Iranian Authorities Mulling Uncustomary Second Annual Vehicle Price Hike

EghtesadOnline: In light of recent developments in the forex market coupled with mounting pressure by carmakers, the authority in charge of regulating the auto market in a rare move has announced that it is poised to sanction another round of price increases.

News ID: ۷۸۳۸۱۵

27 August 2018

Head of the Competition Council Reza Shiva announced this week that they could permit a rise in car prices for the second time this year to compensate for the raging inflation that has grappled the country in recent months, Tasnim News Agency reported.

The Competition Council is a state body which when it comes to the auto industry is in charge of setting the price of vehicles under 450 million rials ($4,760).

Back in May, the council authorized a 5.6-7.1% rise in car prices. With the USD exchange rate hitting unprecedented highs and the price of raw materials experiencing up to 100% jumps, the council is considering to show further flexibility to demands of carmakers which are buckling under the pressure of an overregulated system and newly reimposed US sanctions, according to Financial Tribune.

Shiva says the council will ask the Central Bank of Iran to calculate the impact of the inflation rate on production costs of each model and determine how much of a price hike should be permitted.

Head of the Competition Council maintained that producers have not lowered production output, but demand for vehicles has increased dramatically, leading to a sharp price increase in the market. Shiva added, "Some are purchasing cars, not to drive with, but as an investment."

Contrary to what Shiva says, during the one month ending on June 22, the car production in Iran declined by 19% compared to a year earlier.

>Grim Prospects

The decline can be traced back to defective government policies of imposition of a unified dollar exchange rate on the market and the introduction of excessive imports regulations which bottlenecked the supply of auto parts and raw materials. In view of these challenges which have been aggravated by sanctions imposed by the US against Iran's key auto sector, industry insiders are not optimistic about future prospects.

One instance is head of the Iranian Auto Parts Manufacturers Association Mohammad Reza Najafimanesh who believes a 60-80% increase in car prices is expected in the near future.

Talking to IBENA, Najafimanesh says the price of any commodity is dependent on three factors, namely the price of raw materials, wages and other overhead costs.

He added, "Up to May, the price of raw materials experienced a 72% hike, wages 56% and other overhead costs by 21%; therefore, prices cannot remain unchanged."

He further added that since May the dollar exchange rate has practically doubled, "so I believe car prices will experience a 60-80% surge in the future."

According to Najafimanesh, the solution lies with a free market approach to the industry. He is an outspoken advocate of omitting the Competition Council from the pricing process.

Another perspective, however, claims a 20% rise in car prices will suffice. Mohammad Hassan Shojaei, head of the School of Automotive Engineering at Iran University of Science and Technology, is of the opinion that the outflow of foreign currency for the production of each vehicle needs to be considered in the changes made in car prices.

According to Shojaei, for making locally designed models a limited number of parts need to be imported, which he estimates to comprise about 20-23% of production costs. Therefore, he is of the opinion that the upcoming price hike should be capped. However, he fails to notice that due the current economic crisis the country is struggling with, the value of almost all goods have skyrocketed and prices in one sector cannot be limited in a hypothetical economic vacuum.

>Certain Inevitability

While not unanimous on how much the prices will increase, everyone is confident that the prices have nowhere to go but up.

The inevitability of a price jump is rendering the Competition Council irrelevant, as rumors of the government body's closure have gained momentum.

While the rumors being denied and confirmed multiple times, Iran Khodro has updated its website, offering through a presale scheme eight models to be delivered in the winter of 2019.

The down payment demanded by the car producer, which is not allowed to go above 50% of the total cost of a car, puts costs of each model closer to their current market prices, rather than the former factory prices set by the administration.

According to IKCO's website, Arisan pickup truck is likely to experience a whopping 68% price hike in the next few months, going from the current 310 million rials ($3,280) to 530 million rials ($5,608).

According to Asbe Bokhar's projection, Peugeot 206 will observe a 50% price jump going from the 360 million rials ($3,809) to 520 million rials ($5,502).

The Peugeot 405 and the Runna will possibly both see a 46% jump.

The locally designed family sedan Samand is expected to go from 340 million rials ($3,597) to 480 million rials ($5,079), and Dena to go from 460 million rials ($4,867) to 780 million rials ($8,253), respectively 41% and 69% increases.