Economy, Domestic Economy

Iran Builds on Strong Manufacturing Base

Iran Builds on Strong Manufacturing Base
Iran Builds on Strong Manufacturing Base

I recently went vacuum cleaner shopping in a provincial town in Lorestan, western Iran. There was a great selection available in the shops: some imported, a variety of Iranian-made foreign-branded units, as well as Iranian-made, Iranian-branded products.

The most competitive and popular were foreign brands assembled–”montage” in Persian–in the domestic market, wrote William B Jenkins, an associate and Iran specialist for Dearin & Associates, a Sydney-based international business consultancy.

Below is the full text of the article with slight redaction:  

One common and recommended brand was Pars Khazar, formerly Pars Toshiba, a manufacturer that produces all types of household appliances and small white goods from the vacuum cleaner we sought to toasters, ovens, rice cookers and juicers.

Pars Khazar is one of the hundreds of Iranian manufacturing companies competing to make the household appliances Iranians need and that the country exports.

With 92% of Iranian manufacturing being composed of SMEs, it is a competitive and vibrant sector. The numerous dedicated economic dailies in Iran, including Donya-e-Eqtesad, Abrar-e Eqtesadi, Jahan-e San’at and the newer English-language Financial Tribune attest to the liveliness and relevance of industry in Iran’s economy.

  Iranian Manufacturing: Diverse, Self-Sufficient

Iran’s manufacturing sector is dynamic and diverse, but challenged. It meets the vast majority of basic consumption and commercial needs in the country of 80 million, but remains relatively low-tech and inefficient. Iranian industry produces all the essential goods: foodstuffs, packaging for storage, sales and transport, clothing and other textiles, appliances, furniture, infrastructure inputs, pharmaceuticals, office and building equipment, construction materials and electrical and electronic products.

It is one of the world’s most self-sufficient and diversified large economies with a significant and varied industrial base. Furthermore, manufacturing is just one sector in a healthily diversified economy.

While Iran produces most staples domestically, it relies on global procurement for advanced manufactures like anywhere else. Iranian industry has significant capability to produce domestically, but it imports sophisticated products like personal electronics, telecoms and large equipment such as escalators and finished products and components. Maadiran is arguably the most prominent company, reputed for its own production and international partnerships.

Iran’s manufacturing is dominated by small and big businesses with few in the middle. While small manufacturers contribute over 17% to GDP, these struggle to grow into bigger outfits for numerous reasons–a symptom of Iran’s underdevelopment.

International partnering and competition could alleviate some of the major issues that include shortage of managerial skills, cumbersome processes and lagging technological and R&D advancement.

  Autos, Tractors, Combines

The most prominent focus on Iran’s manufacturing in western media coverage with the lifting of sanctions has been the auto sector.

Iran is the Middle East’s vehicle powerhouse. Given its size and importance economically and historically, the auto sector’s future will be a bellwether of political and economic confidence in Iranian manufacturing. It will indicate the broader sweep and direction of Iranian industrial policy.

The government of President Hassan Rouhani has announced plans to retract car industry support, a plan of uncertain likelihood that nonetheless directs much domestic attention to the industry’s fortunes.

With new international deals, Iran’s auto sector is likely to prosper if it can balance international investment and partnerships with modernization to boost sales at home and abroad.

Alongside its sizable consumer and industrial auto market, Iran is a prominent and award-winning manufacturer of tractors and combine harvesters.

Tradition stretching back decades makes Iranian tractors a point of pride, especially for the Turkish northeast, whose football club Tractor Sazi, which is owned by Iran Tractor Manufacturing Company, plays in Iran’s professional league.

Over 30,000 tractor units are exported to 29 countries annually. This is expected to increase to 50,000 in the coming three to five years.

Combine harvesters and trucks also have a significant production line in Iran and are exported around the Middle East and East Asia, though Iran’s own agriculture requires development in aspects other than technology.

  Old-Fashioned Industrial Development

Sanctions limited the reach of Iranian products but also reinforced the self-sufficiency of Iranian producers, supported by the Iranian government. This has led to a situation where Iran, though well below best practice, has been able to produce and manufacture most products needed on the domestic market and expand its industrial base with a proliferation of manufacturing outfits.

This situation is unlikely to change soon. Iran’s isolation over the last three decades and particularly under sanctions, necessitated an old-school “modernization” model of protected import substitution to incubate a strong industrial base.

This path was followed by modern industrial giants such as South Korea and Brazil and is likely to remain the dominant model for Iran politically and economically into the medium-term future, particularly with regard to manufacturing.

  Gov’t Relations With Manufacturing

While the Iranian auto industry receives major direct government assistance, most Iranian manufacturing operates in a lively private sector.

Non-auto Iranian manufacturing benefits from preferential rates on loans, tax concessions, energy discounts and tariff protection but does not generally receive direct assistance like the auto industry.

Government policy on industry is flexible and pragmatic: It promotes various regions and industries with tax and capital concessions while industrial parks are generously supported to encourage industry. Most Iranian industry is private, but some bigger players are government-backed and operate in the economy’s cooperative sector.

International firms looking to enter the market and partner with Iranian manufacturers should prioritize two areas for investment and involvement (as with other parts of the economy):

- Implementation of management practice and systems to raise productivity, and

- Supply of sophisticated technology to improve outdated technical advancement.

Iranian producers and government have a long history of making foreign-branded products locally as a base for the Middle Eastern and Central Asian regions.

Contracts with international partners often include a technology transfer clause to come into force at the conclusion of a contract.

As with infrastructure and other sectors, Build, Operate, Transfer will remain a popular partnership structure. Iranian business and government prefer ultimate control of commerce and business, but are open to full foreign ownership unlike other Middle Eastern countries. They look for partnerships to strengthen their existing capabilities in ways not available at home.

The big question is how Iranian manufacturing will fare when and if it is opened to global competition. But due to continuing protective barriers and the cautious conservatism of Iranian business, this is at best a medium-term prospect in most manufacturing. The auto industry will prove an early test case of the industrial currents given its relative strength, level of development and concurrent need of foreign involvement and partnerships.

By introducing external competition and partnerships, Iran may be able to build the unassailable regional auto industry.

The rest of Iran’s manufacturing has similar needs to the auto industry, across a more disparate and competitive sector.

International firms looking to engage will find a great deal of opportunity in the breadth of the industry.

Iran is already the manufacturing dynamo for much of the Middle Eastern region and exports its best products globally.

The development of its industrial base, including through strategic partnerships with foreign firms, promises that it could well become a major global industrial player.