The True State of Auto Industry

The True State of Auto IndustryThe True State of Auto Industry

About 10,000 people working in auto part manufacturing units have been laid off or temporarily suspended, a member of the board of directors at Iran's Auto Part Makers Guild said.

Mohammad Reza Najafimanesh also told the Persian website Khabar Online that nearly 190,000 people are employed in 1,200 Iranian auto part companies.

"These companies have neither logged sales, nor have they received debts owed to them. As a result, many workers have not received wages for several months now," he said.

"Company owners are dismissing the workforce whom they had trained and invested time and resources in."

Najafimanesh rued that conscientious and skilled workforce is one of the major assets that companies cannot afford to lose, hence layoffs will cost the companies dearly.

"However, layoffs are the last resort that the firms turn to when there are no resources available to even pay the wages of employees. By taking such a measure, the companies can cut expenses by a razor-thin margin and this will at best sustain their existence for another few years," he said.          

According to the official, the auto part industry is taking its last breaths and if this issue is not seriously tackled, 300,000 more workers are predicted to face the sack. He clarified that this number includes those working with the supply chains and providers of raw materials.  Najafimanesh warned that a major crisis looms, which will take its toll on the auto part manufacturing industry and other industries directly or indirectly working with the auto part makers.  According to the most recent official statistics, the debt to the auto part manufacturing sector is estimated at 40 trillion rials ($1.2 billion at market exchange rate).

This is all the more surprising since Iran's carmakers have been selling their overpriced products for decades by taking advance payments from buyers. This does not make sense to most analysts.

  What Figures Fail to Log

When asked if the amount has since increased, the guild official noted that he was not aware of the exact figures, but added that the auto industry has not been doing any better since the last figures were released.

He confirmed that the problems crippling the industry still persist and "must have only worsened."

As long as the debts are not settled, not only the auto part manufacturing industry cannot improve, even maintaining its current status might also be impossible "for the auto manufacturers themselves will be in debt to laborers, insurance companies, banks and tax organizations," Najafimanesh said.    

The official added that over 80% of the parts used in manufacturing Iranian vehicles are produced inside the country.

"With the current problems blowing out of proportion, our national economy will take the hardest hit," he said.

Najafimanesh noted that data released by Iran's Judiciary indicates that among all the country's industries, the auto part manufacturing sector has been the one registering the largest number of bankruptcies.

"Nearly 50% of all firms filing bankruptcy were auto part manufacturing companies," he said.  

The official explained that from the time a firm files for bankruptcy, it will take at least a year until the request is reviewed and the firm is officially declared bankrupt.

"Given the current dire situation with which the auto part manufacturers are grappling, we will have to expect a new wave of bankruptcy in this sector in a year or two," he said.

Asked whether the automakers also had to lay off their workforce, Najafimanesh responded that automakers no longer allow their staff to work overtime or on weekends. Companies that would work until 9 p.m. now close at 4, however, the difference lies in the fact that since carmakers are managed by state officials, they incur losses but are not held accountable.

During the past three months, production started to decline and the situation alarmed most officials including Minister of Industries, Mining and Trade Mohammad Reza Nematzadeh.

The minister, along with the head of Iran's Management and Planning Organization and the government's spokesman, Mohammad Baqer Nobakht, toured Iran's largest auto manufacturing company, Iran Khodro, late in September.

Instead of questioning the performance of automotive companies' managers, who are appointed by the government, they have been promised financial assistance.

  Connecting With Banks

Officials have held several meetings with carmakers, auto part manufacturers and the Central Bank of Iran to tackle this issue.

The official suggested that the same measures taken by foreign industries in similar situations be implemented in Iran.

"Banks often purchase half the assets of a company going bankrupt and release the assets to the public. We need to take up similar measures," he said.

Najafimanesh also blamed high interest rates on loans and deposits for the lack of liquidity in domestic industries.

"So long as banks offer 20 to 30% interest on deposits, other industries cannot compete in attracting investment. Also, high interest rates on loans have taken their toll on domestic production and this issue needs to be addressed."

According to President Hassan Rouhani, Iran's car manufacturing industry, which is now 60 years old, "needs no help."

However, the government's spokesman announced the allocation of 2,000 billion rials ($59 million in market exchange rate) as aid to IKCO and SAIPA, the products of which have been boycotted by domestic consumers through an online campaign for months over their high prices and low quality.

Produced by Saipa—the country's second largest auto manufacturer—the Kia Pride, for instance, needs to be taken straight to the repairs shop once it is released from the factory.  

With the possibility of the entry of foreign players in the near future, instead of blaming the sanctions, local auto manufacturers must come to realize that they are currently paying for their own flaws. They have no choice but to face the realities and prepare to stand up to the upcoming competition. This includes improving the quality of products and moderating prices.   

If Iranian car companies need a lesson from the past, the slow demise of British Leyland, the UK's national car producer of the mid-20th century, should act as a wakeup call when it comes to government backed oligopolies.