Auto Industry Explores Ways to Address Upcoming US Sanctions

EghtesadOnline: Key players in the Iranian auto industry are pooling all their resources to address the tumultuous state of the industry and the car market in recent months and work out strategies that could help sustain the sector in the face of upcoming economic sanctions by the US.

News ID: ۷۸۳۲۳۴

11 July 2018

Carmakers’ representatives, parliament members and directors of auto part manufacturers from across the country exchanged views on the matter during a session held by the Iranian Specialized Manufactures of Auto Part Association at the Iran Chamber of Commerce on Sunday, the association’s website reported.

Overshadowed by the absence of representatives from the Industries Ministry and Iran Khodro, the gathering put together a list of demands they expect the government and lawmakers to accommodate.

The makers have demanded an update in auto part prices according to the current inflation rate and the skyrocketing costs of raw materials, according to Financial Tribune.

Furthermore, in a statement they have called on the government to stop “intervening” in the process of setting prices of domestically produced cars.

Currently, a state body, namely the Competition Council, headed by Reza Shiva, is in charge of setting prices for several local goods including vehicles under 450 million rials ($10,700) to protect buyers with limited budgets from the raging inflation. Carmakers and auto part manufacturers see the system as “an obstacle in the way of an all-out market competition.”

Moreover, the auto industry seeks low-interest loans and easier access to subsidized hard currencies to acquire necessary raw materials and components.

Following US President Donald Trump’s pullout from the Iran nuclear deal, the dollar exchange rate hit unprecedented highs, prompting the government of President Hassan Rouhani to supply key businesses with subsidized currency at 42,000 rials to the US dollar to mitigate the impact of the jump in foreign exchange rates on the gray market.

Outstanding Debt

Furthermore, the suppliers have called on the carmakers to enhance their payment mechanisms so as to provide the former with the funds needed for continuing production.

Car manufacturers owe outstanding amounts of money to auto parts makers that have paralyzed the sector and have forced many to shutter their business. Over 70 companies have gone out of business during recent months.

The industry also wants a revision in customs regulations that can facilitate raw material imports.

Lastly, the meeting proposed the establishment of a crisis committee that can work out solutions to deal with the upcoming sanctions with the belligerent US president promising to clamp down on Iran’s key automotive sector.

The auto industry has a 3.5-4% share in Iran’s GDP and 12% of the country’s workforce is employed by the key sector. The annual turnover of the auto industry is $12 billion.

Grievances and Solutions

During the meeting, ISMAPA secretary Arash Mohebinejad broke the dismal news that around 70 auto parts manufacturers have closed down, leading to massive layoffs.

He further noted that the 40-45% rise in raw material prices coupled with the inadequate supply of subsidized foreign currency has wreaked havoc on the auto sector.

To take the edge off, SAIPA CEO Mohsen Jahroudi promised in the meeting to inject seven trillion rials ($166 million) to bail out auto parts manufacturers in seven weeks’ time.

Jahroudi is trying to rectify the situation by settling part of the enormous debt of the car manufacturers to auto parts makers. While the amount of debts has not been disclosed, industry insiders put the number at hundreds of millions of dollars.

Moreover, ISMAPA is tapping the academia’s potential to withstand looming sanctions and limit possible damages caused by a lack of access to cutting-edge technologies.

Damage Control

In a meeting held earlier in the week and on the occasion of National Mines and Industries Day, Industries Minister Mohammad Shariatmadari said they are looking for partners that will not budge in the face of US pressure.

The industry has been preparing for such circumstances in recent months. The managing director of SAIPA visited the headquarters of two of its Chinese partners, Brilliance and Changan, on his trip to China in April to discuss forging new collaborations.

Chongqing Changan Automobile Co., a major state-owned automaker based in the southwest China city of Chongqing, signed a joint venture deal with SAIPA in 2014 to produce vehicles in Iran. The company is set to produce two new models in the country in the near future.

In 2015, Brilliance signed a deal with SAIPA to produce its H300 and H200 series in Iran. SAIPA and Brilliance currently produce four models in the country, namely H220, H230, H320 and H330 and have plans to manufacture four more.

Inevitable Slump

Deputy Industries Minister Mohsen Salehinia has told reporters that as a result of uncertainty over Renault’s operations in Iran, the number of cars produced by the French brand will soon decline.

Salehinia named three vehicles which face production reduction in the coming months, the popular Renault Logan (locally known as L90), the family-friendly Sandero and Sandero Stepway.

“Due to the 54% localization of the L90, Sandero and Sandero Stepway, we can find alternatives for some parts, but a production slump is inevitable,” he added.

The deputy minister compared the circumstances to when the previous sanctions had resulted in a drop in the production of Peugeot 206. The numbers picked up again after a while.

While Renault’s cars will continue to be produced although in lesser numbers, according to the official, production lines of some vehicles locally called as “post-Iran deal cars” are likely to be halted.

The cars in question are Peugeot 2008 and Citroen C3, respectively manufactured through joint ventures between IKCO-Peugeot and SAIPA-Citroen.

According to Salehinia, carmakers are to find alternatives for the two models.

He then provided the public with financial details of the contracts with the two French automakers. “Out of €700 million worth of contracts signed between Iranian carmaker [SAIPA and IKCO] and PSA Group’s Citroen and Peugeot brands, the French automotive company has brought €200 million into Iran.”

“Peugeot has injected €67 million into IKCO, and Citroen has already invested €133 million in SAIPA,” he added.

Considering the time and money invested by French carmakers in Iran, according to Salehinia, they are looking for ways to minimize losses by seeking sanctions waivers from the US.