Economy, Business And Markets

Auto Market; Constructive Competition

Auto Market; Constructive CompetitionAuto Market; Constructive Competition

C ar imports accounted for more than 6% of the total value of imports during the past fiscal year – which ended on March 20, 2014 – indicating that despite criticisms, the car import business still enjoys a good profit margin.

More than 78,000 cars were imported in the one year period (March 21, 2013 - March 20, 2014), registering a 74% growth in numbers and 174% growth in value compared with the previous year. The figures also indicate that the average price of imported cars increased significantly over this period.

Last week, the ministry of industry, mine, and trade passed a new regulation based on which cars can only be imported through official representatives of foreign automakers whose licenses have been registered in the ministry. Reports suggest that so far in Iran, more than half of the foreign cars have been imported by individuals or entities other than the official representative companies.

Earlier this week, the ministry of industry, mine, and trade called on the Competition Council – the government body in charge of market regulation – to set prices for the imported cars. The ministry also prohibited import of cars with engine displacements beyond 2000 cc; a move aimed at protecting the domestic auto industry and reducing fuel consumption.

Conflicts between Iranian automakers and importers have a long history.  The automakers, benefitting from government regulative support, are against import of high-quality cars from well-known international manufacturers and instead prefer collaborating (mostly through direct imports in recent years) with the manufacturers of cheap, low-quality cars from countries such as China and South Korea.

Manufacturers often urge government officials to tighten restrictions (through higher tariffs and strict regulations) on car imports. This is while some experts believe that efforts by the government to regulate the automotive market, which has 17 manufacturers and 21 importers in Iran, can disturb the balance in the market.

Importers on the other hand believe that reducing import duties and easing customs regulations for car imports will benefit consumers. They argue that the low quality of Iranian aut products (especially in terms of safety) threatens the life of Iranian consumers, in addition to making a hole in their pockets. They suggest that import of high quality cars from famous international manufacturers would create a constructive competition in the domestic auto market and ultimately benefits consumers.  

Experts argue that a free market economy, wherein the prices of goods and services are set by the forces of supply and demand without government intervention, entails support for highly competitive markets and private ownership of productive enterprises. Hence in line with the same argument, lack of a genuine business environment and stringent rules and regulations imposed by the government results in lack of enthusiasm for the private sector investment in productive activities such as car manufacturing.

Critics of market regulation believe the government should divert its attention to creating a secure economic environment to draw foreign investment in productive sectors, while maintaining a supervisory role in the market to protect the manufacturers against market fluctuations.

The policies of ‘resistance economy’ introduced by Leader of Iran’s Islamic Revolution Ayatollah Seyyed Ali Khamenei and propagated by President Hassan Rouhani and his administration aim to boost foreign investment and promote domestic production, in a bid to make the Iranian economy resistant to external economic shocks in the long term, including western sanctions and global financial crises.

There is a need to reform the domestic automotive industries in order to reduce vulnerability to global crises while establishing a self-sufficient system of quality and price control. But, economic experts argue that regulatory interventions by the Competition Council are not in line with the objectives of the resistance economy and must be stopped to allow the the private sector achieve self-sufficiency.

Economic problems can only be solved through “sustainable and steady economic growth,” which is only achievable through easing investment regulations, suggested Masoud Nili, a senior economic advisor to President Hassan Rouhani.

As experts suggest, car imports can be viewed by automakers and government officials as an opportunity rather than a threat,  to create a constructive competition in the automotive market, both in terms of quality and prices, and to increase government revenues from import duties.