Iranians are starved for cars after years of crippling international economic sanctions. As the nation’s automotive marketplace starts to crank up again it will most likely have to make due without American-made vehicles and components because U.S. exports to Iran remain stalled under a highly complex list of federal restrictions.
With Iran and Boeing engaging in negotiations to update the country’s dangerously aging civilian aircraft fleet, conservatives in Congress are attempting to shoot down the deal – representative of a lingering anti-Iranian trend that does not bode well for official licensing of automotive exports anytime soon. None of the Presidential candidates have thus far voiced support for improving diplomatic relations with Iran.
“I expect it will be difficult” for American companies interested in taking advantage of Iran’s burgeoning auto market, says Clif Burns at the Washington, D.C.-based Bryan Cave international law firm. “Nothing can directly be sent from the U.S. to Iran.”
“You can’t export any auto parts to Iran,” laments Shahriar Afshar, president of the Iranian Trade Association in San Diego. “Iran has a booming auto business” that includes vehicle exports throughout the Middle East.
This ongoing growth has non-American auto industry firms venturing into Iran at an accelerated pace following January’s partial lifting of sanctions that had been imposed by the United Nations, the European Union and the U.S. to disarm Iran’s pursuit of nuclear weapons. Iran has accepted strict limits to its atomic quest with “snap back” sanctions looming if it violates the agreement.
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Now being referred to as “the largest untapped automotive market on the planet” with its population of 79.5 million people, Iranian drivers are seeking upgrades to a countrywide fleet of older vehicles frequently lacking replacement parts.
In 2014 Iran managed to sell more than 860,000 cars – even with the sanctions in place – surpassing all the other Middle Eastern nations despite a dearth of monetary resources and technological expertise largely brought about by the long American boycott and Europe’s subsequent sanctions-induced exit from the market.
“Almost the entire automotive industry is open to partnering as international technology, modern production lines and finance is the need of the hour,” says senior research analyst Isaac Abraham at Frost & Sullivan, which has produced a series of reports on the nation’s vehicle sector.
“Iranian OEMs lack the powertrain technology, build quality and finesse of foreign companies, and would benefit immensely from partnering with them,” he says.
Iran’s vehicle market is complicated, though, with the government maintaining a stake among OEMs and suppliers, according to Abraham, who was assisted in his research by Vishwas Shankar. Protectionist policies and high localization mandates raise the entry barriers for foreign companies at the cost of quality, but they also boost local economies and employment levels.
Negotiating joint ventures
The government’s authoritarian presence is pronounced. The Ministry of Industry, Mine and Trade plays an active role with direct supervision by Iran’s appropriately named Automotive Advisor, Buick Alimoradlou. Alimoradlou served as chairman of the Iran Automotive Industry’s International Capabilities Exhibition (IAIIC) held earlier this year.
Among the IAIIC highlights was an appearance by Iranian President Hassan Rouhani to personally preside over the unveiling of the new Saina model from SAIPA (Société Anonyme Iranienne de Production Automobile), and a debut diesel engine produced by Iran Khodro (IKCO), the Middle East’s largest automaker accounting for more than 65 percent of Iran’s domestic car and commercial vehicle production.
Rouhani traveled to France to negotiate joint venture agreements with Renault and Peugeot. The two OEMs are still facing harsh criticism within Iran for abruptly pulling out of the market in 2012 when the UN/EU sanctions were imposed.
There are currently more than 4 million Peugeots traversing Iran’s roadways. New Iranian-produced Peugeot models under a JV with IKCO are scheduled to start rolling off the assembly line in mid-2017.
“This strategic agreement turns the page on the period of international sanctions and enables PSA (Peugeot) and Iran Khodro to start a new chapter in their 30-year history of cooperation,” says Peugeot Chairman Carlos Tavares. “Our shared ambition is to offer our loyal customers high-tech products to deliver mobility that meets the highest comfort, safety and environmental standards.”
“The strategic partnership with PSA will serve as a unique platform for both parties to capitalize on each other’s competitive advantages, especially given the scale, technology and long-term outlook that the parties are able to bring to their cooperation,” agrees Dr. Hashem Yekehzare, IKCO’s president and CEO. “A particular benefit of this partnership is to bring cost effective and the best automotive technology to the customers.”
It was reported in May that IKCO is in talks to establish a JV with India’s Tata Motors. Automakers from Russia and China also have a presence in the Iranian auto marketplace.
Chinese OEMs are already offering up to 20 percent discounts to entrench themselves before Western companies can enter the market, says Frost & Sullivan’s Abraham, channeling the widespread belief that Iran is “the next global automotive hotspot,” but customers are likely to defer making purchases until the pronounced performance and comfort attributes signified by European marques are available to them.
“Overall, the Iranian passenger vehicle market’s potential to quickly launch new models with existing levels of localization and the country’s high annual consumption will attract investors to the country,” Abraham asserts. “Cooperation with foreign auto industries and the resulting modern technology as well as vast options in models and makes will give the push needed to make Iran an automotive hub in the Middle East.”
Iran’s opening up to trade and providing opportunities for global auto producers to be a part of its growth “certainly creates buzz in the industry,” says Abraham. “With around 11.7 million vehicles on the road, the aftermarket potential is massive and the average age of vehicles is steadily increasing.”
These tantalizing prospects are driving increased exhibitor and attendee interest in the Nov. 16-19 Auto Parts International Fair 2016 at the Tehran International Fairground, according to the show’s organizers.
Trucks and buses on a roll
As with cars, Iran’s commercial vehicle market is “rising from the ashes” after being burned by the sanctions, according to Frost & Sullivan research analyst Marshall Martin.
Anticipating an annual growth rate of 10.4 percent, overall commercial vehicle sales are expected to reach 320,148 units in 2022 compared to the 160,107 vehicles produced last year. The bus segment is likely to grow the fastest at 34.9 percent. Medium and heavy duty truck sales are on the rise as well, jump-starting a stagnant market beset by external and internal factors that had stifled the economic growth and trade that typically steers truck purchases. Also as with cars, truck customers have been deferring purchasing decisions while awaiting the return of Western OEMs.
Because foreign firms can enter the highly regulated marketplace only through JVs with domestic companies, “the dominance of local participants and high import duty on completely built units encourage local production and assembling, thereby reducing reliance on imports,” says Martin. “Iran has regional access to 15 countries and strategically placed free trade zones for exporting, making it an extremely attractive investment destination for commercial vehicles.”
The entry of Chinese and Russian manufacturers, though, will compel western OEMs to reduce prices to regain market share. “Convergence by both budget and premium manufacturers towards a common price range of $55,000 to $75,000 will enhance the competitiveness of the market,” he says.
“The Iranian market offers a great deal of potential,” notes Matthias Benz, a senior vice president at Germany’s ZF Friedrichshafen, which has opened a JV-negotiated ZF Pars SSK subsidiary combining ZF’s transmission production operations in the region.
“The new Iranian subsidiary will enable us to concentrate our existing business activities while also tapping into new business areas and acquiring new customers,” he reports. It will also establish partnerships for the company’s new Active & Passive Safety Technology Division and the ZF Services aftermarket unit. Ten employees will initially be staffing ZF Pars SSK’s inaugural Tehran location with the prospect of additional hires as activities expand.
Pre-sanctions, ZF entered the region 30 years ago and has been a 16.7 percent shareholder in the S.S. Charkheshgar JV since the mid-1980s. Transmissions primarily used in city buses are produced at the Tabriz plant in northern Iran.
“ZF has already contributed toward maintaining the country’s infrastructure and improving the living conditions of its population,” says Benz. S.S. Charkheshgar’s growth-oriented goals, continuing alongside ZF Pars SSK, will be intensified, and the production facility is scheduled to be modernized and updated.
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