Economy, Business And Markets

Auto Fair Highlights Need to Improve Quality

Auto Fair Highlights Need to Improve Quality
Auto Fair Highlights Need to Improve Quality

The 9th auto parts international exhibition (IAP 2014) was inaugurated on Tehran's Permanent International Fairground on Friday, hosting over 360 domestic companies and some 450 foreign exhibitors from 15 countries.

The IAP is showcasing parts, equipment, services, and car accessories. This year's exhibition has witnessed an almost 35% rise in terms of the number of foreign exhibitors and companies, most of whom from China.

During the past four years, when the international pressure tightened up on Iran over its nuclear energy program, almost all the foreign partners in auto industry withdrew from Iran's market. For instance, French giants Peugeot and Renault, as well as the Japanese carmaker Mazda stopped providing Iranian automobile manufacturers, namely Iran Khodro and Saipa, with the parts and equipment they required. The move, coupled with the devaluation of the national currency, hit the domestic automakers hard and sales dropped due to decreased purchasing power and the shortage in parts.

The most available solution was multi-sourcing and the main target was China. During the past two years, many Iranian carmakers claim self-sufficiency in auto part production, while the majority of parts for any Iranian-made car is now supplied by the Chinese.           

“I have many customers who have had cars like Peugeot for ten years,” Mohsen, a 43-year-old distributor of auto parts, told the Financial Tribune at IAP 2014. “They had, for some ten years, no problems with their original French parts. But after years, when they changed the parts, the new Chinese ones had to be changed after less than a year.”

When Iranian carmakers buy auto parts from foreign companies, namely Chinese and Turkish auto parts makers, they have to pay for their order in advance and in many cases, especially in the case of Chinese products, they receive parts with lower quality than the Iranian products. “But when the very same customers come to us to buy the same parts, they will settle their debts after months, while they have been given products with a much higher quality than the Chinese ones,” Manoochehr Naqavi, the managing director of Toos Rubber Industries said Friday at the IAP.

Naqavi, whose company produces different types of oil seals, o-rings, and precision rubber parts, complained about the favoritism that prevails in the domestic auto industry. He said the state-owned carmakers pretend to be serious about quality standards for the parts, while they ignore the same factors when buying the Chinese products.

The participation of companies from countries such as Germany, Japan, Italy, Argentina, France, the UK, Spain, Brazil, Belgium, Taiwan, South Korea, the Netherlands, Sweden, and Austria has been interpreted here as a very promising sign. These companies are expected to sign dozens of contracts with Iranian carmakers as soon as the international sanctions are removed. But even if they directly or indirectly enter the Iranian car market, no expert in the field could claim that Iranian auto industry would see fundamental changes anytime soon. Since 15 years ago, a handful of such giant automakers were present in the country’s market, supplying Iran both with CKD (complete knock down) kits and CBUs (complete built up unit). But as soon as they left the market, the Iranian auto industry encountered numerous problems.

 Private Sector Role Minor

The domestic auto industry is still growing and has a long way to go. “As a company, which directly exports the major portion of its production to Germany, and also as a company that has been working with Iranian carmakers and parts distributors for more than 8 years, I can say for sure that Iran’s auto industry could flourish only if it is not controlled by the government,” Yasar Baki, a Turkish industrial engineer who exports his company’s gaskets to Iran, told the Financial Tribune.

The Turkish government published an official automotive sector strategy document in 2011 in a bid to shape the future of the industry. Baki added that enhancement of sustainable global competitive strength of the automotive sector and its transformation into a structure using advance technology and generating high value-added will be realized only if the private sector is assigned more pivotal roles and the key decisions are made by the private sector.

The automotive industry in the country is an oligopoly, which is constantly manipulated by the administration. In 2007, the Logan, branded as Renault Tondar 90, began to be marketed in Iran by Pars Khodro. The car, which was set to be sold at maximum 80 million rials ($8600 by the then foreign exchange rate), was priced 120 million rials due to pressure by the rival state-owned carmakers. Despite the price hike, more than 100,000 Tondar 90 were ordered just in the first month of its production.

The actors in the car market unanimously believe the government will not easily give up control over the auto industry as the sector is the biggest non-oil sector across the economy and constitutes around 10% of the GDP. The industry witnessed sizeable growth during the decade from 2001 to 2011 due to an increase in the government support and the absence of international rivals.

The current tariffs for imported cars are amongst the highest in the world. The tariffs were recently reduced to 100% from the previous 200% and 300%. The applying of unreasonably high tariffs would temporarily protect the domestic state-owned carmakers, Poopak Mojtahed, an industrial designer working at the private sector told the Financial Tribune Friday. She emphasized that such protection in the long run will backfire. According to the expert, the state-owned carmakers are like infants who are always kept in an incubator. When Iran finally joins the World Trade Organization, the car manufacturers will not be able to enjoy the full protection of the government, she said.

 High Tariffs Won’t Protect Carmakers

In July this year, the Competition Council yielded to pressure from carmakers and increased car prices by 30%. Following the rise, the MPs threatened they would grill the minister of industry, mine, and trade, Mohammadreza Nematzadeh over the price hike. In addition, the government spokesman, Mohammad-Baqer Nobakht, said such an increase was not admissible. Nobakht criticized the council, urging it to reconsider its decision. But the debate has apparently been forgotten and the Iranian customers have to pay over $6,000 for some low-quality domestic car, while a brand new Toyota Yaris which is priced around $15,000 in international markets costs the Iranian customer around $34,000 (1,100,000,000 rials) due to the high rate of import tariffs and taxes.    

Lawmakers say a special committee set up to investigate the auto industry’s activities has identified numerous cases of violations in the industry and submitted six different cases to the judiciary. They also say the recent rise in car prices has no legal basis and that the automakers are taking advantage of their domination to violate the consumers’ rights.

According to economists, the main reason for the latest hike in the prices of cars is mismanagement in the auto industry. They argue that a limited group of people are benefitting from the car market and that they are not willing to leave the scene anytime soon.

The industries and mines committee of the parliament recently announced that the administration should cut car import tariffs to zero in two year’s time to boost domestic production and make the auto industry competitive with its counterparts worldwide. The lawmakers also urged the government to abandon support for the auto industry whose products are largely criticized for low quality and high prices.

On the other hand, the domestic carmakers are asking the new administration to not only keep the tariffs high but also bail them out to save the sector, which already owes local banks as much as 100 trillion rials ($4 billion).