Now is the opportune time for western multinational companies to build effective plans for the Iranian market, which will gradually open once a nuclear deal is eventually reached. As the world’s largest untapped emerging market, Iran leaves senior executives little room for error. Additionally, it is difficult to anticipate an exact timetable for sanctions relief after an Iran nuclear deal, so multinationals should prioritize ready-to-execute strategic plans.
In this article, Matthew Spivack, a leading specialist in the Middle East and North Africa region who works for Frontier Strategy Group, provides three recommendations for multinationals developing Iran plans.
An Iran nuclear deal will provide an historic opportunity for multinationals to return to the market. Because multinationals with an Iran presence report receiving inconsistent feedback from local contacts and partners, additional resources will be needed to gather information as the market opening occurs. Senior executives who wait to request new resources risk falling behind competition. Multinationals with an established presence in Iran will need to fend off new market entrants who are keen to capture untapped market demand. On the other hand, multinationals entering sectors that fare especially attractive in Iran, such as consumer goods, medical devices, and pharmaceuticals, will need to gain ground against competitors with an entrenched presence.
Companies across sectors can argue for more resources by citing Iran’s favorable demographics and energy reserves data, which demonstrate long-term market potential. Iran, which has the second largest population in the Middle East and North Africa, is also the region’s third-largest economy despite economic sanctions that contributed to a total loss in GDP of as much as 25% between 2011 and 2014. Iran has the world’s second-largest deposit of proven gas reserves and is among the top four in proven oil reserves, translating into massive potential for government expenditure in the future.
Engage With Key Internal Stakeholders
A rethinking of the Iran narrative is essential in western boardrooms. In recent years, international sanctions have made Iran a taboo topic among some western executives. However, 40% of senior executives surveyed by FSG report that their companies are currently prioritizing Iran. Consequently, companies must renew internal discussions on Iran to prepare for the market’s unique opportunities and complex challenges. To ensure strategic alignment on Iran, companies must be ready to answer tough questions such as whether Iran’s potential justifies significant organizational resources and what is the contingency plan if new sanctions are imposed.
Companies can control the Iran conversation by approaching their senior leadership and enacting a structure that will thoroughly educate and prepare their organization. A process for facilitating internal communication is critical to overcoming objections to investment and maintaining readiness for when the market opens.
Avoid Overly Ambitious Sales Targets
An eventual Iran nuclear deal and subsequent sanctions relief will ease pressure on the struggling economy, but the recovery will be slow. Iran’s currency crashed after tougher sanctions were imposed in 2011, making imports more expensive and exports worth less. Economic mismanagement by the government exacerbated the problem. The effects continue to put pressure on the Iranian economy, undermining consumer purchasing power in particular.
Furthermore, the current oil price environment undercuts an economic boost provided by sanctions relief. Despite some success in economic diversification projects, Iran still depends on oil for between 40 percent and 60 percent of government revenue and for more than two-thirds of export earnings. In order to avoid a large budget deficit, Iran’s 2015-2016 budget is expected to have an updated breakeven point of $40 per barrel.
Balancing the budget against a lower oil price insulates the economy from risk, but it also limits Iran’s government spending and domestic investment capabilities. Iran is expected to rely on increased revenue from taxes, subsidy reform, and privatization of state-owned entities.
Senior executives should incorporate scenario thinking into their Iran plan for flexibility in this uncertain environment. It will be critical to determine how different scenario signposts are likely to influence Iran’s trajectory to build an effective and achievable strategic plan.
An eventual Iran nuclear deal will allow multinationals to invest in the world’s largest untapped emerging market. However, companies that take a wait-and-see attitude to planning risk falling behind competition and missing out on the huge opportunity.
A proactive approach is required for companies that are keen to take advantage of this historic opportunity.
