At least 60 percent of parts for new automobiles should be produced domestically within the next three years, the Minister of Industry, Mine and Trade, Mohammadreza Nematzadeh said last week. The "term 'assembling' must be removed from the glossary of Iran's auto manufacturing industry."
Reiterating the need for developing the struggling, and in some cases insolvent, domestic auto part industry, the minister had earlier stated that if foreign investors and companies want to enter the lucrative Iranian auto market they must "produce at least forty percent of the parts inside the country."
Although the news was sound of music for domestic auto part manufacturers, some observers say the stance could well dissuade and discourage foreign investors now waiting to get a bigger slice of Iran's huge auto market.
Feasibility
Given the increased stress on expanding domestic production, the minister's proposition is worthy of notice. It has, however, been marred by the issue of feasibilities under which the new regulations (if and when officially notified) will be carried out and the lack of success of similar calls and propositions in the past.
In a talk with the Persian daily Forsat Emruz, economist Saeed Laylaz said from an engineering perspective, the proposition is "one hundred percent feasible because the domestic production lines have improved considerably, specifically in major automakers" like Iran Khodro, Saipa, and Pars Khodro.
Member of Auto Parts Manufacturers Association, Bahram Shahriari, noted that even if the proposition does not get a full embrace, it still is the right policy. "Cars produced in the country should be of quality and fit for export.
Domestic production per se is insufficient; cutting edge technology is a must to enhance quality." He opined that even if 60% of parts are not manufactured domestically over the next three years, in sum the need to do so is a correct policy.
Not by Decree
The minister's proposition may overhaul the local auto manufacturing industry, which for years has come under mounting criticism both for poor quality and high prices. However, what effective measures the government can and will take to put into effect the '60% condition' remains to be seen.
Such needs and necessities are simply not the function of "decrees or orders" Laylaz said as a matter of fact. "If the government really wants to enhance domestic production, feasible policies, mechanisms, and solutions are essential." Foreign currency exchange rates, inflation, custom tariffs, and pricing are all key factors which can help or harm production, the former journalist and auto industry manager told the economic newspaper.
"Over the past twelve years, due to governments' incorrect economic policies, although inflation increased and foreign currency rates were relatively stable, domestic auto production declined and all spare part manufacturers turned into importers from China."
Past Errors
Given the givens, none of the previous governments would ever dare openly say that they were against domestic manufacturing, he added. However, during the past administration (Mahmoud Ahmadinejad), the truth of the matter was that even though inflation was as high as 15-20 percent, "the government artificially stabilized the (car) prices by propping up foreign currency rates."
Workable economic policy depends, among other things, on a reasonable balance between foreign exchange and inflation rates. For instance, if inflation is near 17 percent, the US dollar should be traded for exactly 31,000 rials, he was quoted as saying.
"If it were to be sold for 2000 rials less, this would lopsidedly favor importers, and undermine manufacturers. Only if the balance (between inflation and forex rates) is maintained would domestic manufacturers be able to compete with imports.
Infrastructure is a key factor which can contribute to the realization of the auto development industry, according to experts. The nature of foreign automakers in Iran should be clarified. "It must be known if they plan to assemble cars or take part in production. If the plan is to coproduce, factors such as diversity, quality, price competitiveness, and presence in international markets will depend largely on whether or not the interest of both parties are connected," Shahriari noted.
According to Laylaz if the government delivers on the above-mentioned issues "it will no longer have to interfere in pricing. Manufacturers and importers will (then) enter a healthy competition which will eventually benefit all parties.
Shahriari believes the right policies and practices "will help transform the domestic auto part industry and create the groundwork for manufacturers to innovate."
