Iran hasn’t been getting a very favourable international press lately. Political tensions between reformers and conservatives in the Islamic republic have become more public and international concerns over Iran’s nuclear programme have intensified. But Iran’s huge energy reserves have given it the wealth to develop a sizeable industrial base and its automotive market and industry is developing rapidly. Dave Leggett recently visited Iran and offers this assessment of the country’s automotive industry (article includes model level production data).
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Political and economic conditions
Iran became the centre of world attention in 1979 when the monarchy was overthrown and an Islamic republic declared, in which political control was in the hands of religious clerics. An unstable period followed, including an eight-year war against Iraq. In the late 1990s, the country entered another epoch of political and social change heralded by the victory of liberal reformers over the conservative elite in parliamentary elections. Iran’s president, Mohammed Khatami, won a landslide election victory on a pro-reform platform in 1997 and he was elected for a second term in 2001 winning just under 77% of the vote. However, tensions between the reformist movement and conservative forces have intensified in recent years. Demonstrations by students in the summer of 2003 threatened to destabilise the political situation further. Relations with the US remain sensitive – the US backed the deposed Shah and the US Embassy siege that followed the Islamic revolution is still remembered. The US imposes a unilateral trade embargo on Iran. However, countries in the European Union have been expanding their trade with Iran in recent years.
Iran has huge energy reserves. The country is OPEC’s second largest oil producer and has approximately 9% of the world’s oil reserves. It also has the second largest reserves of natural gas in the world. Iran also possesses mineral resources that include reserves of coal, copper, iron, zinc and gold. Processing industries such as steel are developing and Iran is the third largest copper producer in the world. Oil exports dominate though, accounting for around 80% of foreign exchange rate earnings and 15% of Iran’s Gross Domestic Product (GDP).
The economy is currently growing at around 5-6% per annum and the main current macroeconomic preoccupation is keeping inflation (running at around 15%) under control.
Iran at a glance 
GlobalData Strategic Intelligence
US Tariffs are shifting - will you react or anticipate?Don’t let policy changes catch you off guard. Stay proactive with real-time data and expert analysis. By GlobalDataPopulation: 65 million GDP: $111 billion (2002) GDP per head: $2,000 (US$@PPP) Inflation rate: 20% Unemployment rate: 20% Oil dominates economy: 80% of export earnings, 50% of Iranian government budget Biggest export partner: Japan Annual car production: 471,000 units (‘1381’) |
Automotive industry history
The first Ford Model T’s arrived in Iran in the 1930s and by 1955 annual imports were around 10,000 units. In 1958 the first local assembly operations began with a Jeep model and the local assembly of Land Rover models began in the 1960s. As oil revenues soared in the 1970s the industry expanded rapidly and in 1979 Iran became the only country outside the US to assemble Cadillacs.
After the Islamic revolution in 1979, all domestic automotive manufacturers were nationalised. The Iraqi invasion of 1980 encouraged the development of a centrally planned economy to direct production towards goods needed for the war effort. Domestic demand for vehicles dropped during the 1980s along with investment and output.
When the war with Iraq ended in 1988, vehicle demand picked up. Imports rose to record levels in 1993/4 with up to 90,000 vehicles arriving annually. But Iran’s growing trade imbalance led to the loss of foreign exchange and increased foreign debt. In early 1993, the Automotive Law of Iran was enacted, bringing high import tariffs and incentives designed to encourage local production.
Iran’s automotive industry today – state directed
The state department, the Industrial Development and Renovation Organisation (IDRO) is responsible for the development of Iran’s automotive industry and is central to its operation and structure. IDRO is affiliated to the Ministry of Industry and Mines and owns some 45% of some of the largest vehicle manufacturers in Iran – such as Iran Khodro. IDRO claims that over 20% of the value of industrial production in Iran is related to the output of vehicles. IDRO plays a key role in the protectionist policies of the government due to the heavy stakes it has in the automotive sector.
Iran’s automotive industry is said to receive a high priority in the allocation of domestic capital for investment as well as foreign exchange for the purchase of raw materials.
The auto industry is mainly located in three locations: (i) in and around Tehran and (ii) in and around Mashhad (Khorasan province, close to the Afghan border) and (iii) around Tabriz (in the northeast, mainly components).
Developing local content and the trading framework
Iran’s government has a well-established protectionist policy towards its automotive industry. The importation of completely built-up units (CBU) has been prohibited since 1995. Observers and participants in Iran’s auto industry say that the government view is relaxing somewhat and that imports – in principle – are no longer seen as a threat to local manufacturers. However, although there are proposals to lift the blanket ban on imports, customs tariffs are expected to be extremely high (200-400%) in order to safeguard local makers.
Establishing the local content of vehicles produced in Iran is not easy. IDRO is prone to overstate the level of local content (for example claiming 95% for Paykan, 82% for Peugeot 405). Local data suggests that Peugeot 405 has US$2,000 per vehicle imported.
Ultimately, the government and the industry in Iran is interested in joining the WTO, although it is recognised that political factors (such as American objections) will make that unlikely for some time.
IDRO has formulated a plan to facilitate the production of eight new models using common platforms at the two biggest makers – Iran Khodro and Saipa. It is envisaged that these will include common major components, such as engine, transmission box and chassis. IDRO believes that under such a plan, car production could be increased to 600,000 units per annum at these two manufacturers. That level of output gain is seen as needed to make the industry more globally competitive and able to survive when import restrictions are eventually relaxed. A special FOREX Reserve Fund is planned to help provide the necessary investment resources and the plan is expected to take four years to implement with the first production under it planned to roll out in 2006.
IDRO has reportedly set a target of 700,000 units vehicle production for the current Iranian year of 1382 (ending March 2004) – which compares with total production of 534,000 units in 1381 (year ended March 2003 – see data table below).
IDRO policy is to encourage greater integration between Iran’s two biggest vehicle makers – Iran Khodro and Saipa Group – in order to promote industrial efficiency and lower unit costs.
Profile – Iran Khodro
The biggest vehicle maker in Iran is Iran Khodro (IK) – maker of the ubiquitous Paykan (Hillman Hunter) and a clutch of Peugeot-derived models. Established in 1962, Iran Khodro accounts for around 60% of Iran’s vehicle output. The company is owned jointly by IDRO, its workers and some private investors. IK employs around 13,000 people.
IK has been at the forefront of plans to develop Iran’s indigenous automotive design, engineering and manufacturing capabilities. IK’s technology partner is Peugeot and the company makes the following vehicles:
- Paykan (Hillman Hunter)
- Paykan RD (Paykan engine and running gear; Peugeot 405 bodywork)
- Peugeot 405 (saloon and estate)
- Peugeot Pars (restyled Peugeot 405)
- Peugeot 206
- Samand (national car project supposed to replace Paykan)
Production of the Samand commenced in 2002. The car’s design and engineering involved a number of design firms and consultants in Europe but Iranians managed the project. IK’s R&D centre was also established during the development of the Samand and is now known to be working on a number of projects with an emphasis on smaller and lower price models (derivatives based on Peugeot designs).
IK is supplied by a supply chain mainly under the control of SAPCO which is responsible for supplying IK’s parts needs.
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Iran Khodro’s Samand – Iran’s national car |
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Iran Khodro Samand – front |
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Iran Khodro Samand – rear |
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Paykan RD: underneath that Peugeot 405 exterior it’s a modified Hillman Hunter |
Profile – Saipa
Saipa is virtually 100% owned by IDRO and was established in 1968 as the Citroen Production Association. In June 2000, Saipa signed a contract to produce 20,000 Citroen Xantia cars annually and a new paint shop for the project was purchased from Durr in Germany. The contract with Peugeot stipulates a local content split of 51% local, 49% French imports. Saipa also manufactures Kia Pride models in large volume and is believed to have developed high local content.
Saipa owns a high percentage of its supply chain, with around thirty affiliated companies including Mega Motors, which supplies Kia engines and gearboxes. Sazeh Gostar claims to supply over 50% of SAIPA’s parts for its Pride and Nissan pick-up models.
Saipa has also been involved, under IDRO guidance, in the development of its own vehicles – most notably the low-volume SAIPA Caravan.
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Saipa Caravan MPV |
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Smaller makers
There are a number of small volume makers in Iran, some of which are privately, or majority privately owned. Pars Khodro was established in 1957 and is owned by IDRO. It produces old design Nissan Patrol models and the Nissan Maxima as well as a version of the Renault 5 known as the Sepand (95% local content is claimed). The licensing deal with Nissan for the Maxima was signed in 2000 (with approximately 15% local content) and the intended annual production run is 2,000 units. Like Iran Khodro and SAIPA, Pars Khodro also has its own parts supplier, a company called Desco.
Bahman Group is a privately owned group that manufacturers single and double-cab versions of an old Mazda 1600 pick-up. The company also assembles from CKD kits the Mazda 323 passenger car.
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Spot welding Mazda 323 panels by hand – Bahman Group |
Kerman Khodro was established in 1995 as a joint venture between the Iranian private sector and Daewoo of Korea. The company makes the Cielo and Matiz models and is 51% owned by Iranian interests and 49% by Daewoo. It has not been able to introduce a replacement for the aged Cielo model due to political problems involving the US ownership of Daewoo Motor.
Renault X90 project
Louis Schweitzer, chairman and CEO of Renault, and R. Veyseh, chairman and CEO of IDRO (Industrial development and renovation organisation of Iran) have signed a letter of intent earlier this year signalling the start of negotiations to create a joint venture company which would involve both Iran Khodro and Saipa in the production of an economy model range (the so-called ‘5,000 euro car’). The deal is reportedly close to being inked.
The project envisages manufacturing and selling a car model, currently known by the codename X90, being developed by Renault, which will also be made in Russia and Romania. The X90 vehicle, which is currently being developed by Renault’s vehicle and powertrain engineering teams in France, will use a platform derived from the Renault-Nissan Alliance B platform (also used for the Nissan Micra and Renault Clio).
The letter of intent between Renault and IDRO envisages a common platform strategy leading to the eventual production of 500,000 vehicles per year under the collaboration. Under the proposals, a new car production facility would be established in Iran to produce cars under license at the rate of 100,000 units per annum. In addition, it is hoped that Renault would assist Iran Khodro and Saipa with the production of 250,000 and 150,000 units per annum respectively under a ‘common platform strategy’. It is hoped that some 60% of all parts produced under the joint venture can be manufactured or sourced locally and that exports of final vehicles can balance the import trade. It is stipulated also that the cars should be able to run on dual fuel systems (ie gasoline and CNG).
It is hoped that X90 in Iran (also known as L90) will finally replace the Paykan. Similar hopes for the Iran Khodro Samand floundered on its too high price. In the Iranian year of 1383 (beginning March 2004) it is hoped that some 300,000 cars will be produced in Iran under this project.
Natural gas
Large gas reserves and problems of acute pollution are encouraging the development of CNG for automotive applications and the automotive industry is moving ahead with plans to manufacture models with engines equipped for dual gasoline-CNG use. Iran Khodro and Saipa are both working fast to increase the proportion of their cars that are capable of dual fuel use.
The Supreme Economic Council, headed by the President, has also approved a plan aimed at installing special kits on some 550,000 existing cars to enable them to use CNG.
Some demand-side considerations
Wealth indicators, demographics (60% of the population is under 26 years of age) and pent-up replacement demand are among the factors suggesting very strong growth potential for Iran’s car market. The estimated four million vehicles on the road have an average age of fifteen years and less than 30% of Iran’s three million private cars are under ten years old.
But there are constraints. One is the tax inclusive price of vehicles. Even a basic Paykan costs the equivalent of $10,000. A more modern car? Try $30,000 after the local maker has been stung on imported parts and tariffs. Also, finance purchase does not exist in the Islamic Republic – cash only. Half down now, half on delivery – which even for a Paykan may be a year away, such is the demand for cars in Iran. Unsurprisingly, many cars in use in Iran are used as workhorses, earning their keep as the ubiquitous unofficial Paykan shared taxis. The realisation of pent-up replacement demand requires Iran’s car industry to develop in a way that creates low-price models. If a way can be found to overcome the affordability and financing problems, Iran’s car market could grow rapidly towards one million units a year – given the country’s indigenous wealth and sizeable population.
In terms of export demand, Iran is already shipping significant numbers of vehicles to CIS republics in Central Asia as well as to countries in the Middle East and North Africa. The government sees the development of further export business as a way to consolidate Iran as the leading regional industrial player (to some degree, Iran already finds itself in competition with Turkey throughout the region Middle East and Central Asian regions).
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Replacing the omnipresent ageing Paykans holds out the hope of massive market growth – one day |
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click on the table for enlarged view |
