Auto Anticipations

Auto AnticipationsAuto Anticipations

Iran’s auto sector is currently evolving, according to several well respected sources in the field, with new cars slowly entering the market and the range of vehicles available today expanding compared with three years ago.

Everything should look rosy, but is it? Many canaries in the mines have gone quiet in the past few months and it would seem that the country’s automotive sector was not at all prepared for the sluggish sales pattern since the beginning of the new Iranian year (started March 20).

As previously reported in Financial Tribune, Iran’s automotive sector has entered a recession of sorts, being in decline for three consecutive months. Several automotive experts weighed in on the debate, as to why cars sales and production numbers are getting stuck in the mud, but here are some explanations.

As we wrote last week, Iran’s car output during the 12-month period ending March 19, 2016, declined by 13.7% y/y, as Iranian companies manufactured 976,836 cars.

The great hope that several new French and Chinese models would shake up flagging interest in locally produced cars seems to have been unfounded. Coupled with a stagnating economic atmosphere and a lack of credit, it is no surprise that things are turning south, quickly.

  European Car Sales Not Biting

To put things into perspective, as many new vehicles are slated to enter the market, European cars, which are much more affordable to Iran’s growing middle class, have become a slightly depressing, unrealized dream.

Several new low-cost models coming in from manufacturers like Peugeot and Renault have not excited the buyers much.

Renault’s Sandero, basically a Romanian Dacia Sandero, given a Renault badge in Iran, has only sold limited numbers since its launch, while Renault’s Symbol is not to be seen on Tehran’s streets—a clear indication of a car’s popularity. Both of these vehicles are still more expensive than others available in the market.

The long-awaited Peugeot 208 has still not arrived and even when it does, it will be more than double the cost of the omnipresent 206—hardly an exciting offer.

  Chinese Car Sales Weak

Similarly, the expectation that Iran’s streets would be awash with cheap Chinese cars seems to have also been unfounded. Iranians firstly are hesitant to buy Chinese cars, even from growing manufacturers like Chery and Geely.

These companies’ offerings are still better than the European competition, in terms of range of vehicles entering the market, while also being somewhat cheaper.

But they too are suffering from the market slowdown. Imports from luxury cars too are starting to slip, with buyers holding off purchases.

European luxury brands are also facing a tougher time, due to the rise of South Korean companies Hyundai and Kia.

With their European-like vehicles, the South Koreans are giving the Europeans a harder time these days. Korean cars on average are 30-40% cheaper than their European competitors.

However, a Sante Fe, seen abroad as a fairly inexpensive purchase, is in the Iranian market akin to a Mercedez-Benz in its desirability and buying-factor, meaning that the South Korean cars are quickly becoming too expensive to contemplate.

Since the start of sanctions and the devaluation of Iranian currency, brands like Hyundai and Kia have effectively tripled their price range, while salaries have only increased by the official 12% rate of inflation. They still, according to import statistics, remain among the top three imported brands.

  Auto Loan’s Impact

The Central Bank of Iran-backed auto loan scheme may have also contributed to today’s dip in purchases.

Originally, announced by CBI and backed by the administration of President Hassan Rouhanu, the auto loan was meant to help sagging sales in the automotive market.

At the time of introduction, the auto loan ceiling was set at 250 million rials ($7,120 at market exchange rate at the time) with an interest rate of between 16-18%. The payback period was a maximum seven years or 84 installments, Mehr News Agency reported.

The loan covered 80% of the car’s value or less depending on the price of the vehicle. Customers needed to make a down payment of 20% of the vehicle’s value, but slightly less in the case of the Kia Pride pickup.    

The auto loan scheme, widely covered by Financial Tribune, was meant to be a serious form of credit to boost purchases in the latter half of last year. It effectively led to a mass buying frenzy with showrooms inundated with people desperate to buy vehicles.

What in effect happened was that it filled a “buyers’ vacuum” where all pent-up demand was met in one fell swoop, forcing a significant amount of sales to be purchased in the six-day lifespan of the deal.

What may have happened was buyers, who would normally wait till the new Iranian year to purchase a car, rushed in to get the cheap credit, thus dampening demand for the current year.

How will the market react in the next six months to a year is anyone’s guess. Experts are divided about the auto loan’s value: Some call for the revival of the same credit scheme to support the sector, while others propose the elimination of the high import tariffs to make the auto sector more competitive and allow market forces to whet the domestic appetite.