Domestic Economy

Paddling Out of Quicksand

Business & Markets Desk
Paddling Out of Quicksand
Paddling Out of Quicksand

The problem with ignorantly pursuing wrong policies is that sooner or later you have to enact new ones to cancel out their side effects.

Fast forward a little and you get entangled in a web of bureaucracy, wondering where it all went wrong.

It’s like getting stuck in quicksand and trying to paddle your way out instead of grabbing the rope that is at an arm’s length. A good example of such a quagmire is the story of government policies concerning Iran’s automotive industry.

The government nationalized the industry after the 1979 Islamic Revolution and for years ran them the way governments run companies, in the most unproductive way imaginable.

Walls of tariffs and import duties were erected to protect automakers from outside competition. At this point, you could easily mistake Iran’s streets with the old Soviet Russia.

 Pride in What?

Even today, 40% of cars on Iranian roads are of the same model and make. A copy of a failure of a car originally designed by Mazda in the 80s is now called Pride (one should ask in what?).

Don’t worry, there are facelift models with different headlamps and the cars now sport airbags, and can come with power windows and power steering.

All these come standard around the world these days. But SAIPA, Pride’s manufacturer, would make the steering wheel optional if it could.

Inevitably the government started flaunting the idea of a market economy and private business a decade ago. Companies started being “privatized”. Well over 95% of the stocks from state companies offered to the public in the past decade ended up in the hands of quasi-state companies, according to a study led by Abbass Akhoundi, minister of roads and urban development.

Out of the frying pan and into the fire would be an apt metaphor for “privatization”.

Regardless, the government was not running Iran’s big two anymore. SAIPA and IKCO together hold 80% of Iran’s car market today. So the government created a committee called “Competition Council” to protect consumers and parts suppliers from the monopoly handed to carmakers. See where we are going with this?

The council is tasked with creating a competitive environment in monopolized industries and get producers to increase product quality for the sake of the consumer.

To achieve its goals, the council can set price ranges on goods and fine manufacturers. That’s about it. Even using these tools needs Cabinet approval. So, one of the hot debates these days is how to put more dynamism behind its actions. Our sister paper Donya-e-Eghtesad ran a debate on it recently.

Today the big two dominate the car market for cars under $15,000 due to high tariffs. You can pick from their stable of cars, pay up and generally end up with a faulty car in the near future. Doors won’t close, car catches fire, gearbox breaks down, you name it and they have it. Ask mechanics and consumers, and they all have one of these stories to tell. It is also not uncommon for you to have to take delivery of a different car because the manufacturer didn’t make enough of the model you ordered.

These automakers have one specialty no other automaker has, however. They can turn any saloon car into a pickup truck. The venerable Pride, the Peugeot 405, anything. Too bad they don’t license build the Mercedes S-class; it could make a cracking pickup truck!

Anyway, to get the cheapest foreign-made car–compacts like the Fiat 500 and Kia Picanto come to mind–you would need over $24,000. Roughly, there is a $9,000 safety margin for automakers due to high tariffs and duties, in a country where the average wage is $6,600 dollars a year.

A simple Toyota Corolla in Tehran goes for over $36,000, roughly the price of a basic BMW 3 series in the neighboring UAE.

This week the Competition Council agreed automakers could raise their prices a little: SAIPA by 0.4% and IKCO by 1.8%. The ruling has angered automakers who say their costs have gone up far more. Inflation averaged 11% last year and wages are up 14%.

The council contends these costs are cancelled out by cheaper raw materials and parts, courtesy of sanctions relief.

 The Real Solution

The real solution has been voiced by some government officials. But none pursues it for fear of political backlash.  Competition is what makes companies great and consumers satisfied. Protectionism and government controls only halt progress and in the standstill, corruption and rent seeking thrive.

The government should cut tariffs gradually so automakers feel the heat of competition. They will either close down, get taken over by a multinational or may just survive. A few years will give them enough time to restructure, though those years will be wasted.

But support for automakers is strong. Arguments range from nationalistic ones to those concerning jobs. Yet we should consider the cost that holding these companies together inflicts on Iranian society.

Outdated cars waste more fuel and spit out more deadly pollutants. They are less safe, so we get more crashes and more injuries from those crashes. The result is higher healthcare, insurance and fuel consumption costs.

Furthermore, the high tariffs squeeze out consumer choice.

Grocery shopping, taking kids to school, going on a 1,000-mile cross-country trip, going off-road, the Pride is proud to be commendable for all those tasks, or SAIPA thinks so. IKCO definitely agrees.

What will the government do, grab the rope or paddle more?