Gov’t to Invest Over $170m in Auto Localization R&D Project

EghtesadOnline: Iran’s Industries Ministry plans to invest 40 trillion rials ($173.9 million) in a research and development project aimed at localizing key auto parts, a deputy industries minister said.

News ID: ۷۵۰۷۵۴

20 August 2020

Mehdi Sadeqi Niyaraki added that several firms and state entities have joined forces to implement the project.

Major Iranian car companies are to spearhead the project by tapping into the potentials of local tech firms and knowledge-based companies, IRNA reported.

The Defense Ministry and the Islamic Revolution Guard Corps’ Aerospace Division will also contribute to the project. The ministry has lately undertaken a number of projects to indigenize auto parts production and IRGC’s aerospace arm has become active in the field of automotive engineering and R&D over the past few years.

“The project envisages the production of automotive high-tech components, including turbochargers, electronic control units and special sensors, which are currently imported. After developing and testing prototypes, we will begin mass production,” Niyaraki said.

He stressed that the indigenization of automotive technologies is high on the agenda of Iranian state authorities.

According to the deputy industries minister, there is a huge demand for auto parts in the domestic market, as devaluation of Iran’s national currency rial has made auto parts imports economically unviable.

He emphasized that production units should be overhauled to mass-produce high-tech auto part.

“Manufacturers should be able to offer the parts at affordable prices to car companies,” he added.

Niyaraki noted that in the last Iranian year (ended March 19, 2020), over €330 million have been invested in localization of auto parts and the government and automotive companies plan to inject more funds into the project.

High Hopes

In a recent interview, secretary of Iranian Auto Parts Manufacturers Association said that the local auto industries can reduce capital flight by up to $2 billion, if the government were to support their localization efforts.

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.

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 worth €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, around 25% of key auto parts need to be imported. Outdated technologies employed by Iranian carmakers have hindered 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 reimposed sanctions 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,” he said.

“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, which add to the parts makers’ financial woes.”

Calling on policymakers to modify their earlier deals, Mohebbinejad suggested a 65% increase in parts price to pay off higher operating costs.

Possible Solutions

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 strong collaboration with parts makers,” he said.

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