Call for Car Industry Soul-Searching

Call for Car Industry Soul-Searching
Call for Car Industry Soul-Searching

Iran’s carmakers have announced repeatedly in recent weeks that car buyers have fallen out of love with their offerings.

They have struggled to drum up excitement for even new joint platforms with foreign companies (especially the Chinese), with sales continuing to lag behind expectations, even after the signing of the Joint Comprehensive Plan of Action over Iran’s nuclear program.

Ironically, JCPOA was anticipated to trigger a turnaround in the local car industry, but it may eventually cause a post-sanctions downturn as prospective buyers await the arrival of new models and expect domestic car prices to decline in the face of new competition.

On October 26, Financial Tribune reported that Iran Khodro’s production numbers dwindled to less than 910 vehicles a day, down from a 2011 peak of over 2,500 daily.

A variety of factors are at play with regard to IKCO’s production figures, including lack of investment in new vehicles and aging platforms, which are well known to most.

But this is not the entire story. The government’s role in backing the state-affiliated auto duopoly—Iran Khodro and SAIPA—through the last decade, which produce the bulk of vehicles, is also another leading reason for their general decline in sales and interest.

In foreign markets like the United Kingdom, this blind backing of weak industries has shown over the past 50 years not to work in favor of the auto producer, as it leads to weak sales and slow R&D.

Recently, the President Hassan Rouhani administration scrambled a last-ditch offer to the ailing industry in the form of a 250-million-rial car loan, payable over a seven-year period for car buyers.

The interest rate is expected to be around 16%, with the lending banks getting a return of 2%.

The government hopes this would halt the month-on-month decline in sales, but with people’s spending power still relative to where it was in the past three years, the auto loan may just be a futile effort in the long run.

 Problematic Cars

Inferior vehicle quality is the leading reason for the general disinterest in the local vehicle market.

In the case of Iran’s former best-selling car, SAIPA’s Pride, which has been produced in the country for some 20 odd years, issues of engine construction, weak body and passenger safety have given the small vehicle an infamous reputation.

Minister of Industries, Mining and Trade Mohammad Reza Nematzadeh also expressed his dissatisfaction with the situation a few months back by rhetorically asking why locally-made cars break down and must be repaired before having worked even 10,000 kilometers. This has been confirmed by numerous media reports.  

In another sign of changing times, a recent report in a local auto magazine said car owners are more than impressed with their new Chinese cars.

Financial Tribune picked up the story that the Brilliance cars, built by Kerman Khodro, scored high on quality as opposed to their Iranian counterparts. This adds credence to the quality issues of locally-made cars and their parts following the imposition of sanctions in recent years.

A Kerman Khodro spokesman said at the time, “The durability of the vehicle’s testing for the long-term test was done with European test requirements in mind. The car passed all the regular tests required by the European Union.”

The same cannot be said for many Iranian cars.

 Wait-&-See Effect

The one entirely new situation currently hurting more than most is by its very nature a byproduct of the recent nuclear deal. That is, Iranians are no longer putting their trust in the local car industry. This is primarily due to the recent rumors of foreign models on the verge of making an entry.

Volkswagen, Skoda, Peugeot, Honda and Suzuki are just a few of the companies who have been in discussions with local car producers and dealers. This information alone seriously dampened the general populace’s urge to buy Iranian cars.

Whether these car companies do sign joint contracts with Iranian counterparts or not, the damage has been done.

The proverbial nail is not exactly on top of the coffin, but the whispers of a foreign auto future, coupled with the expected advent of cars meeting international standards, will likely push the two key players to make tough decisions and a lot of soul-searching.