Auto Parts Localization Curbs Capital Flight Worth €13m

EghtesadOnline: Iran’s major automaker Iran Khodro Company (IKCO) has slashed capital flight worth €13 million through the indigenization of auto parts production since the beginning of the current Iranian year (March 2021).

News ID: ۷۸۶۵۳۰

27 June 2021

According to Farshad Moqimi, the company’s CEO, the achievement was made possible by technological breakthroughs in the auto industry, YJC reported.

“IKCO has implemented over 150 auto parts localization and vehicle design projects in the past two years with the help of Iranian auto parts manufacturer SAPCO,” he added.

Moqimi said this has resulted in the production and utilization of a local car platform, a large number of parts, six-speed manual transmission (gearbox) and three-cylinder piston engines.

“These projects have gradually curbed IKCO’s dependency on foreign suppliers,” he added, hoping that the use of imported complete knock-down (CKD) kits will be minimized by the time.

According to IKCO’s chief, the company has so far localized 2,000 sets of vehicle frames and mechanical tools with the support of industrial units affiliated with the Defense Ministry and knowledge-based companies.

“The company used to spend close to $360 million for the import of parts every year. Fortunately, indigenization efforts can raise the amount of saving to $248 million per year,” he said.

Ties With Banks

To boost IKCO’s localization efforts, Iran’s Bank Tejarat has decided to lend 1.5 trillion rials ($6.25 million) to the automaker.

Based on a recent agreement between the two entities, the bank agreed to pay financial facility by the end of the current fiscal year (March 2022).

Moqimi said Bank Tejarat is the company's financial strategic partner, stressing that financial assistance can help localize auto parts manufacture and increase the sector's net working capital.

“The bank has also agreed to issue a specific amount of productive credit certificates to the carmaker to help oil the industry's wheels,” he added, hoping that the pact will encourage automakers and parts manufacturers to expand their operations.

Also known by its Persian acronym Gam, Productive Credit Certificates are a financial instrument newly developed by the Central Bank of Iran to help meet the funding needs of manufacturing units and businesses.

The instrument is described by the bank as a “market-oriented instrument that can be traded in money and capital markets”.

CBI Assistance

In a similar move, the Central Bank of Iran allocated 150 trillion rials ($625 million) as aid packages and loans to the auto sector in February to help bolster productivity and localization efforts.

Abdolnasser Hemmati, the CBI chief, said that of the total sum, CBI’s Money and Credit Council, Iran’s top monetary decision-making body, has earmarked 50 trillion rials ($208 million) to be directly lent to automakers from bank reserves.

Hemmati announced that the rest would be 100 trillion rials ($416 million) worth of Murabaha bonds — an Islamic financing structure in which the seller provides the cost and profit margin of a commodity — and Gam certificates.

Mohammad Reza Najafi-Manesh, the head of Iranian Automotive Parts Manufacturers Association, told reporters that the Gam certificates seem to be a workable substitute for other ways of credit-based purchases, as they are more easily encashed and transferred in the local banking system compared to regular bonds. He called on automakers to use the opportunity for a positive change.

Soheil Memarbashi, the head of Transportation Office at the Industries Ministry, said the automotive sector is in dire need of financial help.

“The credit certificates can be a sustainable source of finance and simultaneously help boost parts and vehicle production,” he added.

He said the new type of financial instrument is aimed at helping develop other industrial sectors in the near future.

The efforts are in line with the government policies to minimize the industry’s dependency on foreign resources to bypass US sanctions.

Strategic Players

While the financial facilities being poured in the auto sector, official data show Iranian automotive companies are in the red, owing parts makers 430 trillion rials ($1.8 billion).

According to Reza Rezaei, a member of Iran Auto Parts Makers Association, parts manufacturers are strategic players of the auto industry, who help materialize the 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.

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 240,000 rials in Tehran on Saturday, though it hardly fetched 42,000 rials a year earlier.

Criticizing the state’s inefficient management of the ailing sector, Razmkhah said 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 concluded.