After oil and gas, the automotive industry is the biggest contributor to Iran's GDP, accounting for 10% and employing more than 700,000. Prior to the sanctions in 2013, Iran was producing 1.5 million cars annually. Following a period of setback, the country aims to regain its position as an automotive hub in the Middle East.
Before 2013, Iran’s 50-year car industry was the world’s 11th highest automobile producer. High currency exchange rates and the ban on international transactions damaged free cash flow in the automotive sector, especially for suppliers and original equipment manufacturers (OEMs). The Iranian market leaders, Iran Khodro (IKCO) and SAIPA, accounting for more than 90% of the total domestic production, assemble European and Asian cars under license and produce their own brands.
While Iran prides itself on manufacturing cars domestically, the country is still reliant on imported components. This economic void presents an opportunity for global players to penetrate the market. Therefore, supplier and OEM partnerships have been the most common form of relationship between Iranian manufacturers and foreign multinationals. A past IKCO partner, the auto giant PSA Peugeot Citroí«n, became the first foreign company to invest in the sector since the Joint Comprehensive Plan of Action (JCPOA). After a four-year interruption, the French manufacturer resumed deliveries of auto parts in a USD452 million joint venture to produce 200,000 cars per annum with IKCO, the largest car producer in the Middle East. One prerequisite for any industrial partnership implemented by President Hassan Rouhani’s administration requires manufacturing technology to be transferred to Iran. Thus, the country aims to improve the quality of its production, which was significantly affected during sanctions. The Iranian middle class, which currently accounts for around 30% of the population, may be of particular interest to the international automotive industry.
The preference for imported vehicles from Western markets made SAIPA draw its plans to select up to four strategic foreign partners to develop its brand both nationally and internationally. The second-largest Iranian car manufacturer expects USD564 million in foreign direct investment, likely from France’s Renault, Japan’s Nissan, and South Korea’s KIA. Other European manufacturers have expressed their willingness to take a piece of the Iranian pie. Mercedes-Benz, a subsidiary of Germany-based Daimler, aims to locally manufacture commercial vehicles and passenger cars. Moreover, Volkswagen with its Skoda brand and Italy’s Fiat are also among the multinational automakers that have approached Iranian carmakers.
Hence, the automotive market has recently picked up, as Iran now produces about 900,000 cars annually. The country hopes to increase the number to 3 million by 2025 in order to become a regional center for car manufacturing and exports to neighboring countries. Traditional markets for Iranian automobiles include Middle East, Africa, and the CIS. Indeed, Western companies have declared their interest in using Iran as a hub for exporting their products to countries such as Iraq, Azerbaijan, Syria, and Afghanistan.
With the elimination of Iran’s gasoline subsidy and the enactment of a vehicle scrappage program, which aims to remove 2.2 million aging vehicles from its roads, car sales are expected to grow with a CAGR of 18% per annum until 2020. The authorities want to pull in some 200,000 efficient cars each year out of the market, fostering the shift from petrol to natural gas-powered vehicles. With the world’s biggest natural gas reserves, Iran rapidly became the world leader of vehicles running on natural gas, with over 3.7 million on the road in 2014.
Accordingly, Iran has a self-sustained automotive industry ready to embrace environmental and transportation challenges. Car penetration levels in Iran remain below neighboring countries such as Turkey, Lebanon, and Saudi Arabia. These factors, combined with a growing and young population, make Iran an attractive opportunity for international automakers.
In March 2016, President Rouhani expressed plans to privatize the industry in order to encourage joint ventures and make the car industry more technologically advanced and efficient. By removing government protection on domestically produced cars, Iran aims to absorb USD8 billion of foreign investment to erase the effects of years of international sanctions. In this regard, the country appears as an attractive market for foreign carmakers due to its vast untapped potential, where early entrants can reap major gains, as well as its strategic geographic position, giving Iran the status of an export hub in the Middle East.
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