Iran Auto Industry Under Fire Over Soaring Car Prices

EghtesadOnline: The auto industry faces scrutiny on multiple fronts as car prices spike in Iran, with the bullish market observing a 10% price increase only in recent weeks.

News ID: ۷۸۲۷۷۶

30 May 2018

The industry seems to be stuck in a witch's brew comprised of raging inflation, wobbly foreign currency rate and human avarice.

Public outrage over the rising prices ignited a media firestorm, which goaded the Iranian Parliament to summon Iran Khodro and SAIPA's CEOs as well as Industries Minister Mohammad Shariatmadari to present their arguments, local automotive website Asbe Bokhar reported.

According to lawmaker Nader Qazipour, the two major manufacturers have hoarded products in storage, leading to price increases. "IKCO has stockpiled 30,000 vehicles while SAIPA has done the same with 60,000 units."

According to Financial Tribune, Qazipour says carmakers have produced the said vehicles receiving subsidized currency from the government at the rate of 32,000 rials to the US dollar. With the dollar-rial exchange rate unified at 42,000, the carmakers are now hoping to sell the cars at excessively higher prices.

Since last December, the foreign exchange market has been in a state of upheaval as the US dollar exchange rate jumped to unprecedented levels several times before the government of President Hassan Rouhani stepped in and unified the rate at 42,000 rials last month to put an end to the raging market.

In response to the public's fury over skyrocketing prices, the industries minister on Wednesday stepped in and said the prices of local cars are not to be raised more than 9.6%. With some automotive industry officials floating the idea of a 30% hike, the ministry's statement is certain to lead to a showdown soon.

>Bleak Prospects

SAIPA's senior adviser and the company's former CEO Saeed Madani says Iranian carmakers vastly rely on foreign suppliers and the volatility in the forex market has hit the firms hard.

According to Madani, several parts even used in the market's cheapest model on offer, SAIPA's Pride, are still imported. He says some 20% of the parts used in the vehicle are brought into the country which cost $1,200-1,500 for each unit.

He adds, "Homegrown products are not yet fully localized while the status of cars manufactured from completely knocked down [CKD] kits is self-explanatory."

Pride is a small city car produced by the second largest local carmaker SAIPA since 1993. However, after 25 years, SAIPA still relies on Chinese suppliers for keeping this car's production lines in operation.

Madani further says major auto bodywork panels are also imported. "Although we initiated a project with Mobarakeh Steel Company to manufacture car body parts, the quality and output have not yet reached the desired levels."

He adds that the local carmakers' reliance on foreign suppliers is not limited to bodywork parts and tires and raw materials are still brought into Iran. The imported parts include but are not limited to anti-skid braking systems and airbags.

Madani concluded that authorities should take account of the realities on the ground and allow the prices to rise; if not, the auto industry will go into a hiatus.

Taking into consideration the bullish dollar exchange rate, he believes authorities ought to give auto manufacturers enough wiggle room to raise the prices by 25-30%.

>Escalating Costs

According to the head of the Iranian Auto Parts Manufacturing Association, the expectations for car prices to remain steady, despite recent developments, are "unfair".

Mohammad Reza Najafi-Manesh talked to IRNA in regard to the price hikes in recent weeks, vindicating automakers and suppliers by specifying the price-setting process.

"Prices are set according to raw material, wages and overhead expenses. Salaries have been raised by the Supreme Labor Council, and raw material imports including steel, aluminum and copper have seen an increase in costs. Furthermore, foreign currency exchange rates have jumped as well."

According to IAPMA's estimates, raw materials have experienced a 40% year-on-year price hike compared to the fiscal which ended in March 2018.

Furthermore, he says, overhead costs have surged in proportion with the 10% inflation rate. All the named factors are contributing to the expectation that auto part prices need to be increased up to 30% and car prices should rise by 19.5%.

Najafi-Manesh pointed the finger of blame at the Competition Council, counting them as one of auto market's current problems. He is of the opinion that "the market should determine the prices. Nowhere in the world prices are set by a council."

The Competition Council, headed by Reza Shiva, is a state body that keeps an eye on many domestic products, including cars and set prices for some goods including vehicles priced under 450 million rials ($10,700).

>Market Insider

In a recent interview with local news website Asbe Bokhar, car dealer Amir Hossein Bayat lists the increases in car prices over the past two weeks, in some cases showing a 20% price jump.

According to him, Peugeot 405 is now sold at 345 million rials ($8,214), a 9.5% rise compared to two weeks ago.

Another version of the sedan, Peugeot Pars—a locally modified version of Peugeot 405 equipped with a TU5 engine— has observed a 30 million rials ($714) jump from 440 million rials ($10,470) to 470 million rials ($11,190).

Locally designed sedan Samand offered by Iran Khodro saw a 40 million rials ($952) rise from 320 million rials ($7,610) to 360 ($8,570). Another homegrown sedan Dena now changes hands at 550 million rials ($13,000) experiencing a 22.2% hike.

The smallest price change belongs to the cheapest vehicle in the market, SAIPA's Pride, which has seen a 6.6% increase and now costs 240 million rials ($5,714).

The popular Renault Logan (locally better known as Tondar 90) comes at 480 million rials ($11,428), the price has been jacked up by 20%.

Value of Changan CS35 is estimated at 750 million rials ($17,857), an 11.9% increase, and JAC S5 at 1.25 billion rials ($29,760) a staggering 20% jump.

While the public is decrying the new prices, market insiders are discussing further increases to compensate for the sudden surge in overhead costs.