Iran Auto Parts Makers Facing More Headwinds

EghtesadOnline: Given the turmoil surrounding the government forex policies which have hampered the import of raw materials, auto parts makers are struggling to keep production lines up and running amid a stream of economic setbacks.

News ID: ۷۸۳۸۱۸

27 August 2018

While the government's earlier forex policy had allocated subsidized currency to auto parts makers for import purposes, the strategy was scrapped and replaced with another which requires businesses to now pay the difference between the subsidized US dollar at 42,000 rials and the free market USD exchange rate before they can release goods from customs warehouses, Asre Khodro.

The policy has proven disastrous for parts makers, which argue that the administration's move is unethical as they have already priced and presold the commodities in accord with the 42,000-rial forex rate. The USD is traded at 118,000 rials on the open market.

While Industries Minister Mohammad Shariatmadari had ruled that auto parts makers should be exempted from paying the price difference, his order is not being executed and firms are being forced to shut down their factories due to a widespread lack of raw materials and intermediary goods, Financial Tribune reported.

The spokesperson for Iranian Specialized Manufactures of Auto Parts Association Arash Mohebinejad says even the exemption cannot help the industry recover. He maintains that only the allotment of subsidized currency might be able to save the industry.

"Carmakers' debt to auto parts manufacturers amounts to 150 trillion rials [$3.5 billion], their repayment timelines need to drop to one month, instead of the current 4 to 5 months."

He added, "If the industry is repaid and is allocated subsidized currency and car prices are revised, only then we can hope to weather the current situation."

>Root Causes

Following US President Donald Trump's withdrawal from the multi-nation Iran nuclear deal, the dollar exchange rate hit unprecedented highs and prompted the government of President Hassan Rouhani to unify the rate at 42,000 rials, a move that in two months' time proved ineffective and led to even higher foreign currency rates in the gray market.

To tackle the issue, the administration tried to stringently regulate imports, which bottlenecked supply and resulted in a widespread shutdown of auto parts factories across the country, and the unemployment of 70,000 workers.

The newly appointed Central Bank of Iran governor Abdolnasser Hemmati recently announced the latest state monetary policies as per which the government no longer grants subsidized US dollars to imported items, except for essential goods and medicines. Auto parts and the raw materials used by local manufacturers are not considered essential.

Under the new policy, importers of products listed as non-essential, need to purchase foreign currency from a secondary market regulated by CBI at prices negotiated with suppliers.

With the introduction of the latest forex policy some were hopeful that goods would be released from the customs more smoothly, but the Cabinet's decision to collect the price difference between subsidized currency and the free market rate from importers delivered yet another blow to an industry already strained under US sanctions.

Director of Spare Parts Sellers Union of Karaj, capital of Alborz Province to the west of Tehran, has also elaborated on the current state of affairs in an interview with ISNA.

Ahmad Mousavi says due to the economic circumstances, they have been forced to downsize. "We do not have goods or customers to continue work."

Mousavi is of the opinion that recent forex fluctuations have impacted prices of all commodities, adding, "Producers and importers are waiting for an improvement in the forex market."

The head of the union asks the government to help importers and producers.

>Beleaguered Industry

The auto industry has created roughly three million direct and indirect employment opportunities across the country, making the sector one of the priorities of the Rouhani administration and one of the first businesses targeted the US sanctions.

During the first four months of the current fiscal which started in March, Iranian automakers manufactured 436,136 cars and commercial vehicles, down 0.1% from last year's 436,413 units.

According to the data released by the Ministry of Industries, car production has declined 0.2% compared to the same period last year dropping to 410,722.

The ailing economy has hampered activities of Iran's largest automotive companies Iran Khodro and SAIPA.

The production rate of IKCO plummeted 11.8% with the company's total output sliding to 185,308 cars, and commercials vehicles' output was significantly lower than last year's 210,132 units.

Furthermore, during the month ending on July 22, the company observed a sharp fall of 35.4% in its output, churning out 39,672 units, a sizable decline compared to 61,436 cars and commercial vehicles manufactured by the firm during the same period last year. IKCO had also failed to reach its output record of the same period of 2016 when it made 52,190 units.

IKCO archrival, SAIPA has been able to keep its head above the water and even increase its production rate by 8.2% compared to the corresponding period a year ago, manufacturing 193,702 cars and commercials vehicles.

However, considering SAIPA's production spree during recent years, with the company reporting two-digit growth rates in the past months, the 8.2% increase does not speak of promising prospects for the firm.

Moreover, during the month ending on July 22, SAIPA's car factories' output slumped 21.9% YoY falling to 40,284.