Economy, Business And Markets

Small German Firms Hold Edge in Iran

Small German Firms Hold Edge in IranSmall German Firms Hold Edge in Iran

Despite western sanctions that have choked off much of Iran’s foreign trade, many German companies have continued to do business with the Middle Eastern country—legally—in recent years.

Now those companies are likely to be among the first to benefit from Iran’s expected reopening, after a landmark deal in July to ease the sanctions in exchange for limits on Iran’s nuclear program, wrote The Wall Street Journal.

As of last year, more than 75 German companies had operations in Iran, according to the Tehran-based German-Iranian Chamber of Industries and Commerce.

Most of them were small, family-owned businesses that make specialty products not directly covered by the sanctions, often for the healthcare, construction or automotive markets.

Those companies—many of which are privately held—can typically afford to keep a presence here in part because many have limited ties to the US, whose sanctions on Iran are especially strict. The US often has relatively little leverage over such companies, experts say.

By contrast, many of Germany’s publicly listed multinational companies, including engineering group Siemens AG, are listed in the US and have acknowledged they have little choice but to comply with the US restrictions.

“We never really left the country,” said Mark Pace, the chief executive and co-owner of Dentaurum GmbH, which has done business in Iran for decades.

Pace added that while the sanctions do not bar the dental-equipment company from selling in Iran, it has had to have all of its financial transactions here approved by Germany’s Federal Office for Economic Affairs and Export Control to avoid running afoul of US and European laws.

That kind of red tape is not the only reason that operating a business in Iran is not for the faint of heart. The obstacles, experts say, include corruption, exchange-rate uncertainty and aggressive competitors from Asian countries that don’t enforce the sanctions.

For German companies, the biggest headache is just getting paid, because the sanctions shut Iran out of the global financial-banking system.

As a result, Dentaurum’s sales to Iran have fallen almost 90% over the past decade, Pace said in September, when he made his first visit to the country as part of a delegation of German business executives.

The difficulties have forced Dentaurum and its German peers to look beyond chasing short-term profits.

“With Iran, we have the problem that we don’t get money,” Pace said.

That’s partly because Iranian customers have to jump through hoops just to pay their western suppliers without violating sanctions. They have to transfer cash in small installments through a local foreign-exchange office or use banks from countries such as Turkey that still have some relations with Iran, said Houman Dolatshahi, head of Tehran-based Atieh Bahar Consulting, which helps foreign companies navigate the Iranian market.

The UAE is another conduit, experts say. Pace said Dentaurum handles transactions through Dubai, which is part of the UAE.

“It’s more or less a miracle how the companies do it,” said Friedolin Strack, head of international markets at the Federation of German Industries in Berlin. “We don’t know any functioning channels [that are] transparent or reliable.”

Still, German executives say access to Iran’s 80 million potential consumers is worth the hassles. Iranians “want to have state-of-the-art technology”, said Michael Hack, director for automotive-business development at Hilger u. Kern GmbH, a Mannheim-based supplier of pumps, valves and other industrial equipment that has sold its products in Iran since the 1980s.

“For all its challenges, Iran does offer some business advantages. They include a highly educated labor force of 27 million people, flat tax rates and a lightly regulated market for foreign investment,” said Mohammad Nikjoo, the head of mergers and acquisitions at Iran’s Amin Investment Bank.

Their persistence has provided German companies with an edge in Iran.

“We want to work with [European Union] countries—especially your country,” Iranian Industries Minister Mohammad Reza Nematzadeh told the visiting German executives in September. Nematzadeh said 40% of Iran’s technology and machinery has a German connection.

The delegation’s visit gave German companies a chance to talk with Iranian distributors, who have been crucial to their business here in recent years.

Hilger’s Hack used the visit to court a new local distributor, after the company’s former distributor here vanished.

“We can’t reach any of them anymore, so we quit the contract,” he said.

Hack said he is now completing negotiations with Tehran-based Mahar Fan Abzar Co., and might even forgo Hilger’s standard prepayment requirement to seal a distribution deal.

“We could defer [payment] for the first round of goods,” he said. “We see big potential.”

Hilger and other small privately held firms can improvise on such terms in ways global corporations often can’t, experts say.

Small companies “don’t have time-consuming internal processes or internal compliance controls”, said Strack at the German industrial federation.

And they are generally less worried about US reaction to their working in Iran, he added.

“No sanctions can last forever and once they are lifted or relaxed, then we are already there, while others have to look for partners and start from the very beginning,” said Dentaurum’s Pace.