Over the past few days, car prices have jumped 6 to 20 million rials ($1,420 to $4,760) reacting to the news that President Hassan Rouhani’s administration might implement “free market reforms” in the auto industry and cut the state-backed Competition Council out of the price-setting process.
The Competition Council is a state body which when it comes to the auto industry is in charge of setting the price of vehicles under 450 million rials ($10,714).
With the rising price of raw materials and the plunging value of the rial, the council’s attempts to contain prices have been perceived as futile by many in the administration and the auto industry, prompting the Iranian Parliament to announce that as per a bill going through the Majlis, the council’s role will be curbed by March 2019, according to Financial Tribune.
The whims of the legislature gave a boost to the price of the Peugeot 405 with TU5 engine from 600 million rials ($14,285) to 700 million rials ($16,666), up 16.6% from last week.
Another version of the Peugeot 405 produced by IKCO also experienced a 16% rise, now exchanging hands at 490 million rials ($11,666). The Peugeot 2008 saw an 8.3% spike and now costs 1.95 billion rials ($46,428).
Locally designed sedan model Dena+ and Peugeot 206 are currently priced 840 million rials ($20,000) and 550 million rials ($13,095), up 20% and 14.7% from just a few days ago.
The prices are according to Persian Khodro’s interview with the head of Tehran Auto Dealers Association, Saeed Motemani.
Parliament’s Impact
Last week the car market saw as much as 10% drops in prices due to the introduction of the new forex policy which has cut some red tape and allowed businesses to obtain the required foreign currency in the free market.
The policy was adopted by the government after their earlier policy of overregulation on the imports backfired and drove prices to unprecedented highs ahead of the implementation of the US sanctions.
While the latest forex policy was beginning to soothe markets, the next blow was delivered by the Parliament which openly discussed the implementation of free-market principles in the auto sector from the beginning of the next Iranian year in March 2019.
The fallout of the move can be felt with the cheapest Iran-made car Pride 111, which currently exchanges hands above the psychological threshold of 300 million rials, at 305 million rials ($7,260). The car used to be sold at 200 million rials ($4,760) some six months earlier.
Mounting Debts
With the auto industry hitting a brick wall as the government manipulates car prices, on the one hand, and the recent surge in the price of raw materials, on the other, car manufacturers’ debts to auto parts makers have been steadily piling up over the past few months.
According to the head of the Iranian Specialized Manufactures of Auto Parts Association Mohammad Reza Najafimanesh, the industry is in bad shape and suffers from a lack of liquidity.
Najafimanesh says carmakers have to procure the necessary raw materials according to the dollar exchange rate in the free market, but sell their products to the public based on prices imposed by the Competition Council, a predicament which has sent car producers grappling with dwindling money supply.
Head of ISMAPA maintained that car manufacturers currently owe auto parts makers a total amount of 150 trillion rials ($3.57 billion), one-third of which has been accumulated in the last four months.
US President Donald Trump reneged on the Iran nuclear deal three months ago, which resulted in a jump in the dollar exchange rate against the rial and prompted the government to curb imports which subsequently brought about an even higher inflation in the forex market.
Output Decline, Layoffs
The association’s secretary Shapour Same’ei says their output has declined by 40-50%. Auto parts makers have been forced to downsize, currently, 14,000 workers have lost their jobs and Same’ei speculates that 450,000 more will be out of work.
Same’ei urges the government to intervene and allocate subsidized currency to the sector.
He says if they provide the industry with parts based on the price of the dollar exchange rate in the free market, at 90,000 or 100,000 rials, Pride will cost 430 million rials ($10,238) and the Peugeot 405, 700 million rials ($16,666).
According to Same’ei, if the current crisis prevails, major parts makers will be forced to halt production from August 23, which will, in turn, reduce the car production output by 80%.
President Rouhani is yet to announce whether he will allow free competition in the market or not.