Auto Parts Localization Could Save $2 Billion

EghtesadOnline: Iranian auto industries can reduce capital flight by $2 billion, if the government were to support their localization efforts, secretary of Iranian Auto Parts Manufacturers Association says.

News ID: ۷۵۰۷۳۳

18 August 2020

Arash Mohebbinejad added that bolstering domestic production can reduce the industries’ dependency on international supply chain, although the goal could only be attained with state support, ISNA reported.

He also said that thanks to localization plans, major carmaker Iran Khodro (IKCO) is expected to spend €153 million less on auto parts imports in the current fiscal year that ends in March 2021.

Mohebbinejad also noted that IKCO claims to have already curbed capital flight by €137 million in the first four months of the current Iranian year [started March 20].

“This is thanks to the immense help of Industries Ministry and the constant efforts of major parts makers, plus production optimization solutions employed by the firms,” he said.

“While Iranian automakers have been able to curb reliance on foreign suppliers extensively, still around 25% of key auto parts need to be imported. Outdated technologies employed by Iranian carmakers have put a cap on their localization efforts.”

The business insider also noted that Iranian automotive industries have limited access to subsidized hard currencies, which have hampered production and expansion plans.

Since 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 230,000 rials in Tehran on Monday, though it hardly fetched 42,000 rials two years ago.

The government offers subsidized USD to producers, the exchange rate of which was around 190,000 rials per dollar on Monday.

Criticizing the state’s inefficient management of the ailing sector, Mohebbinejad said, “The sporadic money injections have so far 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.”

“Adding to the problem, contracts between automotive companies and parts makers are pending updates because of the new currency rates. Auto parts are still sold at extremely low prices. This adds to the parts makers’ financial woes,” he said.

Calling on policymakers to modify the deals, he suggested a 65% increase in parts price to match higher operating costs.

Optimistic Recommendations

Presenting a more optimistic perspective, Abdolvahab Sahlabadi, the head of the House of Industry, Mine and Trade of Iran, affiliated to the namesake ministry, earlier 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, Industries and Agriculture announced that local carmakers IKCO and SAIPA are deep in the red, as they owe parts makers 230 trillion rials ($1 billion).

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

Sahlabadi noted that upgrading technologies and machinery in auto parts production are important but overlooked issues.

“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.

Localization Efforts

According to the official data, imported auto 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 IAPMA, earlier told reporters that from July 26 onward, CBI is providing parts makers with subsidized currencies from the secondary foreign exchange market, locally known as Nima, to help them import key auto parts.

Nima is an online platform managed by 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 envisaged to slash demand for auto parts imports and curb capital flight by €246 million.

To accelerate these projects, IKCO has 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.