The top two domestic automakers’ cumulative loss has reached 800 trillion rials ($3.36 billion) by the month ending May 21.
Saeed Madani, a former CEO of SAIPA, added that in view of the declining output of major automakers, Iran Khodro (IKCO) and SAIPA, the mounting loss must be addressed promptly, or their operations will close down, Asr-e Khodro reported.
Based on the data released by Securities and Exchange Organization on Codal.ir, Iran's vehicle output fell by 39.4% year-on-year to 54,233 sedans in the month ending May 21.
According to the ex-official, Iran's automobile industry is a crucial sector, accounting for 18% of the country's GDP, which means that bad decisions in the sector could have far-reaching effects.
“Iranian automakers have been battling to stay afloat due to the limiting effects of US sanctions on the sector's dealings with overseas partners,” he added.
Madani noted that the cumulative loss will not be mitigated until the sector is fully privatized and the Competition Council stops imposing mandatory vehicle pricing.
The council is a state-backed body that monitors and sets prices for key products, including cars. For pricing, automakers send the council a detailed report of their production costs and the council makes a decision based on a variety of factors such as market conditions and consumer purchasing power.
“If pricing is assigned to the producers, market manipulation by middlemen will have little effect on prices, while car production will also increase,” he said.
Madani censures officials who blame the automakers’ losses on their overhead costs, explaining that the overhead costs constitute only 15% of the total vehicle prices.
“Vehicle production costs have at least tripled due to the surging prices of raw materials and auto parts,” he said, calling on government officials to help automakers compensate their losses.
Uncertain Future
Iran’s automotive industry has perennially faced problems even before former US president, Donald Trump, imposed tough economic sanctions in 2018 after quitting the historic Iran nuclear agreement.
As expected, the US penalties gradually cut off the supply of raw materials and auto parts on a massive scale. Foreign carmakers and parts suppliers walked away from the lucrative market fearing Washington’s ire.
Multifarious solutions have been proposed by authorities to minimize the negative impact of the US president’s open animosity and economic war against Iran’s major industries. The proposals have produced nothing of essence and failed to prevent a hike in car prices.
The Industries Ministry is in charge of regulating the loss-making automotive industry. Over the years, the ministry’s thick ties with the undeserving sector and vested interests of some state actors have impeded efforts for real reform.
Corruption scandals running into the hundreds of millions of dollars have further tarnished the auto sector’s public image. The scandals have made economic experts and informed observers wonder whether the paralyzed industry has a future.
As part of the ministry’s agenda to revitalize the sector, localization of parts and technologies has been placed high on the agenda of the government and carmakers. However, it simultaneously issued import permits for low tech auto parts like mudguards.
In a 2018 report, reviewing data from the Islamic Republic of Iran Customs Administration, Financial Tribune revealed that such permits had been issued for years. The data are no longer available and cannot be ascertained whether the practice is continuing.
Dilemma of Parts Makers
Domestic auto parts makers are facing difficulties in procuring raw materials and key parts from foreign sources due to the US sanctions, Mohsen Razmkhah, an industry insider, earlier told reporters.
He said the industry has fallen into stagnation due to soaring currency rates that make it almost impossible to import machinery and equipment.
Since the summer of 2018 when the US sanctions were reimposed, the rial has lost about two-thirds of its value and prices of almost all goods have soared to unprecedented highs.
The greenback was trading at 238,000 rials in Tehran on June 14, though it hardly fetched 42,000 rials two years earlier.
Castigating the state’s poor management of the ailing sector, Razmkhah said loans act like sedatives in this struggling industry.
The government is the main shareholder of the biggest car companies: IKCO and SAIPA.
Both auto “giants” are living on borrowed time, so it seems. They have long been sinking in a sea of red ink and are always salvaged by the state and government on the threadbare pretext that “thousands of jobs are at stake”.
“Borrowing has not and will not solve the deepening problems of auto parts manufacturers and an effective strategy is required to revive the industry,” Razmkhah said.
Giving a more optimistic perspective, Abdolvahab Sahlabadi, the head of the House of Industry, Mine and Trade of Iran, affiliated to the namesake ministry, said automotive companies are in direct contact with parts makers, so they must forge closer collaboration to overcome the current economic headwinds.
“With financial mismanagement, automakers’ debts are piling up, causing trouble for both sides. Parts makers are struggling to finance their operations and this has killed their motivation and working spirit,” he said.
Industries Ministry Stepping In
The Ministry of Industries, Mining and Trade plans to curb imports worth $3.4 billion in domestic industries during the current fiscal year (started March 21), a considerable share of which pertains to the automotive sector.
According to Deputy Industries Minister Saeid Zarandi, the goal will be achieved through 14 localization projects.
The official noted that the ministry is committed to streamlining car production and supporting auto parts makers and tire manufacturers.
“The ministry also plans to help revive 2,000 industrial businesses in the coming months. The businesses were closed due to Covid-19 and economic difficulties,” he said, adding that a large number of these firms are linked to automotive industries.
Zarandi claimed that with state support and the technical assistance of knowledge-based companies, 1.2 million passenger vehicles are set to be produced in the current fiscal year.
