As Peugeot heads for the exit, what happens next in the Iranian car market?

Published in GSN, 7 June 2018

Groupe PSA – owner of brands such as Citroën, Peugeot and Opel – has signed joint venture agreements worth a combined €700m ($820m) with Iran Khodro and Saipa since the Iran nuclear deal was implemented in January 2016. However, following the United States’ decision to pull out of the Joint Comprehensive Plan of Action (JCPOA), the French car group has suspended both ventures with the two main Iranian car makers to build and sell Peugeot and Citroën cars. In a statement issued on 4 June, PSA said it was still seeking a waiver from the US authorities but, in the absence of that, it will be winding down the two deals by early August.

PSA said its Iranian operations represent less than 1% of group turnover, so a decision to exit the market does not hold any significant financial implications. However, it is likely to mark the start of a wider exodus by European car firms. Among others that have signed deals since the JCPOA came into force are Renault-Nissan, which announced a €660m deal with Industrial Development and Renovation Organisation of Iran (IDRO) and Negin Holding last August, with the aim of producing 150,000 Renault cars a year. German firms have also been engaged: Volkswagen began exporting vehicles to Iran last year under an agreement with the local Mammut Khodro; Daimler has signed deals with Iran Khodro Diesel and Mammut Group to produce Mercedes-Benz trucks and engines in Iran.

There are now big question marks over all of these deals, though most of the companies have yet to come out with any definitive statements as to their plans. For now most say they are still evaluating the situation. Volkswagen is typical, with a spokesperson saying it is “monitoring and reviewing political and economic developments in the region very closely”.

More independent observers suggest the brief resurgence of European interest in the Iranian car market is effectively over for now. “For these car manufacturers, the plans they have developed over the past two or three years will be scrapped,” said consultancy Solidiance chief executive Damien Duhamel.

The more pressing question is what might replace them. Iran Khodro and Saipa have plenty of experience in dealing with sanctions and have the ability to continue producing cars regardless. However, many of the models they produce are simply updated versions of ageing European and Japanese cars that have been discontinued in their home markets. Iranians have gained a taste for more modern vehicles over the past few years and may not take kindly to being presented with a restricted list of options once again.

But the Iranian firms are unlikely to have the market entirely to themselves. While European and risk-averse Japanese car companies may be heading for the exit, others are likely to remain in the market and, in some cases, may even seek to increase their presence. The main contenders look to be the Chinese, which have been expanding their sales steadily in Iran and now have a market share of some 15%. Again, this might not please car buyers in Iran. “Chinese cars are still seen in Iran as low-end, as very scrappy,” said Duhamel. “If this is all Iranians can have they will make do with it, but it is a ‘by default’ decision, not because of a full-hearted love of Chinese cars.”

Lying somewhere between the Japanese and the Chinese approaches are South Korean manufacturers, such as Daewoo and Hyundai. As long as their government doesn’t object, at least some are expected to remain in Iran, if at a more discreet level, trying to stay under the radar. “The chaebols [conglomerates] do not do anything without the Korean government green light,” another industry analyst told GSN. “You could see them packing their bags, you could see them removing their names on the office space in Tehran or you could also see them continuing as usual.”

Short-term expediency, long-term ambitions

Beyond the domestic car manufacturing industry, there is likely to be renewed life in the market for second-hand imports, particularly via Turkey. However, the authorities in Tehran are not keen for this to become too sizeable a trade, given it involves hard currency leaking out of the Islamic Republic. Instead, they are likely to do what they can to encourage international firms to stay, but also for other local businesses to enter the fray.

A number of large, privately-owned local industrial groups are believed to be eyeing up the opportunity to set up their own car manufacturing divisions. This may be done with Chinese partners, at least initially, but with the longer-term aim for at least some of them to get into sufficiently decent shape to look appealing to Western car firms if and when they ever come back.

“Right now, from an auto-maker point of view, the partners are not of high grade,” the analyst (who preferred not to be identified) said. “The Iran Khodros of the world have shown their limits – they are state-owned and they’re not top of the range. So there will be large local industrial groups that will start to produce their own cars. It will take a while for them to get it right, but they want to be ready and have leverage in five or eight years’ time to be the partner of choice.”