service,’ we created an economy product that is a very viable product … and clients are using it to substitute for the trucking service.”

Global giant DHL’s air business has similarly seen an uptick. When the border closed, business that had gone to the company’s truck delivery service was channeled into its air and sea options. However, DHL Express country manager John Chedid says, the new air traffic “didn’t suit our timetable … so about a month ago we started using our own plane. … This is one of the benefits of using a company like DHL.” The new DHL-owned plane service allows the company far greater flexibility. “We’re able to control capacity; we’re able to control scheduling; we’re able to control what’s on it, what’s not on it; therefore we’re able to control price,” says Chedid.

Even typically cheap goods that would be uncompetitive if expensively shipped by air must occasionally be flown to meet orders. Gifco’s Ghandour claims the company has handled several such shipments of vegetables, which would go bad if shipped by sea.

The Syrian connection

Trade between Lebanon and the Gulf is not the only route affected by the Syrian crisis. Syria’s own economy — while tailspinning — must still export and import goods. With civil war raging, it is not always possible to get goods out through the ports in Latakia and Tartus, or through the airports.

As a result, says Ghandour, “We’re serving as a gate to Syria. …We are moving cargo via sea [to Lebanon] and [and then via] land to Syria.” For exports, Gifco has forged partnerships with Syrian companies who used to ship through Latakia and Tartus. “Syria has so many things they export … so when they had a problem with the ports, their only option was Beirut,” Ghandour explains, adding that since many Syrians left to work in the Gulf, Gifco has handled more shipments of personal items such as cars through Lebanon.

This service has proved lucrative due to the risk involved on the Syrian side of the border. According to Ghandour, freight charges have doubled since the uprising began. On top of that, she explains that while insurance used to be an option, “Now it’s a must.” This is good for companies like Gifco that offer insurance plans — premiums have “doubled or more to risky areas,” she says.

Such business, however, is shunned by Net Holding. Conceding the opportunities missed by not entering the market, Aoun takes a more cautious approach. The group’s subsidiary SkyNet — a local franchisee of the global SkyNet brand — maintains a presence in the country, but “what we’re moving into Syria is only documents and things that cannot be in breach of compliance issues” such as US sanctions. This strategy accommodates three of Net Holding’s goals: to provide global services and demonstrate the company’s commitment to clients currently living under harsh conditions, while maintaining the company’s ties to American businesses.

Bottom lines

Net Holding’s cautious strategy in the Syrian market has not hurt its financials. Instead, it has seen a dramatic increase in cash flow. Revenues for its express businesses have increased approximately 35 percent over the past year according to Aoun.

But the larger and more lucrative volumes of sea and air traffic do not always make up for the steep decline in trucking services. Gifco’s Ghandour estimates the company’s overall volume of shipments has decreased by 40 percent over the past year and a half. “We used to get two to three containers per month,” from some clients, but “now we’re getting one,” she explains. And increased revenues from sea and air transport have not made up for the loss. Ghandour estimates the company’s revenues are down from pre-crisis levels, but only slightly.

The shifts in the market hit small companies much more heavily. Global Freight and Logistics, a firm started in 2008 specializing in wood and furniture shipments, had to stop land service to the Gulf late last year due to the deteriorating security situation. Its owner and CEO Nagy Feghali explains that while prices have gone up — a typical land shipment from Saudi Arabia costing $1,800 now ships by sea for $4,000 — volumes have decreased even more.

A greater concern, though, is clients’ ability to pay. “We used to get our payments after one month” post-delivery, says Feghali. “Now everyone’s asking for three months, or even four. For one client in Tripoli, it’s been eight months.” While larger businesses only deliver paid orders, Global Freight allows clients to pay as they’re able — usually as they sell the product they’ve ordered.

Despite this, Feghali’s business model does offer an added measure of resilience. “My clients are my friends. Only maybe 30 percent [strict] business relationships, but they become friends,” he says, adding that “they will stay with you. …They don’t even ask about the rate.” Accommodating their financial difficulties thus becomes part of Feghali’s service.

Contingencies …

or opportunities

Amid a deteriorating security situation at home, a ceaseless civil war next door, a potential western attack and sky-high regional tensions, each company Executive spoke with was concerned — enough to have contingency plans — but not overly worried.

Net Holding’s Aoun and DHL’s Chedid both emphasize their companies’ long histories in Lebanon. Net Holding is celebrating its 20th anniversary this year. Aside from temporary disruptions, DHL has continuously operated in the country since 1979, according to Chedid.

When the airport became inaccessible during the 2006 war, DHL Express moved operations to its center in Jal al-Dib, using the land route to Jordan to send and receive shipments, says Chedid. That wouldn’t be a possibility under the current situation. “If the airport is closed, we may have to consider a ferry to Cyprus, which is something we did during [Lebanon’s] civil war,” he says. But failing an airport closure, DHL appears to be moving in the opposite direction — namely, its new weekly flights to Beirut.

For his part, Aoun doesn’t entertain any notion of shutting operations. “We’re not a local company; we’re a Levant-based company. We cannot just stop.” Pointing to SkyNet’s office in Syria, he adds, “If we’re still operating in Syria, I don’t see why we would stop operating in Lebanon.”

If the situation worsens, Aoun says Net Holding has alternate operations centers ready. “We have a war operation type of scenario where we decentralize everything. …This is what we did in 2006; people were working either from home or from a secure location,”    he explains.

But Aoun acknowledges the business opportunity afforded by crisis. “War for us is an opportunity to tell our clients we’re here and we’re solid, because the economy cannot stop. People need to eat …cargo needs to move.” The sentiment is echoed by Gifco’s Ghandour, who succinctly notes, “As logistics people, don’t worry about us.”

Global Freight’s Feghali isn’t worried that his clients, most of whom are friends, will abandon him. This applies even if he’s forced to temporarily shut down operations. While he’s concerned about the immediate situation, he’s resolutely positive about a rebound once security gets better: “Once the situation finishes the work is going to be booming.” He’s even planning an expansion into Syria.

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Executive Editors

Executive Editors represents the voice of the magazine.

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