With Supply Chain Bottlenecked, Car Production Declines in Iran

EghtesadOnline: Imported auto parts have been languishing in customs warehouses as restrictive regulations have put the brakes on commodities getting clearance for entering the country, leading to a slide in Iran's automotive output.

News ID: ۷۸۳۳۲۷

18 July 2018

Currently, a large part of raw materials and auto parts are stuck in warehouses of the Islamic Republic of Iran Customs Administration, with rigid bureaucratic regulations hampering their release.

The recently introduced import regulations have been censured by private firms as being draconian, as they have devastated auto parts makers, bottlenecked supply chain and impeded activities of Iranian carmakers, reported local automotive website Asbe Bokhar.

According to statistics released by the Industries Ministry, during the one month spanning from May 22 to June 21, Iran's automotive output dropped from 134,802 cars a year ago to 108,334, indicating an outstanding 19.6% decline. The numbers are significant since Iranian carmakers for long have been on a production spree, and such a drop in their output has been something unheard of for years, Financial Tribune reported.

Iran's car production numbers were constantly on the rise in previous years, making it vital for the government to revise laws governing auto parts imports.

To shed light on the state of affairs, the secretary for Iranian Specialized Manufactures of Auto Parts Association (ISMAPA) Arash Mohebinejad talked to reporters and detailed the circumstances.

"Before the dollar exchange rate was unified, auto parts makers would pay 30% of the price of imported goods in advance and pay the rest at a later date."However, seemingly the firms have not been provided with the required foreign currencies to meet their commitments. Furthermore, the release of raw materials essential for parts makers' activities has not been on top of authorities' agenda, which have made the process excessively time-consuming."

After US President Donald Trump reneged on the 2015 Iran nuclear deal, the US dollar exchange rate hit unprecedented highs in Tehran, prompting the government of President Hassan Rouhani to step in and unify the USD forex rate at 42,000 rials on April 9.

Later on, the administration established the Forex Deals Integrated System, locally known as Nima, as a platform for importers to declare their currency needs, exporters–including the government as oil exporter–to register their foreign currency proceeds and banks and money exchangers to act as mediators.

Nima supposedly helps the Central Bank of Iran to exert oversight and have better control over market supply and demand.

Mohebinejad says considering the current chaotic situation, auto parts suppliers have not been provided with the required foreign currency to settle either their previous debts or register new orders; therefore, they have faced a deficiency in raw materials and parts.

>Pitfalls

In order to curb imports and save the country's foreign currency reserves from complete depletion, the government has categorized imported items and prioritized their entry into the country.

According to Mohebinejad, the raw materials necessary for the manufacture of auto parts falls under the category of "raw materials and intermediate goods," which is not the administration's top priority, to either allocate subsidized foreign currency to their importers or expedite their release from customs.

Facing a shortage of raw materials, Iranian parts makers have not been able to deliver goods on time to car companies, consequently triggering the sharp decline in their production.

According to Mohebinejad, the drop has forced some 70 auto parts manufacturers to shutter their businesses.

Moreover, he points out that the 40-45% rise in raw materials prices coupled with the inadequate supply of subsidized foreign currency has crushed the sector.

While SAIPA CEO Mohsen Jahroudi has recently promised to inject seven trillion rials ($166 million) to bail out auto parts manufacturers, the situation seems graver, warranting a relaxation of government regulations.

Pulling the United States out of the nuclear deal in May, the belligerent US president has announced that sanctions are to be reimposed against Iran. The penalties in their first phase will target the country's key automotive sector.

US sanctions will not be reinstated until August, making the current state of affairs seem mostly self-inflicted.

In a sarcastic tone, head of the ISMAPA Mohammadreza Najafimanesh said Trump no longer needs to impose sanctions on Iran's auto sector. "If the customs administration refuses to clear goods, slowing car production; the auto industry will be under self-imposed sanctions."