Lebanon’s car sector: the downward shift

By Paul Cochrane, in Beirut  Going by overall figures of new cars sold, the automotive sector is doing surprisingly well in the current economic environment, up 4.33 percent in the first eight months of the year on 2012, and in comparative terms, above the GDP forecast of 1.6 percent for 2013. Furthermore, the figures are up on last year’s August results, which grew by 7.6 percent on 2011, and the 2.1 percent growth reported in the same period in 2010. But the sector is far from being in good health and bucking the downward trend in much of the rest of the economy.

Lump new car sales with the larger used car market, which accounts for around 60 percent of total sales, and overall sales are down 7 percent on last year, according to the Automobile Importers Association.

Yet while a drop in second-hand car sales is a boon to dealerships – and an environmental plus when it comes to the country’s carbon emissions, with fewer fuel-inefficient clunkers on the roads – the market has gone through a radical change in recent years that can be summed up in one word: downsizing.

“The market has shifted over the past five years, from the C segment to the smaller A and B segments,” said Nabil Bazerji, managing director of G.A Bazerji & Sons, distributor of Suzuki, Lancia and Maserati. “Before people bought a used BMW 3 Series, now it is a Kia Picanto as maintenance and fuel costs are lower.”

Prior to 2009, the lion’s share of car sales, at some 65 percent, were in the $22,000 to $90,000 price range. In the used car market, around 70 percent of sales were BMW and Mercedes, reflecting the widespread desire to own a luxury German car, even if several years old with 100,000 km on the clock.

However, the economic realities of inflation, higher fuel costs and lower purchasing power has led to 91 percent of the 24,008 new units sold until August being small cars, with price tags of around $10,000 to $12,000. Luxury car sales now account for just 2 percent of the market.

This trend is not likely to change any time soon.

“The A and B categories already dominate the market, and this trend will continue as consumers are increasingly seeking fuel efficient vehicles because purchasing power is shrinking,” said Farid Homsi, general manager of IMPEX, distributor for GM, Chevrolet and Cadillac.

The brands that have reported the strongest sales are Korean through their price competitive A and B segment models, up 9.52 percent on last year, with 11,181 units sold. Kia and Hyundai are into their fourth-consecutive year as the top two brands after knocking Nissan from the top spot. The Japanese brand is feeling the impact of the economic slowdown, with sales slumping 18.28 percent on last year despite an aggressive marketing campaign.

“The Europeans had their decade [as the top sellers], the Americans had theirs, as did the Japanese, now it is Korea’s turn,” said Rachid Rasamny, sales and marketing manager at Century Motor Co., distributor for Hyundai. 

Cumulatively, the 28 European brands have dropped 2.13 percent on last year, the seven U.S. brands are down 5.26 percent, and the 10 Japanese brands just in the black, at 0.21 percent. There are exceptions, with Infiniti selling well, up 100 percent, Volvo up 51.2 percent, and Mitsubishi up 134.91 percent. Infiniti has introduced smaller engines, which is keeping sales strong, while Mitsubishi has introduced a compact model.

In the European non-luxury segment, it is the low-cost Dacia that is reporting the strongest sales through its Logan model, which sells for upward of $10,000. Among the American brands, only Ford is on the up, attributable to the brand having re-entered the market this past year.

As such figures show, sales are far from being evenly spread, and net profits are generally down across the board.

“The cake is getting smaller and there are more people who want to eat from it. I don’t see brands vanishing from the market but definitely some brands are having a tough time,” Homsi said. 

Complicating the balancing of dealerships’ books is that the average return on a sale is 7 percent, which is equivalent to $700 on a category A model, making the automotive business a volume game with smaller margins.

“To compensate we need to sell bigger volumes but the problem is that not all of us can, and with three brands dominating sales, it is dangerous for the industry,” Bazerji said.

Kia, Hyundai and Nissan account for 59.89 percent of sales, while the two Korean players have 46.5 percent market share, at 26.75 percent and 19.7 percent respectively. In the A segment, the Koreans also dominate, with the Hyundai i10 accounting for 40 percent of sales and the Kia Picanto 50 percent, Rasamny told the Daily Star of Beirut. 

Other distributors are scrambling for what is left. For Chevrolet, the fifth biggest brand by sales in the country, sales are down by 19.41 percent on last year, while 60 percent of sales are in Category A (the Spark) and B (Aveo and Sonic) segments.

“It is true that you have three market leaders today, but competition for fourth to seventh ranking is getting stronger,” Homsi said.

Such competition is focused around the longer-established brands selling more compact vehicles at typically higher prices than the current top three by emphasizing quality, safety and after sales to a squeezed middle class.

“Customer service experience is the key factor that sets the dealer apart from competition. Statistics show that 46 percent of satisfied customers will definitely repurchase a vehicle of the same brand,” Homsi said.

Yet while the sector has been shaken up by a downward shift and the rise of the Korean brands, the situation in the market is not so different from others around the world that are still in the grips of recession and austerity measures.

“It is comparable to the U.S. manufacturers downsizing in the wake of the 2008 financial crisis; they understood that cars that are five meters long with V-8 engines are not for daily use,” Bazerji said.

In Europe, car registration is near a 20 year low, but just as Lebanese are opting for smaller models, Europeans, who have long favored compact models, are also downsizing from the C segment by buying small SUV crossovers, with sales up 88 percent over the past year, according to industry publication I.H.S. Automotive.

“We have clients that come into the showroom who own V-6 or V-8 engine cars but want to downsize to four cylinders. They are not low income earners, but realize they are spending way too much on fuel,” Rasamny said.

With the demand for smaller cars in vogue globally, this has prompted manufacturers to focus on the compact segments by introducing more choice, with Hyundai, for example, to introduce the Grand i10.

“The size is between the i10 and i20, so the A and B segment, and caters to a price segment that we didn’t offer before, at around $12,000 to $17,000,” Rasamny said.

To adapt to the ongoing downward shift in the overall market, some leading dealerships have acquired the import licenses for up-and-coming Chinese brands. Rymco, which has the Nissan dealership, has a 50 percent stake in Chery; NATCO, which has the Kia brand, launched BYD in the market this year; and last June, Rasamny Automotive Industries, which has the Hyundai dealership, launched Geely.

“Dealers had to do this strategically, and to get another brand is not much cost, just another showroom, as the whole back office is already there,” Rasamny said.

The Chinese brands are spicing up competition even further in the sector, with sales up 66.31 percent on last year, and rising nearly a percentage point to 2 percent of the market. Chery had growth of 138.1 percent and Geely, which bought out Volvo in 2010, was up 88.11 percent.

The rise in sales of newcomer Chinese brands further reflects the low purchasing power in the country, with their offerings the cheapest on the road and strong results in the small categories, with 58 percent of Geely’s sales in the A segment.

“People even need help in the $10,000 range as they have limited income,” said Imad Ghorra, general manager at Geely. “Many deals are not done as clients can’t pay the down-payment of $1,000 to $1,500. That shows the income of clients here, so even if the car is 20 percent cheaper than other brands, every dollar counts.”

Holding back the potential of the Chinese brands is that banks are not yet extending loan facilities, a factor that bolstered the overall sector when loans became more readily available, with sales surging from 19,100 in 2004 to reach a benchmark of 35,400 in 2008.

If the banks do extend financing, it may usher in a decade of strong Chinese brand sales, and even more competition for the rest of the sector.

“The future is for more Chinese cars, and we will be among the top players in Lebanon some time in the next few years. I can foresee Geely sales really flying,” Ghorra said.