COMPACT IS KING

Lebanon 2013 | INDUSTRY | FOCUS: AUTO

Downward economic pressure has facilitated increased demand for more affordable and efficient automobiles in the Lebanese market.

Lebanon's auto market has undergone a significant transformation over the last four years as a growing consumer preference for smaller, more compact cars has taken hold. “Some years ago, the market was driven mainly by medium to large cars while the low-budget cars were mainly dominated by used cars imported from Europe and then from the US", said Stephan Haji Touma, Chairman of Gargour Holding (Mercedes-Benz). “In the last two years, the used car market has dropped to be replaced by new Korean cars." By the end of 2012, Korean-manufacturers clearly led the new car market, with a commanding 45% share. Kia and Hyundai have been the main beneficiaries, with sales of the former growing from 4,204 units in 2008 to 9,484 units in 2012, while sales of the latter grew from 2,283 to 6,507. The rise of Korean manufactured cars has come primarily at the expense of Japanese car companies, the market share of which fell from 49% in 2008, to 27% in 2012. However, neither European nor US manufactured vehicles were immune, falling to a 20% and 6% market share, respectively.

The change in purchasing patterns by Lebanese consumers reflects a growing preference for smaller, cheaper, more compact cars in the A and B segments, at the expense of the traditionally dominant, larger, C segment. “The problem is that, again, in our part of the world, the market is split between very low-end and very high-end products," said Assaad R. Raphael, Porsche Centre Lebanon's Chairman and General Manager. “The trend is toward low-end models at the moment and that is why in Lebanon we see many cars being sold at the low end, and a lot of competition in terms of finance and insurance for such models." Indeed, according to the Association of Automobile Importers in Lebanon (AIA), a combination of aggressive loan financing by banks for new cars, together with falling purchasing power, rising fuel costs, and ongoing political uncertainty has contributed significantly to changing trends.

Despite these downward pressures, Lebanon's automotive sector appears to have remained remarkably resilient, with 24,008 new passenger cars sold from January to August 2013, according to the AIA. This marks an increase of 4.33% in new cars sold over the same period in 2012. Korean cars predictably accounted for the lion's share of the market, with 46.6% of sales, while Japanese models took 26.4%, European manufacturers took 19.5%, US automobiles took 5.6%, and Chinese cars took 2%.

However, 91% of the new cars sold over this period were compact models averaging around $10,000 to $11,000 each. This is a stark shift from the past, where, according to Executive Magazine, approximately 65% of automotive sales were in the $22,000 to $90,000 price range. So while sales volume may be increasing somewhat, absolute revenue is evidently on the decline. Furthermore, when taking the new and imported cars, and used car segments as a whole, the number of newly registered vehicles over the same period fell by 8%, according to the AIA. The overall contraction has also been reflected in government tax revenue from the automotive sector, which fell from 8.8% of total tax revenue in 2008 to only 6.2% in 2012.

Lebanon is notorious for its high taxes on luxury cars, a point that has not escaped Raphael. “The tax structure is as such: you get 50% taxes, 10% VAT, and another around 6.5% for road tax and registration fees, which means the price is not aligned with the GCC." This tax structure, together with downward economic pressure, has left the luxury car segment with just 2% of the total new car market. Consequently, customer service and dealers have been pushed to greater lengths to compete through quality customer service. “We sell cars because we have excellent products in addition to the service we provide to our clients," said Raphael. Nevertheless, the luxury car segment still remains relatively inelastic, and Maroun Yazbeck, General Manager of Sport Motors Group (Ferrari), doesn't expect this to change: “During my experience with all the crises that we have passed through, the high end didn't stop buying cars in Lebanon."