Auto Problems Persist Despite the Loans

Auto Problems Persist  Despite the LoansAuto Problems Persist  Despite the Loans

The remarkable success of Iran’s auto loan scheme, which commenced at the beginning of the previous Iranian week and abruptly ended six days later, shows just how much untapped demand there was for locally made vehicles.

The loan offered by the government of President Hassan Rouhani and backed by the Central Bank of Iran was well received by the thousands who signed up for the long-term payment plan–the loan was quite different from what was offered up until this point.

In their droves they came on the first morning, with 4,000 people signing up for the scheme and the majority opting for the lowest cost cars that are not necessarily cheap. These included the Peugeot 405 and the Saipa Pride model variations, which indicate a lack of disposable income.

Iran Khodro Company, the country’s top car manufacturer, announced last Friday it alone had over 53,000 requests for new vehicles and 43,000 of all applicants had paid the down-payments on their requested vehicles, surprising the automotive fraternity.  

As of Saturday, carmakers warned that their car stocks were getting perilously low and that car buyers needed to make the decisions quickly if they wanted to be part of the scheme or not.

By Saturday night, the carmakers’ announcement was taken to heart by many and they too joined the thousands of users in signing up for the loans.

By any stretch of the imagination, selling 110,000 cars in less than six days is unprecedented by any country’s standard, except China’s.

 The Reason for the Spike

The sudden 180-degree swing in car buying attitudes points to a much larger fundamental issue with the country–that is the lack of credit available to consumers.

The recent “Say No to Local Cars” campaign was as the organizers of the grassroots movement perceived: a roaring success. Car sales in the country tumbled during the past few months, as the populace backed the drive against low-quality and high-priced cars.

As recently as last week, the paper reported that auto production figures had declined by 12.2% in the first seven months of this year. During that period, a total of 284,472 passenger vehicles were sold.

The general decline over the past six months may not primarily be down to the campaign against car ownership, but due to the much more everyday issue of lack of liquidity and low spending power.

In the absence of hindsight and sales data, it would seem that the growing campaign against the carmakers was in fact created by their inability to buy and that they may not have been against buying local in the end.

As sales figures are not used by the Iran Vehicle Manufacturers Association, the organization in charge of tallying new vehicle production figures, this is different from international norms due to Iran’s unique automotive environment.

In any case, the sale of 110,000 vehicles does not necessarily suggest that all the cars will be ready to ship immediately, as it was clear last week that some buyers will have to wait untill Q2 2016 to receive some of the models, Tondar et al.

How many of the actual 286,000 cars remain in the car lots of the producers remains a mystery, but it is safe to assume at least 30% of the stock will have been remaining from those original figures.

When the loan came to a screeching halt incredibly early, everybody was taken by surprise, including the government officials. It remains unlikely whether the government will allow for continuing the scheme in the same vein as untapped demand far outweighs supply.

 Will This Help the Industry?

The loan appears to be a litmus test rather than a concrete policy of the government. Prior to the loan, no publication in either Persian or English language could predict the number of applications in such a short period of time.

It is also unlikely to have fixed the structural problems in the car companies, as they continue to weigh heavily on the industry.

The negative backlash after the loan halted, reported by Asre Khodro, and the surge in sales may be a hangover effect from the previous year–the car stock in the country remains at an average of 11 years of age.  

Another pertinent issue is the 2% above inflation interest rate will leave the car producers with little money from sales to reinvest for purchasing new parts or even raw metal. They are likely to still owe the auto part makers back pay from months ago, and this new sales regime is likely to exacerbate the problem only further.

In the medium term, once the loan-takers have all received their cars, the rest of the car buying public is highly unlikely to accept the previous deals offered by the automakers.

This will only reactivate the dormant crisis in the automotive industry and, unfortunately, does not fix any of the major problems afflicting the carmakers in the long run–unless the government can offer low-cost payment plans for longer periods.