The journey of Lebanese makers Joining Industry 4.0 against all odds

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With daily electricity cuts and the lingering garbage crisis overwhelming us, it may be hard to keep our attention on the positive: There is a growing “maker movement” in Lebanon—also known as “Industry 4.0” (part of the fourth industrial revolution). This maker movement is made up of individuals who design, tinker, and create tech-based hardware products. The movement has been gathering traction—and definitions—worldwide, arriving in Lebanon as early as 2008. In Lebanon, however, these makers face a raft of challenges not seen by their global counterparts.

The maker movement has the potential to boost Lebanon’s economy in myriad ways: by increasing Lebanese productivity through the creation of hardware locally, providing job opportunities for engineers, business developers, marketers, and craftsmen, and producing locally-made products for export. Raed Khoury, caretaker minister of economy and trade, says that the maker movement is “a promising sector,” and that “investing in this sector could lead to several success stories” and contribute to economic growth. But before raising up the maker movement as a potent pillar of the Lebanese economy, there are several obstacles that must be addressed. In addition to the struggles that all startups must endure, makers witness additional burdens because hardware is expensive and difficult to make, and considered a risky investment.

Funding, bankruptcy and tax

One of the main obstacles to hardware startups is funding. In 2014, the money injected by Banque du Liban, Lebanon’s central bank, into the ecosystem through Circular 331 aimed to de-risk funding Lebanese startups, but while this has proven successful for software companies, many hardware companies still struggle to find investment.

Fares Samara, chief technical officer and program manager at Speed, a Lebanese accelerator, says that hardware startups are not appealing to local venture capital (VC) funds, and founders are often encouraged to shift to software: “there are limitations in the Lebanese market. Hardware is not [Lebanon’s] strength and it’s very hard for us to compete on a global level in terms of equipment, expertise, and funding. In software we have the capacity to be competitive on a global level as it only requires brainpower and a laptop, which is accessible to everyone and even a slow internet connection cannot obstruct your work.”

This view was echoed by Riyad Abou Jaoudeh, managing director at regional VC Middle East Venture Partners, who cited barriers such as imports, customs clearance, and lack of expertise when it came to hardware. Even those funds willing to invest in hardware, such as Berytech Fund II, look for ideas that find “solutions to big problems,” according to managing director Paul Chukrallah.

Hardware is usually expensive to develop and produce. Jad Berro, co-founder and CEO of the startup Innovo, a hardware prototyping service provider in Lebanon, says, “Many young entrepreneurs have interesting ideas, however, most of the time they cannot afford the cost to build a minimum viable product or a prototype, which could be the main killer of a project that could have become a success story.”

Fouad Fattal, co-founder and CEO of Krimston II, a dual SIM iPhone charging cover, explained that investor mentalities need to change as iteration is tough, long, and costly. He added that VC funds don’t invest in hardware startups because they believe that hardware is difficult, without having an understanding of the product development process: “To assess hardware startups, you need people with product development experience on the committee and that’s what’s missing.”

Investment gaps in Lebanon mean many ideas may not get off the ground at all. This scarcity discourages entrepreneurs, and even worse, makes them more vulnerable to so-called “shark angels” who take advantage and acquire large stakes in startups.

Fouad Fattal and his partner Nabil Nasr

Funding aside, startups are prone to failure—a commonly quoted but rarely sourced statistic is that nine out of 10 startups will fail—and with Lebanese bankruptcy laws as they are currently, this failure can cripple an entrepreneur. It takes two years on average for every bankruptcy case to be finalized and in that period entrepreneurs cannot register a new company. The potential for bankruptcy also deters investors who worry about safeguarding their money through the lengthy procedures, as well as attorney costs, and the reputational hit.

Governments are expected to supply the basic needs for startups—such as continuous electricity supply and fast internet—according to the International Monetary Fund. In Lebanon, however, it is not just these structural needs that are lacking; makers are treated by the government as though they are large enterprises rather than individuals, and suffer from the extra burden of income taxes, Value Added Tax, social security, and custom clearance tariffs. Expecting startups, especially makers, to pay the same taxes and custom tariffs as larger businesses is short-term thinking that could slow down the economic cycle by blocking access for emerging SMEs.

Customs clearance

Another major challenge Lebanon-based makers have to deal with is customs clearance. These businesses must import parts and electronic components from abroad, as they are not readily available in Lebanon. Once packages arrive they are often delayed and have high clearance costs, to the point that some makers find it faster and cheaper to travel and get the packages themselves.

A senior customs official, who spoke on the condition of anonymity, laid the blame for delays at customs on other institutions. He says that packages delayed at the airport are either held by shipping agencies or are being examined by the designated authorities while they are listed online as being held by customs. Customs also has no control over other institutions examining importing goods, such as the Industrial Research Institute or Lebanese Armed Forces, he adds. The customs tariffs for electronics is between 0-5 percent, so the high clearing costs that might exceed the shipments’ cost are defined by the clearing agents, who work independently from the customs institution and set their rates depending on their own expenses.

In the current customs system, the margin of mistakes, bribery, and delays is large. Major reform could spare makers from delays and financial loss. It is up to the Investment Development Authority of Lebanon (IDAL) to lead such reforms, as it is their duty to promote investment in Lebanon and decrease obstacles for entrepreneurs. On his end, Khoury says that the attempts by his ministry to reform customs policies were not successful.

Education: mentality and access

Those interviewed agreed that Lebanese students do not lack talent but are constrained by the lack of practical experience offered by educational institutions in the country. Guillaume Crédoz, a French architect and a maker who runs the “Bits to Atoms” fabrication laboratory (Fab Lab) in Lebanon, says, “Japanese schools send their students to visit pottery makers, for example, as they consider them life treasures, while in Lebanon, parents want their children to become doctors, lawyers, and engineers without getting their hands dirty, because manual work in not well regarded.”

Bassam Jalgha

Wael Khalil, the Berytech Fab Lab manager, points out that not many are taking advantage of the Fab Lab and those who do are either architects eager to learn, or engineers who don’t want to operate the machines themselves. This draws attention to the fact that Lebanese engineers do not lack the means to make, but the skills. How can we expect to have a strong industry sector and educated craftsmen if vocational and technical schools use old curricula, have weak practical training due to a lack of equipment, and no accreditation standards? There are no educational institutions providing technical studies on machinery and equipment manufacturing in Lebanon. This, in addition to the stigma of working with one’s hands, has limited innovation in this sector.

Berro, who started Innovo while still at university and subsequently dropped out in his third year, says “After my second year at university, I could not stand our education system anymore. It was too theoretical for me. Our instructors had never built anything before. I knew what I wanted and how to get there on my own.” Meanwhile, Bassam Jalgha started Roadie Automatic Guitar Tuner as a university project, but said that despite taking courses in entrepreneurship at university, he  realized he lacked the know-how to go about building his project after he had secured funding.

Reforming the education system will be tough, according to Ramy Boujawdeh, deputy general manager at Berytech, who says it is hard to change universities because they are often large and bureaucratic. “It mostly requires a national strategy and a vision,” Boujawdeh says. A 2017 World Bank report also cites the educational barriers to entrepreneurs, finding that local accelerator programs do not provide sufficient quality training, and mentors are scarce.

Further obstacles

Research and development (R&D) plays a critical role in the innovation process, and is an area of high investment in big companies. However, startups cannot afford R&D on the same scale. In Lebanon, R&D is lacking, and, according to Khoury, investing in R&D is the responsibility of the private sector. But spokesperson at the Ministry of Industry (MoI), noted that the ministry is putting more effort into research in response to world trends and the need to develop new industries here.  Infrastructure for hardware production is also an obstacle, as the laboratories specialized for certification are lacking and local patenting is not recognized abroad—which pushes makers to turn to the US or Europe and spend a lot on patenting, which they might regret later.

Securing visas for foreign employees is also a barrier in Lebanon, as Fattal notes: “Unfortunately our CTO is working remotely from India as he could not get a working permit unless it’s a domestic worker permit.” If the CTO were able to be based in Lebanon, he could have shared his knowledge with Lebanese engineers, Fattal adds.

Jad Berro

Light at the end of the tunnel

There are some positives, however. In terms of investment, the iSME program by Kafalat has tried to plug the funding gap by giving grants to early stage startups. Another obstacle has been removed with the  opening of Fab Labs—The Maker Lab, a collaboration between Innovo and Antwork, The Berytech Fab Lab, and Bits to Atoms—in Lebanon, which gives makers access to machinery so they can produce their own prototypes. Boujawdeh says that the aim behind opening a Fab Lab was to allow more hardware companies into Berytech’s programs by helping to reduce prototyping costs.

The MoI has been aiding makers through building industrial zones that include an incubator for high-tech manufacturers across Lebanon. In 2016, three industrial zones launched, and in 2017 five further locations were announced. An upcoming law is also set to provide Lebanese industrialists that export locally manufactured goods with a 50 percent tax cut on the profits generated from exports.

The MoI is also working to reduce another financial burden on entrepreneurs by amending the Income Tax Law to exempt research and development expenditure, and has prepared draft laws suggesting changes and exemptions in VAT.  The ministry has also signed an agreement with the Ministry of Education and Higher Education, and the Association of Lebanese Industrialists to design educational programs addressing industrial needs.

Meanwhile, the Ministry of Economy and Trade is currently working with the World Bank on providing funds for early stage startup, and, according to Khoury, the government is currently working on a draft law that would protect startups, investors, and debtors in the case of bankruptcy.

Moving forward

What if we treat the makers movement as the potential savior of this country, and pour our energy, expertise, and potential into it, instead of planting obstacles? What if the government, ministerial committees, central bank, and other institutions start working together and draw a plan for this movement to succeed? What if more technocrats start occupying public sector positions and start channeling the resources we have, the knowledge economy, in the right direction?

Lebanon should review its business models and consider instigating a free trade regime to become a hub for tech production in the MENA region, galvanized by an industrial free zone, startup visas, and e-services.

Lebanon’s education system, both technical and academic, needs to be geared toward industry, and celebrate makers and making. More funds need to be injected into the local startup ecosystem. The government should support those startups through a “Made in Lebanon” policy, and collaborate closely with them.

It is up to the government to  design a vision, and decide whether to let entrepreneurs like Jalgha, Berro, Fattal, and others be pillars of this movement, or just struggling passengers in the making of Lebanon.

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