Small Rollout Rates Impair Localization Policy

One main difficulty in producing foreign cars in Iran with local automotive parts is their small production numbers, according to one CEO.

Bahram Shariat, chief executive officer of Chery Automobile Company’s local operation, said the production rate of several models do not reach the feasibility threshold therefore, localization and manufacturing the auto parts in Iran is not cost-effective, Financial Tribune’s sister newspaper Donya-e-Eqtesad reported.

“Many foreign vehicles produced in Iran do not reach the minimum roll out rate which is over 100,000 units per year.”

The Ministry of Industries, Mining and Trade announced earlier this year that a minimum localization of automotive content should be 40% and rise to 80% as production expands.

According to the ministry, one of the reasons for insisting on the role and involvement of local auto parts makers is “feasibility and cutting production costs.”

Shariat concurs that local automakers have long focused on boosting quality and capacity of parts production instead of relying on foreign producers.

“But the (localization) plan cannot apply to several foreign vehicles, in particular the wide range of Chinese models in the country that account for 19% of the market.”

Driving the point home, he says, “Each design needs a minimum production rate of 100,000-units in the country if suppliers want to get involved. Should that not be the case, the price of the locally produced part will be over and above the imported product.”

On the issue of genuine Chinese auto parts, several Iranian firms have partnered with Chinese automakers and are importing from that country.

Auto parts in huge volumes are being produced by Chinese companies under the license of European businesses.

Shariat added that such (localization) rules apply to newly-signed contracts and Chinese producers are exempted. He did not say why the rules should be different for the Chinese companies.

In his opinion blanket enforcement of such stringent rules on auto companies will have the opposite effect since the cost of importing would still be cheaper than local production.