Major local carmaker Iran Khodro (IKCO) is strengthening ties with Defense Ministry-affiliated firms by planning 23 auto parts production projects.
This is IKCO's newest move to curb the sector's dependence on imports. Following the imposition of harsh US sanctions, Iranian carmakers faced an uphill battle to sustain their operations.
Farshad Moqimi, CEO of IKCO, said the company will utilize the technical and engineering expertise of eight industrial companies affiliated to the ministry to curb the auto industry’s reliance on imports, Donya-e Eqtesad reported.
The projects will become operational as soon as the agreements' terms and conditions are finalized, he added.
The initiative to increase the share of domestic auto parts production was first launched by the Industries Ministry that also applauded similar moves by carmakers.
According to Moqimi, during the meetings arranged by the Industries Ministry over the past several months, IKCO has signed agreements with 39 local part makers to localize 85 key items that were imported in the past.
"The agreements are expected to curb the capital flight of €127 million per year," he said.
Moqimi noted that the company has also signed several agreements with domestic industrial units and small- and medium-sized enterprises to mass produce 32 key auto parts, which will save up to €16.7 million annually.
Moqimi expressed hope that the efforts will yield sustainable benefits for the domestic auto industry.
Earlier Agreements
This is not the first time that Iran’s Defense Ministry is helping the local auto sector bolster its productivity and curb reliance on foreign auto parts suppliers.
“In early June, the ministry started to share its technological capabilities with local car companies IKCO and SAIPA. As per the move, with the ministry's support, homegrown substitutes for key imported car parts were supposed to be produced in Iran to curb the industry’s reliance on the global supply chain,” Alireza Badkoubeh, a deputy director as SAIPA, said.
Iranian car companies depend on auto parts imports—especially for key electronics—for producing vehicles. Following the imposition of harsh US sanctions against Tehran, the local firms’ ties to the global supply chain were disrupted and parts imports began to trickle.
According to the official, the agreement between carmakers and the ministry is expected to yield results within six months.
Squeezed by Sanctions
Following the reimposition of US sanctions against Tehran last summer, ties between Iranian car companies and international auto part suppliers were disrupted.
Almost all partners of local carmakers suspended their Iran operations. Some of the automotive firms that withdrew from the Iranian market are Renault, Peugeot, Citroen, Volvo, Daimler and Hyundai.
With sanctions taking a toll on Iran’s international banking relations, local car companies can hardly purchase parts from smaller market players and intermediaries.
These developments have led unemployment to rise in the parts manufacturing sector.
According to a September report by Iran Auto Parts Makers Association, since August 2018, 280,000 Iranian workers have lost their jobs in the domestic auto parts industry.
The association says 550,000 workers were employed in the country’s auto parts industry, of which 130,000 were laid off following the imposition of US sanctions. Contracts of 150,000 workers have also been suspended.
US sanctions have also saddled Iranian parts makers with a net loss worth 1.2 quadrillion rials ($8.8 billion).
The report further states that Iranian auto industries are operating at 40% of their nominal capacity and puts the value of auto parts makers’ assets at 2.5 quadrillion rials ($18.5 billion).
Rescue Package
According to the report, by the end of the last fiscal year (ended March 2019), local parts makers received a 40-trillion-rial ($296 million) aid package from the government.
The report states that the package helped parts makers sustain their operations for a few months, but due to the prevailing economic conditions, they again faced hardships.
Of the 1,200 registered auto parts companies in Iran, 400 have been forced to shutter their business or limit their operations.
The association further states that parts makers need 150 trillion rials ($1.1 billion) in loans and aid to sustain their business.
One of the issues that Iranian parts makers have struggled with for long has been delayed payments by carmakers. The report puts local car companies’ accumulated debt to the supply chain at 220 trillion rials ($1.6 billion).
Reportedly, 90 trillion rials ($666 million) of this sum should have been paid months ago.
Shrinking Production
Since June 2018, Iran’s auto production has been plummeting.
Data released by the Industries Ministry show that the decline has continued in the second month of the current fiscal year (ended May 21). Since May, the ministry has halted publishing auto production reports, leaving analysts in the dark.
Iranian carmakers produced 487,096 cars and commercial vehicles during the eight months ending Nov. 21, registering a 32.3% decline compared with the corresponding period of the year before.
The number of passenger vehicles produced during the period is 445,774, 32.8% lower than the year-ago time.
Besides, the production of passenger vans, minibuses, buses and commercial vehicles respectively saw an 87.4%, 67.8%, 43.1% and 76.3% fall.
Industry insiders and local media have speculated that the two companies are on the verge of bankruptcy and, as usual, need the government to bail them out to save thousands of jobs at risk in the chronically dysfunctional automotive companies.
