Economy, Domestic Economy

Germans Look to Retake Market Share

Germans Look to Retake Market Share
Germans Look to Retake Market Share

Germany’s economic activity is growing at a rapid pace. A flurry of recent news indicates to what extent Germany is back in business.

On December 7, a German business delegation described as the ‘most important German trade delegation in 20 years’ arrived in Tehran for talks with Iran’s Chamber of Commerce. Twenty-nine large German companies were present during the visit. One week ago, Reuters reported that German exports to Iran had surged by 32.7 percent to reach $1.6 billion in the first eight months of 2014. As Iran’s car production has boomed back, German engineers have been hired to come and train their Iranian counterparts in car design and technology, according to Hashem Yekeh-Zareh, managing director of Iran Khodro Industrial Group, IKCO.

The Reuters report shows how important Iran is to Berlin and what efforts the Germans are pursuing to retake market share from China.

German–Iranian trade, persistently in favor of Germany, is famed for its endurance despite political obstacles. However, Iran’s has been reoriented towards the East over the past decade as the western economic sanctions have caused a substantial drop in mutual trade and caused much of traditional areas of cooperation, capital imports and, to be substituted by China and other nations, notably Turkey, Russia and Ukraine.

According to the German Chamber of Industry and Commerce (DIHK), 136 German companies are active in Iran. This is not limited to the eye-catching SAP Mammut distribution store on the Karaj-Tehran highway, but also includes giants such as Siemens AG, which has been active in the country since 1868; automaker Daimler AG and the pharmaceutical company Bayer AG. Around 100 German companies have offices in Iran and over 1,000 more operate through intermediaries.

Trade with Germany has declined significantly over the past decade, mainly as a result of sanctions imposed by the US and EU over a nuclear dispute with Iran. Imports from Germany were  rising until the Iranian year 1387, ending March 2009, when imports reached $3.48 billion. However, ever toughening sanctions over Tehran’s nuclear energy program have reduced  imports from Germany to $1.85 billion.

Capital goods have constituted the largest segment of imports from Germany, however, over the past decade China has striven to overtake what was once considered a traditionally German field of expertise.

One of the large capital investment sectors in which China has robustly cast its shadow is infrastructure. Germany, which had been investing in Iranian railways since 1927 when it helped build the Trans-Iranian Railway, has lost a lot of its share over the past decade.

Siemens AG used to be one of the market leaders in Iran. In 2006, Siemens won a €294 ($361.2) million deal to supply 150 locomotives for Iran’s railways and several multimillion-dollar orders the following two years for gas turbines and compressors for power-plant producers, according to a report by the Wall Street Journal. In its 2010 fiscal year, the company reported that profits surged by 20 percent to reach €680 million ($967 million).

However, since the toughening of sanctions between 2010 and 2012, Chinese and other non-western companies have had a much easier job securing contracts, while western companies withdrew in fear of being fined by the US or EU.

In the area of infrastructure, for example, China has secured a contract as prime developer for the Tehran Metro, as well as a range of urban metro and tram systems in Tabriz, Qom and Mashhad amongst other big cities. Last summer, China’s Norinco was hoping to sign a $600 million deal to build subway and tramway projects. In a relevant development in June, a contract with China was signed to electrify the railway linking the capital city of Tehran to Mashhad. Beijing, which often asks German companies to build its own high-speed railways, has also shown interest in building a high-speed rail between Tehran and Qom as well as Qom and Esfahan.

Other countries have also profited from Iran’s eastward shift, notably following complaints that Chinese capital products are not as sophisticated as their western, read German, counterparts.

Under President Hassan Rouhani, Iran has been diversifying its imports from other countries too, notably Russia, Ukraine and Turkey. Recently, the National Development Fund of Iran has provided a credit line to buy 1,000 freight railway cars from Ukraine worth €80 million ($98 million).  

  Productivity, Efficiency

Compared to other western countries, German trade with Iran has been relatively steadfast. While imports from Germany shrank by 46.8 percent between March 2008 and March 2013, imports from France collapsed from $1.68 billion to $651 million over a similar period, a decline of 61.2 percent.

Now Berlin is hoping to capitalize on its relatively strong position. Apart from the most recent trade delegation, two other German business delegations have already visited Iran this year. A two-day conference was also organized in Frankfurt, which drew 40 companies from primarily capital manufacturing industries.

Expanding imports from Germany is not only profitable for Berlin, but it might also develop and strengthen Iran’s economy. According to iran’s leader Seyed Ali Khamnei’s plan of creations a “Resistance Economy”, launched about a decade ago, Iran would gradually diminish its dependence on global commodity markets by decreasing imports and spurring domestic agricultural and manufacturing production. The US and EU sanctions, which are believed to be fully lifted immediately after an agreement is reached between Iran and the six world powers, have made the Resistance Economy an even more pressing issue. Falling global oil prices are another factor why Iran should become more independent.

As opposed to the lower quality goods from China, advanced capital goods from Germany could help Iran increase labor productivity, production efficiency, and eventually decrease Iran’s dependency on the outside world.

Therefore, most predications of German-Iranian ties are very optimistic. The DIHK estimates that German exports to Iran could top €10 billion ($12.2 billion) if sanctions are taken out of the picture.

“The market will explode when the embargo gets lifted,” predicted Stephanie Spinner-Knig, managing director of high-tech component maker Spinner GmbH, who participated in one of the business delegations, Wall Street Journal reported.

Meanwhile, trade delegations are important, as they can explore opportunities for trade within the sanctions framework.

Jens Nagel, a spokesperson for the BGA exporters’ and wholesalers’ association, commented on the recent rise in German imports and the frequent business delegations: “These relatively small steps have been like a lever starting a bigger movement.”

On the export side too, Iran and Germany could increase cooperation. Over the past year, Germany has tried to rekindle ties with Iran in response to Russia’s gas monopoly in Europe.

Berlin has been looking to Iranian gas as a substitute for Russia. In the long run and once the necessary infrastructure is in place, Iran could provide Germany with natural gas, though the idea will face many political and economic restrictions.