In separate proposals, Iranian auto parts makers union and local think tank ITAN have put forward suggestions they believe if implemented by the government can help address the problems the country’s beleaguered auto industry is facing and calm the current turbulent market.
During the past two months, car prices have skyrocketed in Iran outraging the public. Furthermore, due to the reimposition of US sanctions against Iran’s key automotive sector, manufacturers are faced with various hurdles and are struggling to keep their production lines rolling.
To work out a solution, the Iranian Auto Parts Manufacturers Association (IAPMA) has come up with three measures to lower costs, while the ITAN think tank has submitted a letter to Vice President Es’haq Jahangiri, elaborating on two ways that can curb the inflation in the auto market.
The government of President Hassan Rouhani has neither reacted to the letter penned by ITAN think tank members nor to the suggestions by industry insiders so far.
Following US President Donald Trump’s pullout from the 2015 Iran nuclear deal in May, the dollar exchange rate has recorded a succession of highs and triggered a string of defective government policies that have pushed the USD rate even higher, leading to widespread price jumps in almost all markets, including the automotive market, which has experienced up to 70% hikes.
It remains to be seen if the Rouhani administration heeds the proposals outlined by the think tank and the union.
Pricing Mechanisms
ITAN think tank has drafted a letter addressed to the vice president, submitting two suggestions to the official that in their opinion can serve as a solution.
Pointing to the failure of car manufacturer SAIPA’s recent pre-sell of 50,000 vehicles to check prices, the think tank believes more drastic measures need to be taken. The extensive offering by the maker was hoped to calm the markets; however, the prices have relatively remained unchanged.
The first measure put forward by the think tank is a revision of car pricing mechanisms in Iran, proposing that the factory price of cars should be increased and get closer to the market price. There is a wide gap between the vehicles’ factory and market prices in Iran, especially for budget cars.
The think tank proposes that cars’ factory prices should be only 10% lower than their market price, maintaining that the measure would gradually restrain the excessive demand for cars, and help the market settle on a reasonable price.
Currently, a state body, the Competition Council, is in charge of price-setting for a range of products including vehicles worth under 450 million rials ($3,461).
The second measure is for the government to levy taxes on the difference between factory and free market prices to reduce the profit made by dealers.
For years bulk buyers have been purchasing vehicles at factory prices and selling them at much higher rates on the free market.
The think tank believes taxes and an increase in factory prices can diminish the role of middlemen in the auto market.
Union’s Demands
IAPMA secretary Maziar Beiglou says Iran’s Monetary and Credit Council should increase the two leading car producers’ credit by 100 trillion rials ($938 million) so Iran Khodro and SAIPA can repay their overdue debts to auto parts suppliers.
Beiglou continued, “This will solve the shortage of funds faced by auto parts makers. Nothing will improve until this happens.”
Furthermore, Beiglou says the government needs to cut the red tape when it comes to the auto industry. In his opinion, government bureaucracy has bottlenecked the supply chain, leading to price surges in the market.
The association’s secretary pointed to another major issue that the industry is grappling with, namely the import of auto parts, which in the first five months of the current year which started in March experienced a 100% year-on-year increase.
The statistics have raised eyebrows as the industry is lamenting a shortage of auto parts with thousands of half-made vehicles left in carmakers’ warehouses with local media accusing manufacturers of hoarding.
Beiglou explained the matter, saying that after the US president announced its decision to reimpose sanctions on the key automotive industry, suppliers started bringing into the country large amounts of parts so as to become able to weather the sanctions.
While auto parts makers have been able to import the goods, the Islamic Republic of Iran Customs Administration refuses to release the products until certain requirements are met.
This is where the domestically-imposed hurdles which many call “self-imposed sanctions” factor in.
The government of President Rouhani announced back in May that importers can only bring goods into the country with subsidized 42,000-rial dollars and only when the government approves the registration of their orders.
As time passed by and the administration’s foreign currency reserves could not measure up to its commitments, they allowed importers to bring commodities into the country according to the free market dollar rate.
But to release their previous imported goods from customs warehouses, businesses have been obligated by authorities to pay the difference between the subsidized currency they received from the administration and the USD rate at the secondary forex market, making businesses to pay double for a product they had already purchased.
Beiglou says auto parts makers would not have even considered importing products into the country if they had known the government would issue such a directive, given the fact that carmakers cannot set prices according to their expenses, and prices are government-imposed and not adjusted to the realities of the market.
Exemptions
To salvage the sector, the Industries Ministry has exempted auto parts makers from paying the difference between subsidized currency and the secondary forex market dollar rate which stands at around 80,000 rials.
Beiglou, however, points to a little caveat in the exemptions, saying that the directive only spares auto parts imported after August 7 when the sanctions against Iran’s auto industry took effect.
Beiglou added, “Imports after August 7 constitute merely 5% of the goods brought into the country.”
His third solution for the auto market is, therefore, an all-inclusive exemption for auto parts makers from having to pay the difference between subsidized currency and the secondary forex market rates.
