Economy, Business And Markets

IKCO Cautioned to Avoid Past Mistakes in Peugeot Deal

IKCO Cautioned to Avoid Past Mistakes in Peugeot DealIKCO Cautioned to Avoid Past Mistakes in Peugeot Deal

French automaker PSA Peugeot Citroën and its Iranian counterpart Iran Khodro (IKCO) recently reached a new agreement, but some believe IKCO should adopt a tougher approach in order to prevent earlier mistakes and contract violations.

Peugeot was forced to leave Iran in 2012. The company, in which US-based General Motors is the second largest shareholder, feared that its activities in the country would violate a wide range of new tough sanctions imposed by the UN Security Council (over Iran’s nuclear energy program).

Both Peugeot and IKCO had been eyeing a new agreement since the P5+1 group (the US, Britain, France, China, Russia and Germany) partially lifted sanctions against Iran in November 2013.

The sanctions have inflicted losses on both companies. IKCO and Peugeot together produced two models, the Peugeot 405 and 206, which proved to be highly popular in Iran because of their relatively low prices compared to imported models. Iran was Peugeot’s second largest market with a total of 467,000 units sold in 2010, 457,900 in 2011 and 313,000 in 2012. Peugeot dominated more than 30 percent of the Iranian car market, with its French rival Renault running far behind at 7.5 percent.

IKCO was also heavily dependent on Peugeot’s partnership and capital investment. After the French company left Iran, IKCO, which was largely independent of imports, substituted the remaining foreign parts with Iranian or Chinese equivalents. These components were often blamed for lower quality compared to Peugeot’s approved spare parts. Production dropped by up to 68 percent and experts estimate that cumulative losses of IKCO amount to 800 million euros ($870.6 million).

Under the new agreement, which was reached on March 1, Peugeot will team up with IKCO to produce several new models, notably the Peugeot 301, the 208 and the 2008.

The contract also stipulates that Peugeot export 30 percent of its IKCO-produced cars to foreign regional markets. Additionally, Peugeot would also bind itself to direct investment and the transfer of physical capital to Iran.

Although hailed by analysts as a milestone in domestic car production, the investment and export clauses are in fact not new and existed in one form or another in previous agreements too.

However, this time, Peugeot seems more committed. The Peugeot delegation in Iran was led by Jean-Christophe Quémard, head of PSA’s Asia division.

Iran is endowed with a strong stick and a carrot in the recent negotiations. Not only did Peugeot took the one-sided and sudden decision to leave, Iran also showed that it can continue to produce Peugeot cars without official company license.

Some experts believe Peugeot acted irresponsibly when it abandoned its activities in Iran without any prior notice. The validity of this accusation has likely given the IKCO the upper hand during negotiations. In an interview with Eqtesad News, car industry expert and a faculty member at the Iran University of Science and Technology, Amir-Hossein Kakayee, argues that Iran should be more prepared to face Peugeot if similar violations recur in the future.

“In any new contract Tehran should respond to Peugeot’s deviations from the the contract by stipulating fines, rather than the compensation clause. The reason is that the settlement of the compensation claus is time consuming and does not have many advantages for Iran,” said Kakayee.

Kakayee believes that Peugeot did not observe the terms of previous contracts and behaved according to its self-interest. He stated that: “Although the EU supplied the necessary components to Iran, Peugeot did not meet any of its commitments. Peugeot ignored the terms of the contract relating to the improvement of technology for its own products.”

The expert also blamed lack of attention to setting time limits in agreements with auto companies for delays in launching and upgrading car models. “For example, Peugeot 405, originally designed in the 1980s, arrived in Iran years later,” the expert noted.  

Arguing that any deal should be a win-win for both sides, the expert said: “Upgrading technology should be the most important factor in any mutual cooperation. The Peugeot 405 was only upgraded after 10 to 12 years and that too was not a full upgrade. Failing to upgrade technology negatively impacts domestic car production and should be specified in any new contract.”

“In my opinion, the details of time in the contract are much more important than the compensation clause, because engaging in lengthy legal formalities with Peugeot will only prevent the two sides from concentrating on the content and final production targets of the deal,” he added.

Although much of the paper work and negotiations has been done, both companies are still waiting for a final deal on Iran’s nuclear program, after which decision will be taken for full reinstatement of commercial relations.