Tough Times Ahead for Iran Auto Parts Makers

EghtesadOnline: Iran’s auto part production sector is having a hard time procuring the raw material and key parts from foreign sources due to the restrictive US sanctions, an industry insider said.

News ID: ۷۵۰۵۵۵

28 July 2020

Mohsen Razmkhah added that the industry has fallen into stagnation due to soaring foreign exchange rates that make it almost impossible to secure key auto parts through imports, ISNA reported.

Since the summer of 2018 when the US sanctions were reimposed against Iran, the rial has lost about two-thirds of its value and prices of almost all goods have soared to unprecedented highs. The greenback was trading at 233,000 rials in Tehran on Monday, though it hardly fetched 42,000 rials a year earlier.

Criticizing the state’s inefficient management of the ailing sector, Razmkhah said, “The loans so far allocated to the industry have acted more as temporary sedatives.”

Borrowings cannot solve the underlying issues of auto parts manufacturers and an effective strategy is required to revive the industry, he added.

Presenting a more optimistic perspective, Abdolvahab Sahlabadi, the head of the House of Industry, Mine and Trade of Iran, affiliated to the namesake ministry, said automotive companies are in direct contact with parts makers, so they should establish efficient collaboration to overcome the current economic headwinds.

“With financial mismanagement, automakers have run up huge debts for parts makers, causing troubles for both sides. The parts manufacturers are struggling to finance their operations and this has killed their motivation and working spirit,” he said.

In December 2019, Tehran Chamber of Commerce announced that local carmakers Iran Khodro Company (IKCO) and SAIPA are deep in the red, as they owe parts makers 230 trillion rials ($987.12 million).

“The carmakers should cut the extra expenditures, pay off their debts and start over a strong collaboration with parts makers,” he said.

Sahlabadi noted that upgrading technologies and machinery in auto parts production is an important but overlooked issue.

“High tech tools are prerequisites for maximizing domestic production in the industry,” he said.

“Undoubtedly, a scientific and technological upgrade can lead to reliable and efficient production, cutting the whole automotive sector’s reliance on foreign resources.”

Sahlabadi said the urge to supply foreign currency for imports should be curbed by boosting domestic production.

Latest Measures

According to the official data, around 25% of key auto parts are imported, mostly from China. The parts mainly include electronic and high-tech items like immobilizer systems, engine control units and oxygen sensors.

With the volatile foreign exchange market in Iran, auto parts importers are having a hard time meeting the demands of the domestic auto industry.

To resolve the issue, the Central Bank of Iran has taken a corrective measure.

Mohammad Shahpari, a member of Iran Auto Parts Makers Association, told reporters that from Sunday onward, the CBI is providing parts makers with subsidized currencies from the secondary foreign exchange market, locally known as Nima, to help them import the vital auto parts.

Nima is an online platform affiliated to the Central Bank of Iran where exporters sell their overseas currency income and companies buy it for importing goods, machinery, equipment and raw materials.

In line with efforts to deepen the localization of auto parts production,

Iran’s major carmaker IKCO launched 175 projects in late June.

Farshad Moqimi, the head of IKCO, said these projects are expected to slash demand for auto parts imports and curb capital flight by €246 million.

To accelerate these projects, IKCO signed an agreement with Iran’s Tejarat Bank to support small- and medium-sized domestic auto parts producers.

The projects include the production of a large number of key parts for passenger and commercial vehicles, which would hopefully supply IKCO auto production lines.

Moqimi said the continuation of endeavors for localization of parts creates jobs and minimizes the country’s dependency on foreign sources, besides saving forex reserves.

More Efforts

Elaborating on localization plans in March, the Industries Ministry told local media outlets that with the domestic production of 70 key auto parts since July 2019, Iran’s automotive industry has curbed capital flight amounting to €127 million.

The initiative to increase the share of domestic auto parts in local production was launched by the Industries Ministry.

Several meetings have been held in the past few months between government officials and industry insiders in this respect.

According to Saeed Zarandi, a deputy industries minister, during these meetings, deals were forged with domestic manufacturers for the production of 68 key auto parts and several high-tech items that were imported in the past.

Zarandi said the ultimate goal is to save up to €400 million annually through the localization of more auto parts, for which more meetings will be held soon.

The ministry’s initiative also applauded similar moves by carmakers.

According to IKCO, the company has 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.

Officials hope that these efforts will yield sustainable benefits for the domestic auto industry.

Earlier in December 2019, the company announced that it will utilize the technical and engineering expertise of eight industrial companies affiliated to the ministry to curb the auto industry’s reliance on imports.