Iranian car industry weathers stormy year

FT.com -- Iran’s automotive industry overcame international sanctions and a troubled domestic environment during the past 12 months, managing continued if slowed growth in what was a tough year for the country’s economy.

In the Persian calendar year that ended on March 19, car production exceeded 1.6m, up about 2.5 per cent from the previous year – one of the slowest for the industry since the end of the Iran-Iraq war in 1986, analysts said.

“Sanctions created [more] restrictions on the industry last year but production did not face severe fluctuations. The car industry was generally successful,” says Sasan Ghorbani, the secretary-general of the Iranian Auto Parts Manufacturers Association, a private body of about 850 parts companies.

The association’s members supply parts to Iran Khodro and Saipa, Iran’s two largest carmakers, which together form the core of the country’s most profitable industry after oil and gas.

While growth slowed, the industry remains crucial to the domestic economy. The number of cars on Iran’s streets have increased more than 70 per cent in the past decade, according to the country’s traffic police. Economists say the double-digit demand growth for new vehicles cannot last forever, but producers counter that demand has not declined significantly in the country of 75m people.

While production is still growing, the industry is struggling with domestic and foreign challenges, including intensified international sanctions.

The tough sanctions regime imposed by the EU and US have hit Iranian consumers and businesses hard in recent months. Vehicle producers say money transfers have become more difficult thanks to international restrictions on the financial sector, causing delays in payments and imports, pushing up costs and causing some production lines to grind to a halt.

“The restrictions on money transfer and trade exchange are very big limitations for production, but the producers can get around such sanctions with more difficult and complicated methods,” says one businessman. He declines to elaborate, but says car production has become more expensive.

The Iranian rial, which devalued 40 per cent over the past year, also has onlookers worried for the sector.

Ali-Asghar Yousefnejad, a member of the parliament’s industry and mines committee, says currency market fluctuations “inflicted an irreparable hit” on Iranian industry.

In March, General Motors said its French partner, PSA Peugeot Citroën, suspended shipments of vehicle components to an Iranian carmaker, in compliance with US laws governing trade with Iran.

Peugeot supplied parts to Iran Khodro, the country’s biggest carmaker. Iranian experts suspect parts may still be reaching the country via intermediaries in third countries. They also say it is likely Iran Khodro has considered replacing Peugeot with other suppliers, but do not rule out the short-term difficulties that such a supply disruption could cause.

“Although the sanctions may slow development, I do not expect Iran’s car industry, with such high potential, to kneel down against sanctions anytime,” says one reform-minded economist.

Some businessmen say economic hardships affecting local consumers could be taking a toll. Double-digit inflation has persisted for most of the past three decades, and the central bank recently announced an annual inflation rate of 21.8 per cent for the past year – a figure businessmen and economists agree is underestimated.

Despite the challenges, some remain upbeat. After years of resistance the government, which regulates prices in the market, has agreed to an increase in prices of domestically made cars. Local media have reported a 6-9 per cent rise in prices of cars costing under IR300m ($24,000). For more expensive models, the government has agreed to allow carmakers to decide on the level of the rise.

Progress in international talks over Tehran’s nuclear programme have also led to cautious optimism, and hope of a possible easing of sanctions.

“All have been happy in Iran’s industry that the talks are ultimately going ahead positively from both sides and are also happy it will have [positive] results too,” says Mr Ghorbani of the Iran Auto Association.

“I do believe the west will also benefit from such decisions,” he says. “No sides in any dispute would never ever benefit if one of the sides is too weak and the other is too strong.”