Iran Auto Industry Runs Out of Steam After Strong Takeoff - Q1 2018

EghtesadOnline: During the first three months of the current fiscal which started on March 20, 336,699 cars and commercial vehicles rolled out of Iranian carmakers’ production lines indicating a 9.4% year-on-year increase, yet in the final month of the quarter (May 22 – June 21), the country’s automotive output declined by 19.6% compared to the same period of last year.

News ID: ۷۴۵۷۱۱

24 July 2018

As is customary with the Ministry of Industries, the government body released its monthly report on domestic automotive production. While during the recent years Iran’s auto sector has been on a production spree the latest statistics paint a somewhat bleak prospect for the key industrial sector.

Business insiders have been wary that soon-to-be-effective US sanctions against Tehran, which are to target the country’s automotive sector, can disrupt the formerly booming car making industry in Iran.

Following Washington’s exit from the historic 2015 Iran nuclear deal, US President Donald Trump has announced that the country is poised to reimpose some sanctions against Tehran in August, including the bans on the automotive sector. While the White House is yet to move ahead with the proclaimed policy, the upheaval in Iran’s forex market and stringent regulations restricting raw materials and auto parts imports have hindered production in Iran, according to Financial Tribune.

Overview of Statistics

Iran’s Ministry of Industries has released its Q1 Auto Industry Report according to which 317,810 cars were produced in the country during the three-month period, up 9.3% y/y.

During the quarter, companies manufacturing trucks fared well, recording a 27% hike in their output reaching 3,848.

The report further indicates an 8.2% increase in the production of pickup trucks with Iranian makers churning out 14,080 units.

In contrast with the general bright prospects of the three-month period, the closing month of the quarter observed a sharp 19.6% fall in automotive output which took many industry insiders off guard.

In the closing month of the quarter ending on June 21, car production plummeted to 101,791 from 127,859 during the same period of last year, indicating a dramatic 20.4% drop.

Production of pickup trucks also plunged to 4,467, 15.6% lower than the makers’ production rate during the same period of the last fiscal.

Forex Fluctuations

Industry insiders have attributed the unforeseen decline in auto production to restrictive government regulations, which have put the brakes on commodities getting customs clearance for entering the country as well as the shoddy mechanism of allocating subsidized foreign currencies to the beleaguered auto sector.

Since Trump announced his decision on May 8 to pull the United States out of the 2015 Iran nuclear deal and reimpose economic sanctions on Tehran, Iran’s rial has lost over 50% of its value.

The sharp fall in the national currency’s value was accompanied by a sudden surge in demand for hard currencies. In response to the turmoil in the market, and in a move aimed at forestalling possible depletion of national foreign currency reserves, President Hassan Rouhani’s government stepped in and unified USD forex rate at 42,000 rials on April 9 and also banned the physical trade of hard currencies by money changers.

However, as the rate was significantly lower than what USD was traded at in the gray market, fierce competition began among importers to receive more of the cheap currency. On Monday, the greenback traded at 95,000 rials in Tehran.

In response, the government has resorted to a multi-tier scheme based on which importers will receive their needed foreign currency at different rates.

The top-tier branded as “essential goods” such as staples like rice and wheat will receive their currency needs from oil revenues at the 43,000-rial rate, which could be further subsidized to 38,000 rials.

The next priority includes “raw materials and intermediate goods,” the forex requirements of which will be met from the export earnings of petrochemicals, steels and mineral products.

Head of Iranian Specialized Manufactures of Auto Parts Association Arash Mohebinejad in an interview with IRNA has explained that the mechanism of allocating the subsidized currency to auto parts suppliers urgently needs revision.

Most of the goods that the automotive supply chain needs fall in the second category with some parts even classified in the third tier marked as “nonessential consumer goods.” Mohebinejad says this is while that part of the goods imported by Iranian automotive supply chain is raw materials and machinery which should fall in the first category, and government-generated foreign currency earned from oil exports should be allocated to their imports.

He further notes, “The sector currently needs $2 billion in hard currencies to import raw material and machinery. However, the total sum of foreign currencies they have been provided with [at the subsidized rate] barely amounts to one-fourths of this number.”

Some of the goods which the supply chain needs to bring into the county by definition fall in the second tier. However, Mohebinejad says that the promised hard currency for their imports is yet to materialize, “since the non-oil exporters have not generated much in foreign currencies so as to enable them to satisfy suppliers’ needs.”

During recent weeks, industry insiders have pointed to the importance of the automotive sector calling on the government to put preservation of the related businesses on top of its agenda.

According to Industries Minister Mohammad Shariatmadari, the auto industry has a 3.5-4% share in Iran’s GDP and 12% of the Iranian workforce is employed in the key sector. The annual turnover of the auto industry is $12 billion.

Waning French Partnerships

Iranian carmakers manufacture a wide range of vehicles in collaborations with foreign firms, including French automotive giants Peugeot and Renault.

Since US withdrawal from the Iran nuclear deal, Peugeot’s parent company PSA Group has announced that it has suspended its operations in the country, while Renault declared that it is here to stay, however, officials with the latter have forecast that Renault will be forced to downsize its activities in Iran.

While the US is yet to reimpose direct sanctions against Iran’s automotive industry, the key sector has already started to feel the bite of the mounting pressure, with the share of French-derived cars dropping to 37% of local carmakers total output from an outstanding 43% share a year earlier.

The number of French-derived cars made in Iran stumbled to 115,621 units during the three-month period, indicating a 6.3% decline.

Both major Iranian carmakers Iran Khodro and SAIPA have ties with French automakers. IKCO produces three Peugeot models namely 2008, 206 and 405 along with popular Renault sedan Logan (locally better known as L90). SAIPA and its subsidiary Pars Khodro manufacture Renault’s Logan and Sandero.

The number of cars IKCO produced which carry the badge of Renault or Peugeot has sunk 5.9% compared to the same period of last year, falling to 98,207 units. SAIPA manufactured 17,414 units of Renault Logan and Sandero indicating an 8.2% YoY drop.

During the current fiscal’s first quarter, 94,034 Peugeot cars were made in Iran down 1.7% compared to the same period of last year.

Iranian carmakers made 21,587 units bearing the emblem of Renault showing a sharp 22% nosedive.

Peugeot and Renault’s shares in Iranian carmakers’ total output respectively have tumbled to 7% and 30% from 10% and 33% a year earlier.

Other Partners

In addition to the French automakers, Iranian firms have fostered ties with Chinese and South Korean companies. Cars manufactured through collaborations with Chinese firms have a 19% share in Iran’s automotive output. 59,401 Chinese-derived vehicles were made in Iran during the quarter up 24% from a year ago.

Private Iranian automotive conglomerate Kerman Khodro has formed collaborations with South Korea’s Hyundai Motor along with China’s BYD, Geely, JAC Motors, Lifan and Zotye.

China’s Chery independently operates in Iran offering cars with two different badges, namely the Chinese carmaker’s own logo and a brand registered in Iran named Modiran Vehicle Manufacturing carrying the logotype of MVM.

In addition to France’s Peugeot, IKCO has been working with China’s Dongfeng Motor Corporation and FAW Haima Automobile Co.

Just like its arch-rival IKCO, SAIPA has longstanding collaborations with Chinese automakers, namely Brilliance Auto Group, Changan Automobile Co. and Zotye Auto.