PSA Confident Iran Market Will Deliver

EghtesadOnline: While banking hurdles and a volatile forex market have hindered PSA Group’s operations in Iran, the French company’s executive vice president for Africa-Middle East says it is expanding its presence in the country and has signed agreements with 76 local parts makers.

News ID: ۷۴۵۰۱۷

18 February 2018

“As part of its joint venture with local carmakers, PSA Group has signed agreements with 76 Iranian parts makers. I have observed much potential in Iranian parts makers,” Jean Christophe Quemard told the press corps in Tehran this week, IRNA reported.

He went on to add that these firms must “overcome financial hurdles and upgrade their machinery” to be able to “compete with their foreign counterparts and enter the international market.”

Quemard has visited production sites of several Iranian parts makers who have modern technologies and are capable of producing quality parts and compete with companies in other countries, according to Financial Tribune.

He told the reporters that part of the workforce employed by PSA’s local operations has been sent to France for training. The trainees have visited production facilities in his country to get familiar with industrial procedures and operational systems.

The French carmaker is also training parts makers inside Iran. Quemard says that improving the quality of Iran-made parts takes time. On a hopeful note, he adds that after receiving the training the Iranian companies can join the group’s global supply chain.

The automotive giant’s leading brands Peugeot and Citroen have signed two separate joint venture deals with the main Iranian car companies, Iran Khodro and SAIPA.

IKCO and Peugeot signed a €400-million deal in June 2016. Through the 50-50 joint venture known as Iran Khodro Automobiles Peugeot (IKAP), three models, namely Peugeot 208, 2008 and 301, will be produced in Iran. Production of the 2008 SUV has started.

According to Quemard, 20% of the parts used in locally made Peugeot 2008s are manufactured by Iranian firms and this will be increased to 60% over time. So far 1,000 units of the model have been produced in Iran.

Citroen signed a joint production deal with SAIPA in July 2016 that obliges the Paris-based carmaker to invest €300 million in Iran over five years for the production of three models.

Collaboration between SAIPA and Citroen started in 2017 and the first Citroen rolled out of SAIPA’s Kashan plant in December. Quemard added that PSA is investing in the Kashan facility.

SAIPA has started a test assembly of the Citroen C3 and the company says mass production of this car, initially from semi-knocked-down kits, will start in May.

Competitive Edge

According to the French manager, PSA’s main strategy for increasing its profit margin is to increase the content of locally manufactured parts in cars made under Peugeot and Citroen brands in Iran.

“Only by increasing the share of locally manufactured parts in Peugeot and Citroen cars made in Iran can the company have a competitive edge. Iran is rich in natural resources and has the infrastructure for providing  raw material for the expansion of the auto industry.”

He notes that energy prices are relatively low in the country, but is quick to add that “cutting production costs would provide PSA Group and its local partners a competitive edge” in the global auto industry in which the number of sellers is increasing at a rapid pace.

Automotive Standards

Iran’s automotive standards are to be upgraded and a more stringent  system known as the Islamic Republic Car Assessment Program (IRCAP) is to come into effect by next January that includes 30 new regulations with the total automotive standards reaching 85. Quemard says that PSA is aware of the process and will comply with the rules.

Old Peugeot models manufactured in Iran will not be able to pass the new standards, but the Peugeot and Citroen cars which are to be made under the joint venture will be in compliance.

Noting that vehicles like Peugeot 405 and 206, which have been manufactured in Iran for decades will not be able to pass the strict standards, Quemard notes, “PSA has no budget cars to replace these models, but we are trying to find a solution.”

Financial Hurdles

With regard to interaction with banks and lending institutions, Quemard says, “We expected things to go smoother in Iran and expected closer collaboration from Iranian banks.”

The French carmaker is of the opinion that loans with low interest rates are crucial for expanding and developing the auto industry. However, “we have not received the expected support from local institutions.”

While the 2015 nuclear deal had eased sanctions against Iran to some extent, Quemard said, “Banking obstacles are still in place and the PSA Group is facing problems for financing its operations.”

Difficulties in international banking relations are seen as the main barrier to the development of normal trading relations between Iranian firms and foreign exporters and importers. Quemard is hopeful that banking relations with Iran will improve over time.

Suggesting that the ruling administration in Paris also wants Iran to return to the international community, he said, “The French government indeed supports PSA operations in Iran.”

According to Quemard, the instability in foreign exchange rates has also impeded PSA plans for the country. “Instability in the forex market has rendered PSA unable to even come up with a short-term plan for Iran’s market.”

The carmaker is confused by the huge increase in foreign exchange rates in Iran over the past six months. “This is something that is totally out of our hands. We cannot do anything about it. Naturally, we will be forced to rethink the prices of our products in tandem with the rial/dollar rate.”

The rial/dollar exchange rate has shot up a solid 24% over the past six months.

Reports from the market indicate that after having crossed the psychological threshold of 49,000 on Tuesday, the rial was traded at 47,450 to the dollar on Saturday, down from 37,700 in mid-2017.

Quemard recalled that PSA Group is not alone in the forex dilemma and the company’s arch-rival Renault is saddled with similar problems. Renault signed a €660-million trilateral production deal with Industrial Development and Renovation Organization of Iran and a local private company Negin Khodro last August.

PSA is the leading foreign auto company present in Iran in terms of market share. It sold 444,600 cars in Iran in 2017 under Peugeot license owned by IKCO accounting for a 40% of the cars sold in the market.

Iran has 83.4% share of PSA’s total sales of Peugeots in the Mena region alone. Close to 2.1 million Peugeot cars were sold globally in 2017. Here again, Iran had a 21% share of the brand’s global sales.

In addition to Peugeot, cars produced under PSA’s DS Automobiles brand are present in Iran through imports.