Iran revs up for auto revolution

  • The ownership structure of the Iranian auto market is set to radically change over the coming year as international carmakers make their entry.

    Iran revs up for auto revolution

    TEHRAN, Iran — The auto giant PSA Peugeot Citroen has become the first foreign company since the Jan. 16 implementation of the Joint Comprehensive Plan of Action to obtain a license from the Iranian government to invest in Iran Khodro Co. (IKCO), the biggest car manufacturer in the country. Jean-Christophe Quemard, PSA Peugeot Citroen’s executive vice president for Africa and the Middle East, said earlier this month that the next “big step” for the multinational automaker would be the creation of a joint venture this summer, the French business magazine Challenges reported April 6.

    PSA Peugeot Citroen, a past IKCO partner, has just resumed deliveries of auto parts, after a four-year hiatus. Its abrupt 2012 pullout from the Iranian market as nuclear-related sanctions against Iran intensified upset Iranian authorities. The move greatly harmed the Iranian automotive industry. IKCO CEO Hashem Yekkeh-Zare said in an interview with the Islamic Consultative Assembly News Agency that to avoid similar such incidents, any foreign company interested in the Iranian market must firstmake an investment.

    IKCO and Peugeot have apparently put aside their differences and agreed that each will hold a 50% stake in a 400 million euro ($452 million) joint venture to produce Peugeot 208, 2008 and 301 models over the next five years. Under the agreement, the Iranians will fill the CEO position in the joint company while the French side will chair the board. The Iranians have required that manufacturing technology be transferred over the course of a few years, a policy implemented by President Hassan Rouhani’s administration as a prerequisite for any industrial partnership. Iran hopes this strategy will bring an end to the economic ostracism imposed on it by the West over the past decade.

    Despite Iran’s investment conditions, Peugeot officials have expressed happiness over the recent deal, with Quemard calling it a win-win contract. Their satisfaction may partly be due to a likely 15% hike in car production by the end of the current Iranian calendar year, until March 20, 2017. If forecasts hold true, Iran will produce more than 1 million vehicles by year-end, although the figure will still be far lower than the record-setting 1.6 million vehicles produced in 2011. IKCO will be responsible for about half of the output.

    The deal with PSA Peugeot Citroen is not the only IKCO initiative for developing the Iranian automotive industry. IKCO executives are also hammering out a deal with Mercedes-Benz, a subsidiary of Germany-based Daimler, to locally manufacture commercial vehicles and passenger cars. According to the state-run Iran Daily, a letter of intent will be signed in the coming months, allowing the popular German giant to begin operations in Iran. Mercedes-Benz is also negotiating with Iranian companies on the local production of trucks and power-train components, according to the newspaper. It has already agreed on a “comprehensive re-entry” into the Iranian market with Iran Khodro Diesel and the Dubai-based Mammut Group and is preparing to return as a shareholder in the Iranian Diesel Engine Manufacturing Co., which is based in the northwestern city of Tabriz.

    Separately, earlier in April, Iran’s English-language Press TV reported that Volkswagen and its Skoda brand are also among the multinational automakers that have approached Iranian carmakers. VW is now weighing the selection of a local partner, likely Kerman Motor or Mammut Group, to position itself in the race to capture market share in Iran. Meanwhile, the Italians have wasted no time getting into the race. Ahmad Pourfallah, head of the Iranian-Italian Chamber of Commerce, told the Fars News Agency that Fiat is finalizing negotiations with IKCO to buy a part of its shares and establish a joint venture later in the year.

    Meanwhile, SAIPA, the second-largest Iranian car manufacturer, has its own development plans as part of the broader national effort to boost the auto sector. The Asr-e Khodro news site reported April 9 that SAIPA will probably sell 49% of its shares to Citroen. The possibility of the establishment of a joint venture with Citroen was confirmed by Naser Agha-Mohammadi, SAIPA Group’s vice president for product development, in a recent interview with leading economic newspaper Donya-e Eqtesad.

    SAIPA, which consists of seven manufacturers, plans to select up to four strategic foreign partners, which would enable SAIPA to develop its brand both nationally and internationally, Agha-Mohammadi said. A total amount of 500 million euros ($564 million) in foreign direct investment will soon be made, an investment that would considerably elevate the status of SAIPA, and more broadly, transform the whole industry in Iran, Agha-Mohammadi said. Other likely partners are France’s Renault, Japan’s Nissan and South Korea’s KIA.

    Yet despite the Rouhani administration’s all-out efforts to turn the sluggish Iranian auto industry into a more productive one, it has forecast a 33% rise in revenue from car import tariffs in the budget currently being reviewed by parliament. The budget forecasts 22 trillion rials ($726.6 million) in revenue from car import tariffs, up from 13.68 trillion rials ($451.8 million) last year. Critics say the administration is unlikely to meet the target revenue, as domestic demand for expensive cars has already fallen. Given this situation and the 43% drop in revenue from car import tariffs last year, perhaps the best solution would be to allow more affordable cars to be imported.

    Thus, although the ownership structure of Iranian automakers is set to dramatically change over the coming year or so, it need not necessarily be to the detriment of those exporting cars to Iran. Auto giants can keep sending vehicles, with the exception of luxury cars, to the 80-million-strong Iranian market as long as there is a lack of high-quality domestically made cars that meet both industry standards and are affordable for the middle and working classes.

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