BEIRUT – The Lebanese vehicle market experienced its worse summer in decades as a result of the month-long conflict between Israel and Hezbollah, a 2-month sea blockade and an economic downturn.

The number of new registered cars tumbled 81% in August, alone.

“The car market is in complete chaos right now; millions of dollars have been lost,” says Samir Homsi, president of the Association of Car Importers in Lebanon (ACIL) and CEO of Impex Trading, the local representative for Chevrolet and Hummer brands.

Car dealers had high expectations for the summer, as did all businesses in Lebanon, with 1.6 million tourists expected to visit the country.

The economy was picking up after a sluggish 2005 marred by a spate of bombings that began with the assassination of former Prime Minister Rafik Hariri in February.

“We were expecting the best summer ever in Lebanon,” says Charbel Abi Ghanem, marketing manager for Rasamny Younis Motor Co. (Rymco), the dealer for Nissan, Inifiniti and GMC brands.

“Our hopes in the sector were high, believing that over 20,000 units would be sold this year.”

The war between Israel and Hezbollah, which began July 12 and raged for 34 days, put an end to such aspirations. With the country effectively in a state of war, up to 1 million people displaced and the economy at a standstill, many dealers were forced to close or operate with a skeleton staff.

“The management came in, but the showroom was closed; no cars were there,” says Abi Ghanem. Due to the threat of bombing, dealerships distributed vehicles to safer areas in the north.

Until mid-July, vehicle sales for the year had grown 4% with 11,624 new vehicles registered, of which 10,898 were passenger cars and 726 commercial vehicles, ACIL says.

But in August, the number of new-car registrations plummeted 81% to 302 units from 1,550 in like-2005.

Nagy Heneine, manager for BMW brand sales at Bassoul-Heneine, says his dealership saw $7.6 million in sales in July 2005, and had reached $3.5 million for the year this July up to the time the war started. “Business was stunning,” he says.

However, August sales struggled to reach $390,000, compared with $5.8 million in the year-ago period. “We expected to sell 150 BMWs in the last two months, but I suspect September sales will be close to August,” he says.

Negib Debs, sales manager at T. Gargour and Fils, the sole agent for DaimlerChrysler AG, says the distributor expected to sell at least 70 vehicles over the summer worth $5 million in sales. However, it delivered only 90 vehicles between January and August.

When Israel imposed a sea blockade on Lebanon, which lasted for 56 days, ships containing new vehicles had to dock elsewhere, heaping extra operational costs on dealers.

“There were 117 BMWs coming to Beirut that had to be returned to Genoa (Italy) and then to Germany,” Heneine says. “We had to pay for all the port expenses.”

Due to the unpredictability of the situation, Debs says Gargour cancelled orders for 100 vehicles.

Rental car companies, which account for 30% to 35% of overall car sales, also were badly affected. “Rental companies bought like crazy before the war and made orders, but are now trying to sell the cars,” Debs says.

Cancelled orders alsostrained marketing strategies, particularly for new models slated to go on sales this fall.

“We were expecting to launch four new models this year,” Nadine Azar Ghostine, marketing manager at Gargour, says. “We will introduce nothing before the new year, as we have to sell the older models.”

The new Nissan Sunny was to be launched in August, but has been postponed as a result of the war, Rymco’s Abi Ghanem says. Even worse, an auto show held every two years in Beirut and organized for November has been cancelled.

“Lots of people wait for the motor show to buy cars” he says. “It would have been a peak sales period for us.”

Dealerships consequently are scrambling to make up for lost ground. Rymco is searching its customer database to see if any vehicles were damaged in the war in an effort to offer customers assistance and deals.

Promotional campaigns are under way to get rid of ’06 stock by reducing prices, lowering interest rates, offering extras and lines of credit. The price of a GMC Envoy, for instance, has been slashed from $33,500 to $29,500.

“So we practically have no margins,” says Abi Ghanem. “We will forget about the brand and go for the hard sell.”

Heneine says with a 6%-8% net margin, dealers are unable to drop prices significantly. He believes the onus is on the government to help jumpstart the sector.

“The government should take immediate action, as they also are affected by reduced revenues from customs, taxes and registration,” he says. “They should remove registration fees – currently 7% of a vehicle’s cost – as it would help hesitant buyers.”

In the medium to long term, dealers will struggle in the face of sluggish economic growth and rental companies unable to pay back loans. Higher oil prices, which spiked due to the sea blockade, also could affect sales of larger vehicles.

“The worst thing is, even though the war has finished, people have lost confidence in the country,” Heneine says. “People with purchasing power have left – the ones that usually buy luxury brands – and are not coming back. It is a long-term disaster.”

Bassoul-Heneine reluctantly has scaled back annual sales predictions of BMWs from 740 units to between 250 and 400.

Despite the gloomy outlook, some dealers are retaining a degree of optimism.

“The situation here is unstable, and people would rather put their money elsewhere than buy a car,” Rymco Marketing Coordinator Layal Karam says. “But (the Muslim holy month of) Ramadan has started, and tourists from the Gulf are coming, so the economy could pick up.”