Iran: Defense Ministry Strengthening Collaborations With Automakers

EghtesadOnline: Iran's Defense Ministry has signed a deal with local car manufacturing company SAIPA to curb the auto sector's reliance on foreign parts.

News ID: ۷۴۹۲۶۰

22 December 2019

Iranian car companies depend on auto parts imports—especially key electronics—for producing vehicles. Following the imposition of harsh US sanctions against Tehran, the local firms’ ties to the global supply chain were disrupted and parts imports began to trickle, according to Financial Tribune.

During a visit to the automaker's production lines and research center on Wednesday, Defense Minister Amir Hatami signed an agreement with SAIPA to bolster collaboration in research and development, design, technical monitoring, safety standards and localization of parts, Tasnim News Agency reported.

Seyyed Javad Soleimani, CEO of SAIPA, said, “With Defense Ministry’s help, domestic substitutes for 35 key auto parts are to be produced in Iran to curb the industry’s reliance on the global supply chain.”

Soleimani noted that work will soon be started for the modeling and mass production of 16 items, while prototypes of the remaining 19 parts will be produced by the end of the current Iranian year (March 2020).

Pointing to the fact that 23% of auto parts used in SAIPA cars need to be imported, Soleimani said, “If the agreement with the ministry is fully implemented, localization of parts manufacturing will prevent the capital flight of $300 million per year.”

He said cooperation between SAIPA and the Defense Ministry began six months ago, "and if everything goes right, our attempts will yield results within the next six months".

General Hatami says the ministry and its affiliated units are ready to help SAIPA in the design and production of parts.

"Sanctions have hampered Iran’s efforts for localizing auto part production technologies. However, with joint efforts, we will overcome the hurdles,” Hatami said.

Other Deals

The Defense Ministry has been helping the local auto sector bolster its productivity and curb reliance on foreign auto parts suppliers.

“In early June, the ministry started to share its technological capabilities with local car companies IKCO and SAIPA. As per the move, with the ministry's support, homegrown substitutes for key imported car parts were supposed to be produced in Iran to curb the industry’s reliance on the global supply chain,” Alireza Badkoubeh, a deputy director at SAIPA, said.

Major local carmaker Iran Khodro (IKCO) is also strengthening ties with Defense Ministry-affiliated firms by planning 23 auto parts production projects. This is IKCO's newest move to curb the sector's dependence on imports.

Following the reimposition of harsh US sanctions, Iranian carmakers faced an uphill battle to sustain their operations.

Earlier in December, Farshad Moqimi, CEO of IKCO, said the company will utilize the technical and engineering expertise of eight industrial companies affiliated to the ministry to curb the auto industry’s reliance on imports.

“The projects will become operational as soon as the agreement's terms and conditions are finalized,” he added.

The initiative to increase the share of domestic auto parts production was first launched by the Industries Ministry that also applauded similar moves by carmakers.

According to Moqimi, during the meetings arranged by the Industries Ministry over the past several months, IKCO has signed agreements with 39 local parts makers to localize 85 key items that were imported in the past.

"The agreements are expected to curb the capital flight of €127 million per year," he said.

The IKCO chief noted that the company has also signed several agreements with domestic industrial units and small- and medium-sized enterprises to mass produce 32 key auto parts, which will save up to €16.7 million annually.

Moqimi expressed hope that the efforts will yield sustainable benefits for the domestic auto industry.

Sanctions' Effect

Following the reimposition of US sanctions against Tehran last summer, ties between Iranian car companies and international auto part suppliers were disrupted.

Almost all partners of local carmakers suspended their Iran operations. Some of the automotive firms that withdrew from the Iranian market are Renault, Peugeot, Citroen, Volvo, Daimler and Hyundai.

With sanctions taking a toll on Iran’s international banking relations, local car companies can hardly purchase parts from smaller market players and intermediaries.

All these have led to a sharp fall in car output and a piling up of unfinished cars in warehouses for lack of parts.

According to the Persian daily Iran, some 300,000 vehicles are lying in SAIPA’s warehouses since the company is unable to finish the cars due to an auto parts shortage and the same situation applies to IKCO.

Shrinking Output

The latest data of Iranian automotive companies show their output plummeted to new lows in the first month of the current Iranian year (started March 21). As a result of which, unofficial automotive data have been compiled from Tehran Stock Exchange transactions.

Industries Ministry’s data indicate that Iran produced 40,602 cars and 2,021 commercial vehicles in the month, registering a 47.2% decline compared with a combined output of 80,794 units in the corresponding month of the year before.

During the month, car production plummeted by 47.1% from last year’s 76,807 cars.

Commercial vehicle production also registered a 49.3% year-on-year decline, as the number of trucks, buses, minibuses and pickups fell significantly from the previous year’s 3,987 units.

In the last fiscal year (ended March 20, 2019), a total of 955,923 cars and commercial vehicles were produced in Iran, indicating a 37.8% year-on-year decline.

While the prospects for procuring parts have improved in the Iranian market, automotive production has registered a downward trajectory while prices have experienced an upswing.