Making its marque

Published in The Gulf, 1 September 2015

Iran’s automotive sector should be one of the big winners from the deal to lift sanctions, but some Chinese brands could find themselves out of favour.

Iran’s car industry looks set for a brighter future, just as soon as international sanctions are removed. But even as it prepares for growth, the sector is having to deal with some short-term problems that seem to be getting worse rather than better as a result of the deal to lift the trade embargo.

The automotive sector has been one of the hardest hit by sanctions, and western car firms have largely deserted the country, particularly after the embargo was tightened in 2012. That left the two local giants, Iran Khodro Industrial Group and Saipa, to battle it out for market share against Asian brands, most notably from China and South Korea.

With the prospect of the country opening up to western marques once again, the car market is set for another big change. According to observers in Iran, consumers are already reacting by putting off new purchases while they wait for some of the big international manufacturers to start selling their cars in the Islamic Republic once more. That is putting pressure on firms already in the market, who are suffering from falling sales.

“Consumers are waiting to see what happens with the sanctions,” says Mahdi Seifollahi, director of global market development at Mofid Securities in Tehran. “Automobile manufacturers are having a real problem trying to sell their products because everybody is just waiting to see if European car companies will start to sell their products directly in Iran and if the prices are going to go down. People want to see what is going to happen in the future so nobody is doing anything at the moment.”

The biggest losers from the shake-up are likely to be Chinese manufacturers. Local media reports suggest that the Chinese firms such as Chery are already losing market share. Other Chinese manufacturers with a sizeable presence in the market include Lifan, Geely, JAC Motors, and Great Wall Motors. They have all been steadily building up their sales over recent years, but they could now find things far more difficult.

“Chinese cars may seem attractive because of their reasonable prices but they cannot compete at all with European cars in terms of quality and technical features,” said Hashem Yekke Zare, chief executive of Iran’s largest car manufacturer, Iran Khodro, in July. “We need to adopt a new approach towards quality, price and services of our products.”

Iran Khodro and Saipa are not immune from concerns among local consumers about quality and reliability. However, their dominant position in the market, aligned with the enthusiasm of international car brands to re-enter Iran, puts them in a strong position to strike lucrative production and distribution deals. Of the two, Iran Khodro seems to be the more active at the moment. “Several companies have expressed their willingness to cooperate with us. So we can choose a strong and reliable partner,” said Yekke Zare.

Iran Khodro is due to sign a deal with Germany’s Mercedes-Benz to produce commercial vehicles including pick-ups, trucks and buses. The German company is also expected to buy a minority stake in Tabriz-based Iranian Diesel Engine Manufacturing, an Iran Khodro affiliate.

Iran Khodro is also reviving its ties with France’s Peugeot in a deal which will include manufacturing vehicles for export to other markets, and is also working with another French firm, Renault, as well as Japan’s Suzuki. Other foreign marques which have been linked with moves into Iran include Skoda, the Czech brand that forms part of the VW Group.

Some of the companies returning to the market may find that they have to pay for the privilege. Reports in the local media suggest that Iran Khodro has sought compensation from both Mercedes-Benz and Peugeot for the abrupt way they left the country in the past. The French firm said in 2012 that it left Iran to comply with international sanctions that had made it impossible to finance Iran-bound sales.

There may be other problems for the French brands, which have historically been the biggest sellers in Iran because of their production deals with Iran Khodro and Saipa. They could now find that their brand image is diminished in the eyes of consumers looking for something new. A recent survey of more than 70,000 Iranians found that 64 per cent of Iranians preferred German cars, and 17 per cent cited their first choice as Japanese. In contrast only seven per cent named South Korean cars, six per cent said French and just under six per cent said they preferred Chinese vehicles.

Such findings are unlikely to dissuade any company from entering the market in the short-term. The reason for all the activity and enthusiasm surrounding the Iranian car market is understandable given its size and the potential for growth in the years ahead.

According to the International Organisation of Motor Vehicle Manufacturers (OICA), 1.1 million cars were sold in Iran in 2014, making it the 12th largest market in the world and easily the largest in the Middle East region.

Not all those cars were produced in Iran, with some 100,000 being imported. Prior to the deal to remove sanctions, the Iranian car industry had been showing signs of strain, with falling output and a shortage of capital. According to Business Monitor International, production levels fell from 1.6 million vehicles in 2011 to 989,000 in 2012. Overall sales fell from 1.4 million vehicles in 2011 to 650,000 in 2013, before starting to pick up again in 2014.

The situation should now improve and production levels should rise again in the years ahead. In the longer-term, Iran could become a more significant exporter of cars, too. The government has set a target of one million car exports by 2025. The mooted deal between Peugeot and Iran Khodro involves exporting around 30 per cent of production. Iran Khodro has also recently set up a new company to expand co-operation between domestic spare parts suppliers and their international counterparts. The company, Avrand Plastic Company, will target international markets.

Overseas production is also another area of potential growth for the Iranian firms. Saipa already has production sites in Syria, Venezuela, Iraq and Sudan. Iran Khodro also has a production facility in Iraq and recently floated the idea of establishing one in Oman too.

But while the sector as a whole looks set for expansion, there will clearly be winners and losers in the short-term.