The Majlis Industries and Mines Commission has completed examining a bill that calls for auto marketing via the Iran Mercantile Exchange.
Dubbed as “Disciplining the Auto Industry”, the bill has met with skepticism from several quarters for being impractical. One key opponent is the Majlis Research Center, the research wing of the parliament.
As per the provisions of the bill, cars manufactured by domestic companies would be offered on the IME at base prices set by the Competition Council, a government-ordained organization in charge of controlling prices of some locally-produced goods, including auto prices.
Among other things, the bill calls for the people and households that do not own a car be given priority for purchasing a car from the IME.
Though it may merit transparency in the supply and demand of cars, the MRC said “there are fundamental flaws in the plan.” Such a plan “will not deliver a balanced and efficient market in which there are many buyers and suppliers.”
Likewise, it will not be immune from price volatility, the MRC said, adding that “it may even run the risk of sending the [wrong] signals to the unofficial car market and other parallel markets.”.
As the supply side almost always has a deficit due to low output and a limited number of producers and demand in essence is confined to a handful of natural entities, such a market cannot per se be defined as a auto market in the bourse, the MRC said. Such a move would rather resemble “a mechanism for allocating a limited number of cars to a restricted number of buyers.”
Given decades of restrictions on the presence of international carmakers, Iran’s auto industry is under the duopoly of two major automotive companies -- Iran Khodro and SAIPA -- that have always been in the red and depend on the government to be salvaged at regular intervals not to mention their poor quality and rising prices.
Learning From the Past
The MRC said such a plan could hit a snag in the implementation phase if the government intervenes in pricing and sets a ceiling for car prices at the IME.
Setting illogical prices by the government and not letting supply and demand determine prices are seen as unwanted and unhelpful by both buyers and the carmakers.
The think tank said the government may be tempted to setting price ceilings when car prices surge at the IME that would simply be incompatible with the dynamics of the exchange market where market forces rule.
The research center pointed to a failed experience last year when the Industries Ministry set a price ceiling for steel products offered via the IME.
While decision makers advocating such polices claim they seek to protect the domestic market and support end consumers, there are concerns that such moves have the opposite effect and gave rise to rent-seeking, not to mention its detrimental effect on stocks of listed companies whose prices are set by the government.
Last December, the Industry Ministry said steel products must be sold at the IME at prices equivalent to 70% in the Commonwealth of Independent States (CIS) markets. The controversial decision spurred a fresh downturn in the stock market and share prices, especially of commodity companies, nosedived.
“Given the role and significance of car ownership in the country, the government would be predisposed to intervene in the IME auto segment,” the MRC noted.
Fighting Speculation
To counter speculative activity in the auto market, provisions of the bill say buyers should not sell the cars for 2 years after purchase otherwise they have to pay tax equivalent to 30% of the car value.
Proponents claim levying high tax on auto trade will reduce demand and curb the role of the army of avaricious car dealers and middlemen in the permanently chaotic car market in which prices have rocketed to the shock and dismay of the nation at large.
Opponents argue that offering cars via IPOs would over time become attractive and by nature push up prices. They opine that chaos in the auto market is due mainly to insufficient supply and rising forex rates. In their view, proposals like these will never realize their goals unless these two key factors are addressed.
The MRC rightly pointed out that such an initiative has no precedent in the world and in country is the auto sector under the grip of one or two automakers as is the case in Iran
Minus monopolies, the auto industry world over performs in a fair and competitive market, the center stressed and called on MPs and policymakers to avoid haste.
