Economy, Business And Markets

Auto Industry: Restarting the Engine

Auto Industry: Restarting the EngineAuto Industry: Restarting the Engine

If the postponement of the nuclear deadline came as a disappointment to many, Iran’s auto industry, the largest non-oil sector in the country, looks set to benefit from the seven-month extension.

Late in November, the deputy minister of industry, mine and trade announced that the domestic car production had grown by 72 percent in the first half of the current year (March 21-September 22), reaching 610,000 cars.

This strong growth rate has been linked to the sanctions relief granted a year ago in Geneva where Iran and the six world powers (the P5+1) managed to reach a temporary deal in talks over Tehran’s nuclear energy program.

Before the sanctions intensified in 2012, the Iranian auto industry was in a much higher gear. In 2011, total vehicle production in Iran stood at 1.6 million. In addition, the country’s largest car manufacturer, Iran Khodro Industrial Group (IKCO), exported cars to more than 25 countries and had assembly lines in Azerbaijan, Belarus, Syria, Venezuela, Senegal and Iraq. Production at the Venezuela facility was even expected to reach 25,000 units in 2010, but this amount has never been reported as having been realized, according to the news website Venezuelan Analysis (

When sanctions were tightened, the pressure led to an exodus of foreign capital and investment as well as a collapse of domestic car production. The French carmakers Renault and Peugeot were selling 100,000 and 458,000 cars in Iran in 2011, respectively. Many of these cars were produced in Iran with their local partners, with Renault partnering up with Pars Khodro (a Saipa subsidiary), Saipa and IKCO and Peugeot preferring IKCO. The abrupt cessation of activity after the tightening of sanctions caused much panic amongst these car manufacturers, who were left to produce their own vehicles without foreign know-how and technology.  

In the Iranian year ending March 2013, 920,000 vehicles left the assembly lines. In 2013, this figure dropped further to 626,110, according to The National.

Not only did supply collapse, demand also dipped in response to the rapidly eroding value of the rial, which caused car prices to almost triple in a few years. The profit margins of Saipa and Iran Khodro, the major Iranian car manufacturers, fell quickly and these companies accumulated a lot of debt, the amount of which has not been made public yet. According to Davoud Mirkhani Rashti, deputy manager of the Carmakers Association, the two car producers “are trying their best” to solve their debt problem.

In turn, fall in demand forced hundreds of Iran’s dozens or so auto part producers into bankruptcy or to switch to other businesses. Their accumulated debt is also estimated, according to unofficial reports cited by the London-based Financial Times, at $4 billion.

 New Rules of Engagement

 Both the auto industry and the government seem to have learnt from this experience. The Rouhani administration unveiled new rules for foreign investors in October related to the transfer of technological know-how and physical capital to Iran. As a result, if foreign companies are to redraw suddenly again, Iran would have independent capability of continuing production of these models.

Saipa and Iran Khodro have also learned. Farzad Mansouri, head of the assembly line of the Peugeot 206, recalls that “when Peugeot first left, production was brought to a halt. It took us a year to produce our first Iranian part. It was not easy. It was a disaster for us. But now we are completely independent.”

The Iranian auto industry has benefited from the partial sanctions relief agreed upon last year. French companies have shown eagerness to resume operations and now Renault and Peugeot are coming back.

One important sweetener in return for stricter investment requirements has been the opportunity to hold large stakes in the local manufacturing company.

For example, IKCO and PSA Peugeot have agreed a joint venture to produce models 301 and 2008 in Iran. Both companies hold an equal amount of shares in the venture. Additionally, Pars Khodro, which is 74 percent owned by Saipa, is currently in talks with Renault over a 20 percent sale of the company’s shares.

The government is also willing to change the ownership structure of Saipa and IKCO. The clearest sign yet has been the approval of a clause allowing majority (51 percent) ownership by foreign investors.

Iranian car manufacturers, who have a monopoly in the market, are also exploiting regional relations to strengthen their foreign sales of vehicles. Recently, Fars News Agency reported that Iran Khodro plans to export 10,000 vehicles to Russia. According to the agency, IKCO intends to sell “one-third of its cars in the international markets.” Iranian cars are produced in several African states. Most recently and according to Press TV, Saipa signed a deal with a Nigerian carmaker to start production in that country. Most significantly, increasingly deep ties between Iraq and Iran have allowed IKCO to export up to 20,000 cars to the neighboring country.

In order to accomplish this, and bypass trade tariffs, the economic free trade zone in Chabahar has been developed with government support to become the country’s third largest hub for car manufacturing, according to a report by the Financial Tribune. Predictions of future growth in the auto industry have been mostly positive, but inherently tied to the extension of the deadline. Business Monitor International projects a 47.6% growth in car output, to reach 900,790 units in 2015. This is below the target set by Mohammadreza Nematzadeh, minister of Industry, mine and trade, in October when he called on the carmakers to reach the production target of 1.2 million cars by the end of the current year, ending March 2015.    

However, one of the largest long-term roadblocks ahead for Iranian cars may not only be tied to sanctions. Many critics believe that especially if sanctions are resolved, pressure will accumulate on the government to lower the extremely high car import tariffs, standing at 90 percent currently. Critics also argue that the Iranian auto industry is not innovative enough, which puts it at a disadvantage of foreign car companies. Notably, the Chinese are able to enter the Iranian car market due to closer bilateral ties. But fears exist that even if trade barriers are further reduced, the Iranian car market would have to reform or else...