Iran’s vital car sector bows out under the impact of sanctions

Iranian officials were confident the country’s car industry would prove a bastion of economic resilience against sweeping US sanctions imposed after the failure of Tehran’s nuclear deal with world powers.

But hopes that imports from countries such as China would offset the impact of US sanctions have not been realised. The falling riyal and shrinking state revenues have created widespread shortages of key inputs and a sudden rise in prices, which has hit the industry hard and dented the hopes of car owners.

“I can’t even think about that for the rest of my life,” said Mohammad Reza, a construction worker who has been saving for years to buy the Pride, Iran’s cheapest car. “Before it was difficult, now it is impossible.”

Iran’s car industry is the country’s largest sector outside of oil and gas, and was a major beneficiary of the optimism following the 2015 nuclear deal, as foreign auto companies, notably from France, began exploring the Iranian market. Gave.

But sanctions that were imposed in 2018, when then-President Donald Trump pulled the US out of the deal, ended up devastating Iran’s economy, and especially its auto industry, which accounts for 4 percent of the country’s GDP. and provides employment to some. 500,000 workers.

French companies that had jumped into the Iranian market after the nuclear deal started pulling out. PSA canceled production deals worth €700 million, while Renault abandoned plans to increase production to 350,000 vehicles per year.

The industry initially sought to bridge the gap between domestic production and imports from China. According to an industry executive, Iran continued to produce some Peugeot models with half of its share from the Chinese market.

However, car manufacturers have still been unable to meet the demand at a reasonable cost. Production reached 1.5 million units in 2017, one of the highest levels ever, but from there the number fell below 1 million annually.

“As long as US sanctions remain in place, the gap between supply and demand will remain wide,” said Siamak Ghassemi, managing director of Tehran-based consultancy Bamdad Institute.

The cheapest locally-made Peugeot 206 model for sale in a Tehran showroom this month cost IR5.2bn ($10,800) – nearly 15 times more in riyals than in May 2018, when the sanctions were imposed, and the average 5.5 times more than the annual salary of laborers in Iran.

To curb prices, Tehran has revised its ban on car imports. It recently allowed a limited number of new vehicles from China and is considering whether to allow imports of used cars.

Iran’s defense industry took steps to produce some components, such as airbags and electronic control units, boosting production to 1.2 million vehicles in the most recent Iranian year ending March. The prices have also declined slightly in the last two months as the supply has subsequently increased.

But there are drawbacks that those who have money to spend are confined to unused older models made by popular global vehicle brands but offered at very high prices.

A Tehran showroom was selling an unused 2017 Mercedes-Benz E 200 class for IR170bn riyals – almost six times the price of this year’s model in Western markets.

Even used foreign cars fetch premium prices. A Western diplomat in Tehran said, “Iran is probably the only country in the world where you buy a car, drive it for years for 100,000 km and then sell it for double, triple or quadruple the price.”

Analysts say some Iranians want to buy a car that can at least retain its value as a way of protecting their savings against inflation, which currently stands at 49 percent. The Iranian rial has lost more than a third of its value in the past year.

Many have deposited their savings in special bank accounts set up by the government to support domestic industries, including the car sector. Savers register their intention to purchase a product and successful applicants are randomly selected in a lottery-style manner.

It is not clear how long customers usually wait before being able to buy a car from a local manufacturer such as Iran Khodro or Saipa. The companies declined to give details of their production or comment on any production problems.

Analysts have suggested that the crisis in key industries such as the auto sector could prompt the Islamic republic to seek at least a tentative new nuclear deal with the US to ease economic pressure.

Saeed Lelaz, an analyst specializing in the political economy of Iran, did not rule out such a deal, but said the country’s political isolation would remain a major problem for the car industry.

“How can an Iranian carmaker make a profit and provide after-sales services when the country is fighting with other countries all the time?” They said. “Politics has taken over the economy. The car industry can only flourish if it can expand production beyond the Iranian market, and this requires a change in approach to foreign policy.”

Iranian officials were confident the country’s car industry would prove a bastion of economic resilience against sweeping US sanctions imposed after the failure of Tehran’s nuclear deal with world powers.

But hopes that imports from countries such as China would offset the impact of US sanctions have not been realised. The falling riyal and shrinking state revenues have created widespread shortages of key inputs and a sudden rise in prices, which has hit the industry hard and dented the hopes of car owners.

“I can’t even think about that for the rest of my life,” said Mohammad Reza, a construction worker who has been saving for years to buy the Pride, Iran’s cheapest car. “Before it was difficult, now it is impossible.”

Iran’s car industry is the country’s largest sector outside of oil and gas, and was a major beneficiary of the optimism following the 2015 nuclear deal, as foreign auto companies, notably from France, began exploring the Iranian market. Gave.

But sanctions that were imposed in 2018, when then-President Donald Trump pulled the US out of the deal, ended up devastating Iran’s economy, and especially its auto industry, which accounts for 4 percent of the country’s GDP. and provides employment to some. 500,000 workers.

French companies that had jumped into the Iranian market after the nuclear deal started pulling out. PSA canceled production deals worth €700 million, while Renault abandoned plans to increase production to 350,000 vehicles per year.

The industry initially sought to bridge the gap between domestic production and imports from China. According to an industry executive, Iran continued to produce some Peugeot models with half of its share from the Chinese market.

However, car manufacturers have still been unable to meet the demand at a reasonable cost. Production reached 1.5 million units in 2017, one of the highest levels ever, but from there the number fell below 1 million annually.

“As long as US sanctions remain in place, the gap between supply and demand will remain wide,” said Siamak Ghassemi, managing director of Tehran-based consultancy Bamdad Institute.

The cheapest locally-made Peugeot 206 model for sale in a Tehran showroom this month cost IR5.2bn ($10,800) – nearly 15 times more in riyals than in May 2018, when the sanctions were imposed, and the average 5.5 times more than the annual salary of laborers in Iran.

To curb prices, Tehran has revised its ban on car imports. It recently allowed a limited number of new vehicles from China and is considering whether to allow imports of used cars.

Iran’s defense industry took steps to produce some components, such as airbags and electronic control units, boosting production to 1.2 million vehicles in the most recent Iranian year ending March. The prices have also declined slightly in the last two months as the supply has subsequently increased.

But there are drawbacks that those who have money to spend are confined to unused older models made by popular global vehicle brands but offered at very high prices.

A Tehran showroom was selling an unused 2017 Mercedes-Benz E 200 class for IR170bn riyals – almost six times the price of this year’s model in Western markets.

Even used foreign cars fetch premium prices. A Western diplomat in Tehran said, “Iran is probably the only country in the world where you buy a car, drive it for years for 100,000 km and then sell it for double, triple or quadruple the price.”

Analysts say some Iranians want to buy a car that can at least retain its value as a way of protecting their savings against inflation, which currently stands at 49 percent. The Iranian rial has lost more than a third of its value in the past year.

Many have deposited their savings in special bank accounts set up by the government to support domestic industries, including the car sector. Savers register their intention to purchase a product and successful applicants are randomly selected in a lottery-style manner.

It is not clear how long customers usually wait before being able to buy a car from a local manufacturer such as Iran Khodro or Saipa. The companies declined to give details of their production or comment on any production problems.

Analysts have suggested that the crisis in key industries such as the auto sector could prompt the Islamic republic to seek at least a tentative new nuclear deal with the US to ease economic pressure.

Saeed Lelaz, an analyst specializing in the political economy of Iran, did not rule out such a deal, but said the country’s political isolation would remain a major problem for the car industry.

“How can an Iranian carmaker make a profit and provide after-sales services when the country is fighting with other countries all the time?” They said. “Politics has taken over the economy. The car industry can only flourish if it can expand production beyond the Iranian market, and this requires a change in approach to foreign policy.”