Iran Auto Industry Future Uncertain

As expected, the US penalties disrupted and gradually cut off the supply of raw materials and auto parts on a massive scale. Foreign carmakers and part suppliers walked away from the lucrative market fearing Washington’s ire.

Multifarious solutions have been proposed by authorities to minimize the negative impact of the US president’s open animosity and ‘economic war’, namely against Iran’s major industries. The proposals have produced nothing of essence, save for car prices going through the roof!

The Ministry of Industries is in charge of regulating the loss-making car making industry. Over the years (decades), the ministry’s thick ties with the undeserving sector and vested interests of some state actors has impeded efforts for real reform.

Corruption scandals running into the hundreds of millions of dollars have been exposed further tarnishing the auto sector’s public image. The scandals have made economic experts and informed observers wonder whether the paralyzed industry has a future.

As part of the ministry’s agenda to revitalize the sector, localization of parts and technologies has been put high on the agenda of the government and carmakers. However, simultaneously import permits were issued for low auto parts like mudguards.

In a 2018 report, reviewing data from the Islamic Republic of Iran Customs Administration, the Financial Tribune revealed that such permits had been issued for years. The data is no longer available and it cannot be ascertained whether the practice still continues.

Dilemma of Parts Makers 

Domestic auto part makers are having a harder time procuring raw material and key parts from foreign sources due to the US sanctions, an industry insider told the semi-official news agency ISNA this week.

Mohsen Razmkhah said the industry has fallen into stagnation due to soaring currency rates that make it almost impossible to import machinery and equipment.

Since the summer of 2018 when the US sanctions were reimposed, 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 235,000 rials in Tehran on Wednesday August 5), though it hardly fetched 42,000 rials two years earlier.

Castigating the state’s poor management of the ailing sector, Razmkhah said, “Loans given to this struggling industry have done what sedatives do.” 

The government is the main shareholder of the biggest car companies -- Iran Khodro and Saipa. Both auto ‘giants’ are living on borrowed time, so it seems. They have long been sinking in a sea of red ink and are always salvaged by the state and government on the threadbare pretext that “thousands of jobs are at stake.” 

Borrowing has not and will not solve the deepening problems of auto parts manufacturers and an effective strategy is required to revive the industry, he said.

Giving a more optimistic perspective, Abdolvahab Sahlabadi, 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 must forge closer collaboration to overcome the current economic headwinds.

“With financial mismanagement, automakers’ debts are piling up, causing trouble for both sides. Part makers are struggling to finance their operations and this has killed their motivation and working spirit,” he said.

In December 2019, the Tehran Chamber of Commerce announced that Iran Khodro (IKCO) and Saipa are very close to insolvency and owe parts makers 230 trillion rials ($987 million).

“Carmakers should cut costs, pay their debts and build a meaningful collaboration with parts makers.”

Localization

In line with efforts to increase indigenization of auto parts,  IKCO launched 175 projects in late June.

Farshad Moqimi, the IKCO boss, said the projects would cut demand for foreign auto parts to the tune of €246 million.

To accelerate the projects, IKCO signed an agreement with Iran’s Tejarat Bank to support SMEs in the key auto parts sector.

The projects include mass production of key parts for passenger and commercial vehicles to supply IKCO production lines.

Moqimi said making auto parts inside the country is a win-win situation simply because it creates much-needed jobs and reduces dependency on foreign suppliers.

Elaborating on indigenization plans, the Industries Ministry in March said with domestic production of 70 key parts since July 2019, the auto industry saved €127 million. The claims cannot be independently verified.

Implementation of measures to increase local content in vehicles have had some positive impact on the auto industry. Only time will tell whether this policy and practice can be sustained.

After a year of declining output, domestic auto output picke up in the first quarter of the current fiscal year in March. According to the Industries Ministry data, output increased by 9.4% during the first three months (March 20-June 20) compared to the year-ago period.

The ministry said 336,699 cars and commercial vehicles were produced during the period. Last year, the figure was 307,666. Output of passenger cars rose 9.3% -- from 290,877 to 317,810.