In light of the massive disturbance in Iran's forex market, automotive industry insiders are anticipating that car prices will skyrocket when the Competition Council gives the green light to producers to jack up prices.
Since last December, the market has been in a state of upheaval as the US dollar exchange rate jumped to unprecedented levels several times before the government of President Hassan Rouhani stepped in and unified the rate at 42,000 rials to put an end to the raging market.
As with every year, new prices for vehicles will be updated in the next two months and the public is distraught over a possible surge in prices.
For increasing the prices, producers need to obtain the assent of the Competition Council—a government-backed body that monitors, and in some cases sets, prices of local products including cars.
Even before the start of the new Iranian year in March, auto parts makers were devastated by the rise in the greenback's exchange rate against the rial saying their expenses had risen by 30% and the increase must somehow be compensated.
Experts in the field are estimating that this adjustment can translate into a 20% increase in car prices in the coming months when Reza Shiva and colleagues in the Competition Council come to a decision about auto costs.
Shiva, head of the council, has reassured the public that this year's forex fluctuations will have no impact on the prices and only economic indices of the fiscal which ended in March will come into consideration and influence the decision by the regulating body.
The Competition Council holds off on calling a meeting until the Central Bank of Iran announces the inflation rate of the last fiscal to set prices accordingly.
Auto part makers, the tire association and experts are not as optimistic as Shiva as they are closely dealing with the ramifications of the dollar exchange rate.
>Auto Parts
Secretary for Iranian Specialized Manufactures of Auto (ISMAPA) Arash Mohebinejad says due to an average 30% hike in production costs of auto parts, the average price of vehicles must go up by 19.5%.
Mohebinejad noted that from April 2017, cost of raw material has grown exponentially, leading to much trouble for producers.
Lamenting the auto manufacturer's refusal to reimburse auto part makers, he said in order for suppliers to be able to increase prices, cost of vehicles need to rise 19.5%.
Mohebinejad warned against overlooking the hurdle, adding that if a solution is not worked out in the near future, more factories will shut down as a result.
>Tire Industry
Head of the Tire Industry Association of Iran Mohammad Reza Taqiganji says the required currency for the business will be provided with the unified dollar rate. Even so, production expenses will still experience a rise since the tire industry received subsidized currency in the past.
Taqiganji says the difference in the unified rate and the subsidized currency which used to be offered to producers (5,000 rials for each dollar) must be made up for by either the government or a rise in the prices of products.
Head of the association noted that before the new developments, 80% of a maker's needs were provided by the subsidized currency (37,000 rials for each dollar) and 20% by open-market dollar, stressing that the 13.5% rise will affect the final prices of products.
In order for the costs to remain stable, the association has called on the government to allocate 380 trillion rials to producers through relief packages.
In regard with the impact of the unified rate on tire imports, Taqiganji noted that before this the importers had to secure their currency requirements from the open market and would face a challenge every time forex fluctuations occurred.
He added, "Currently tire importers are registering their orders with the 42,000 rials rate, which will help block contraband from entering the market."
Tariff rates for imports have been increased 8% from the previous 32% to reach 40%.
The combination of the mentioned factors ensures the final prices for imported tires and local ones to rise.
>Hindered Foreign Deals
At the first look, the historic nuclear deal signed in 2015, provided new opportunities for car makers in Iran to collaborate with foreign companies in producing better vehicles, but the fluctuation in the forex has either thrown cold water on potential investors or driven up prices so much that jointly-produced vehicles can be afforded only by the well-off.
The jointly-produced cars are only partly domestically manufactured and parts are imported to the country in unprecedented quantities, which make the final products susceptible to the forex rate.
One instance is the experience of the PSA Group in Iran. Iran Khodro and PSA Group's Peugeot brand signed a €400-million deal in June 2016 creating a 50-50 joint venture they call Iran Khodro Automobiles Peugeot (IKAP).
When asked about the high price of Peugeot 2008, Executive Vice-President of PSA Group for Africa and the Middle East Jean-Christophe Quémard said less than 20% of parts used in Peugeot 2008 are produced in Iran and the rest are imported. The high foreign exchange rate has compelled the French company and its Iranian partner to raise prices.
Quémard says they are in favor of localization, but lack of proper infrastructure, customs-related issues and forex fluctuations have hindered their progress.
The PSA Group was bewildered by the volatility of the currency market in Iran, same as other investors.
The auto market in Iran seems to be plagued by the volatile forex market, high auto part tariffs, crummy produced vehicles and mismanagement. Even if the right policy is formulated, it will be years before the population of Iran can enjoy high-quality affordable vehicles that the rest of the world enjoys.
