Post-Sanctions Automotive Outlook

Post-Sanctions  Automotive Outlook
Post-Sanctions  Automotive Outlook

As Iran and major powers signed the long-awaited nuclear treaty on Tuesday in the Austrian capital Vienna, Iran's automotive experts are beginning to speak out about the future of their sector.

One auto official explained how the country's automakers must prepare for the post-sanctions era, IRNA reported.

While envisioning a bright future, Davoud Mirkhani Rashti, a consultant at Iran's Automakers Organization, stressed that local auto manufacturers must prioritize joint ventures with foreign business partners.

"As automotive competitors from abroad begin to get a foothold in the market, Iranian carmakers need to show dynamism," he said.

"The situation in the auto sector will change for the better, once western sanctions on Iran over its nuclear energy program are lifted."

Mirkhani added that the immediate positive effects will be that availability of original auto parts for manufacturing will boost the quality of cars. He also said transactions will ease, as letters of credit and bank transfers will be streamlined in the coming months.

Finally, Iranian automakers are eager to start joint ventures with well-known international brands but "Iranians must offer incentives to attract foreign investment".

 Joint Ventures Way Forward

The idea of JVs in the local auto market is nothing new, since many producers over the last decade had teamed up with a host of companies from both Europe and Asia.  

Major auto manufacturers are already acting on Mirkhani's advice with regard to signing up foreign business partners.  Last month, Renault signed contracts with both Iran Khodro and Saipa to build new vehicles at both companies.

In addition to the French reasserting their role in the market, several Chinese organizations are offering a growing range of vehicles by nearly all major manufacturers, including Saipa.

Mirkhani added that for foreign investors to enter, the stability of the market needs to be established.

"Stability" was absent from the entire economy in the latter years of the administration of ex-president Mahmoud Ahmadinejad.

"Only then can foreign firms go beyond the mere offering of foreign models in the domestic market," Mirkhani said.

 Production Numbers

Iranian vehicle production rose by 67.5% in 2014, to 1,090,846 units, according to statistics from the International Organization of Motor Vehicle Manufacturers (OICA). Breaking down the headline figure, Iran produced 925,975 passenger cars and 164,871 commercial vehicles in 2014. This makes Iran the 18th largest auto producer in the world.

According to Mirkhani, Iranians should not expect vehicle prices to decline in the short run.

"The depreciation of the rial against all major currencies is the main reason why vehicle prices skyrocketed and labor wages increased by 22%. Hence, the lifting of sanctions will not fix everything," he said.

Although the wider trend in the industry would suggest that prices are not going to fall immediately, the gradual lifting of sanctions on Iran will have a positive impact on prices in the long run, coupled with the rise in spending power of Iran's middle class. Prices will likely appear more.

As we move in to Q3 2015, analyses like Mirkhani's will likely play into the wider economic forces. Rising competition is expected to be the real "game-changer", as the year progresses.

The rumored discontinuation of older models, like Peugeot 405, will lead to devaluation of similar vehicles and help roll new domestic models across the country.