Auto Parts Localization Prevents Capital Flight Worth Over €130m

EghtesadOnline: Major Iranian carmaker Iran Khodro Company (IKCO) has curbed capital flight to the tune of €137 million through the localization of 54 auto parts in the first six months of the current Iranian year (March 20- Sept. 21), a senior company official said.

News ID: ۷۵۱۱۵۷

01 October 2020

Hamid Moradi, IKCO’s deputy executive manager, noted that this has been accomplished, thanks to the support of industrial units affiliated to the Defense Ministry and knowledge-based companies, the company’s website Ikcopress.ikco.ir reported.

“This is part of efforts to gradually slash the capital flight caused by auto parts imports. The sum can reach €248 million annually,” he said.

Moradi noted that the implementation of projects will save another €13 million for the company in the second half of the current year, reducing IKCO’s annual capital flight down to €150 million this year, which used to exceed €300 million.

Highlighting IKCO’s productivity enhancement during the current year’s first half, Moradi said the automaker has raised output by 52%.

“During the period, over 248,000 sedans were produced and 207,000 have been delivered to customers. IKCO’s delayed deliveries have reduced from 186,000 to 30,000 vehicles,” he said.

Moradi noted that with more than 10,500 technicians and professionals, Iran Khodro is taking strong steps toward “boosting production”, the strategy put forward by Leader of Islamic Revolution Ayatollah Seyyed Ali Khamenei, as a solution for all economic and industrial sectors to bypass the current economic headwinds.

According to insiders, the Iranian auto industries can reduce capital flight by $2 billion, if the government were to increase localization efforts.

Arash Mohebbinejad, secretary of Iranian Auto Parts Manufacturers Association, says the dependency of industries on the international supply chain can decline by bolstering domestic production, although the goal could only be attained with state support.

He also said IKCO’s progress in the localization of auto parts is thanks to the immense help of the industries and defense ministries, and the constant efforts of major parts makers, as well as production optimization solutions employed by firms.

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 Outdated technologies employed by Iranian carmakers have put a cap on their localization efforts,” he added.

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

The government offers subsidized US dollars to producers, locally known as Nima, the exchange rate of which was around 235,000 rials per dollar on Monday.

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.

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 295,000 rials in Tehran on Wednesday, though it hardly fetched 42,000 rials two years ago.

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. This adds to the parts makers’ financial woes.”

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

Longstanding Agenda

The Defense Ministry is supporting domestic automakers to curb their reliance on foreign parts.

In June last year, the ministry began to share its technological capabilities with local car companies, Iran Khodro and SAIPA.

With the ministry's support, the production of homegrown substitutes for key imported car parts was placed on the agenda.

In an integrated move, the ministry signed a deal with SAIPA in December 2019 to bolster collaboration in research and development, design, technical monitoring, safety standards and localization of parts.

The ministry helped produce domestic substitutes for 35 key auto parts in Iran to curb the industry’s reliance on the global supply chain.

According to Seyyed Javad Soleimani, CEO of SAIPA, 23% of auto parts used in SAIPA cars need to be imported.

“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.

Recently, the Iranian Army also joined the Defense Ministry in backing domestic automakers.

A month ago, SAIPA signed an agreement with the Iranian Army’s Air Force, based on which the latter’s technologies will be shared with the carmaker.

Deputy Coordinator of Iran Air Force Brigadier General Mehdi Hadian and a member of SAIPA’s board of directors, Masoum Najafian, signed a collaboration deal.

According to Hadian, the army’s Air Force has upgraded high-tech equipment to support the domestic auto sector.

“The linkup can put this potential into practice and fill the gaps on both sides,” he said.

Najafian noted that self-sufficiency in the production of all auto parts, especially high-tech components, is the main challenge facing the auto sector.

“The goal is certainly achievable with the army’s support. Besides maximizing the share of domestic producers in the auto parts sector, this cooperation can also be extended to launch new schemes and expand the sector’s horizons,” he concluded.