Iranian Auto Parts Makers Beleaguered

EghtesadOnline: The procurement of raw materials and key components in Iran’s auto parts manufacturing sector has been beleaguered by US sanctions, an industry insider said.

News ID: ۷۸۶۸۵۳

12 August 2021

Mohsen Razmkhah added that the sector is stagnating due to soaring foreign exchange prices, which make the import of crucial car parts almost impossible, ISNA reported.

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 260,000 rials in Tehran on Wednesday, though it hardly fetched 42,000 rials a year earlier.

Criticizing the state’s inept management of the troubled sector, Razmkhah said the loans so far allocated to the industry have served more as temporary sedatives.

Borrowings cannot solve the fundamental issues of auto parts manufacturers and the sector will require an effective plan to recover, he added.

Abdolvahab Sahlabadi, the head of the House of Industry, Mine and Trade of Iran, affiliated to the namesake ministry, noted that because automotive businesses interact directly with parts manufacturers, they should work together to solve the current economic challenges.

“Automakers have racked up massive debts for manufacturers of components as a result of financial mismanagement, generating problems for both parties,” he said.

“Parts manufacturers are having trouble funding their operations, which has diminished their enthusiasm and productivity.”

Iran Auto Parts Makers Association announced in March that local carmakers Iran Khodro Company (IKCO) and SAIPA are deep in the red, owing parts makers 430 trillion rials ($1.65 billion).

“The carmakers should cut extra expenditures, pay off their debts and reestablish a solid partnership with parts makers,” he said.

Sahlabadi noted that upgrading technologies and machinery in auto parts production is an important but overlooked issue.

“High-tech tools are prerequisites for maximizing domestic production in the industry. Undoubtedly, a scientific and technological upgrade can lead to reliable and efficient production, cutting the automotive sector’s reliance on foreign resources,” he said.

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

Latest Measures

According to the 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.

The volatile foreign exchange market in Iran has made it auto parts importers are having a hard time meeting the demands of the domestic auto industry.

To resolve the issue, the Iranian auto parts manufacturer SAPCO has devised a scheme for the indigenization of metal and non-metal components worth €26 million in the current fiscal year (started March 21).

According to the company, the localization scheme has been split into 20 projects that are to employ high-tech solutions offered by the local technology ecosystem.

The production of isocyanate car seat cushions, raw material for dashboards, glass and loctite paste, auto lube, engine oil, brake fluids and advanced auto cabin metal sheets has been envisaged by SAPCO.

The company also plans to produce front coil springs, copper-based bearing alloys, magnesium ingots and raw material for injection molding of automotive plastic parts.

Auto component indigenization efforts were limited to the production of airbag cover material, polycarbonate material used in front lights, cabin metal sheets and metal powders last year.

Last year’s plans totally curbed capital flight in the auto sector’s supply chain by €20 million, SAPCO announced.

The parts maker is also planning to produce vehicle frames, parts and mechanical tools for 630,000 cars produced by IKCO in the current fiscal year.

The effort is aimed at promoting localization by reducing auto part imports and utilizing the domestic industrial, scientific and technological capacities.

CBI Assistance

In a similar move, the Central Bank of Iran allocated 150 trillion rials ($577 million) as aid packages and loans to the auto sector in February to help bolster productivity and localization efforts.

Abdolnasser Hemmati, the former 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 ($192 million) to be directly lent to automakers from bank reserves.

Hemmati announced that the rest would be 100 trillion rials ($384 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 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.