Auto Sector Facing Tough Times

EghtesadOnline: Iranian automotive companies are in the red, owing parts makers 430 trillion rials ($1.72 billion), a member of Iran Auto Parts Makers Association said.

News ID: ۷۸۶۰۹۰

23 February 2021

Reza Rezaei added that parts manufacturers are struggling to finance their operations and urged automakers to pay at least part of the debt as soon as possible, Tasnim News Agency reported.

He said the part making sector is a strategic component in the auto sector, which is able to materialize localization goals.

“They deserve more support from the government, but unfortunately the state has paid little attention to the sector,” he added.

Criticizing the cumbersome regulations in the banking system, Rezaei noted that parts makers are having a hard time in getting bank facilities.

“Even when we are trying to import raw materials, customs officials are reluctant to cooperate, which makes import procedures more difficult,” he said.

Lawmaker Ali Haddadi echoed these comments, saying rules set by the Central Bank of Iran also hamper automotive development.

Meeting officials at Iran Khodro Company (IKCO) last week, Haddadi said the restrictive regulations should be modified and the state should open up its coffers to the auto sector.

Mohsen Razmkhah, another industry insider, earlier said Iran’s auto part production sector is struggling to procure the raw material and key parts from foreign sources due to the restrictive US sanctions.

He added that the industry has fallen into stagnation due to the soaring foreign exchange rates that make it almost impossible to secure key auto parts through imports.

Since the summer of 2018 when the US sanctions were reimposed against Iran, the rial has lost about two-thirds of its value and prices of almost all goods have soared to unprecedented highs. The greenback was trading at 248,000 rials in Tehran on Monday, though it hardly fetched 42,000 rials a year earlier.

Criticizing the state’s inefficient management of the ailing sector, Razmkhah said the loans allocated to the industry so far have acted more as temporary sedatives.

Borrowings cannot solve the underlying issues of auto parts manufacturers and an effective strategy is required to revive the industry, he added.

Glimmer of Hope

Presenting a more optimistic perspective, Abdolvahab Sahlabadi, the head of the House of Industry, Mine and Trade of Iran, affiliated to the namesake ministry, said automotive companies are in direct contact with parts makers, so they should establish efficient collaboration to overcome the current economic headwinds.

“With financial mismanagement, automakers have run up huge debts to parts makers, creating troubles on both sides. The parts manufacturers are struggling to finance their operations and this has killed their motivation and working spirit,” he said.

“The carmakers should cut the extra expenditure, pay off their debts and start over a strong collaboration with parts makers,” he said.

Sahlabadi noted that upgrading technologies and machinery in auto parts production is an important issue that’s sorely neglected.

“High-tech tools are prerequisites for maximizing domestic production in the industry,” he said.

“Undoubtedly, a scientific and technological upgrade can lead to reliable and efficient production, cutting the whole automotive sector’s reliance on foreign resources.”

Sahlabadi said the urge to supply foreign currency for imports should be curbed by boosting domestic production.

According to official data, around 25% of key auto parts are imported, mostly from China. The parts mainly include electronic and high-tech items like immobilizer systems, engine control units and oxygen sensors.

With the volatile foreign exchange market in Iran, auto parts importers are having a hard time meeting the demands of the domestic auto industry.

To alleviate the issue, plans have been designed to deepen the localization of auto parts production. Accordingly, IKCO launched 175 such projects in late June 2020.

Indigenization Efforts

Farshad Moqimi, the head of IKCO, said these projects are expected to slash demand for auto parts imports and curb capital flight by €246 million.

To accelerate these projects, the automaker has signed an agreement with Iran’s Tejarat Bank to support small- and medium-sized domestic auto parts producers.

The projects include the production of a large number of key parts for passenger and commercial vehicles, which would hopefully supply IKCO auto production lines.

Moqimi said the continuation of endeavors for localization of parts creates jobs and minimizes the country’s dependency on foreign sources, besides saving forex reserves.

In another move, a knowledge-based company produced several high-tech auto parts in July 2020, which meet global standards.

According to the Vice Presidential Office for Science and Technology, Iran Spare Parts Company, a major manufacturer of auto components, announced it has produced crankshaft pulley, rubber bush, plastic bush, engine handle, hydro mount and balance shaft using state-of-the-art technologies.

The components used in the production of several car models are in high demand.

Reza Aryana, the CEO of ISPC, said various engineering methods have been employed to design these parts.

“The production is supervised by professionals and quality control units to enforce the latest global standards and meet the requirements of domestic automakers,” he added.

In December 2020, Moqimi said IKCO has curbed capital flight to the tune of $138 million through the localization of vehicle parts in the first eight months of the current Iranian year (March 20–Nov. 20, 2020).

He maintained that this is achievable, thanks to the support of industrial units affiliated with the Defense Ministry and knowledge-based companies.

“Several projects have been launched to gradually slash capital flight caused by auto parts imports, which amount can reach $248 million per year,” he added.

Moqimi noted that the projects are curbing production costs and reducing IKCO’s annual import bill by $180 million while the company used to spend $360 million on the import of parts every year.

He called on the banks to extend support to domestic parts makers for upgrading their machinery and asked relevant authorities to cut their tax rates.

“Encouraging local parts makers for manufacturing high-tech imported components is on IKCO’s agenda,” he said.