Eyeball on Iran
A lot of people are not aware that Iran’s history as a nation dates back 5 millennia, (approx.5,220 years) and is regarded as the one of the oldest countries in the world today. In the recent years Iran’s revenue has been 50-60-% dependent on oil and gas exports and has been stymied not only by the international sanctions that prevented it from selling oil and gas but also by a range of market impeding sanctions.
Fast forward to January 2016, and with removal of International sanctions placed on Iran after United nation watchdog was satisfied with Iranian government compliance, the interest of global corporates swarming around the opportunities of accessing the country’s strong consumer base. This is considered great news especially for international automotive players seeking to supply vehicles to Iran, as its demographic, normative and economic conditions provide a remarkable opportunity for growth.
The sanctions plunged the Iranian economy into the deep; a two year recession was noted with GDP growth of between -7% and -3% in 2012 and 2013 respectively. High inflation at figures surging past 30% was also noted serving up a horrible dose of stagflation for the country. The lifting of the sanctions definitely brings Iran out of economic despair with long projected growth approximated at 4% till at least next year (2017) with inflation proposed to drop sub 18%.
An increase in economic activity and decrease in inflation is indeed fertile ground for automotive OEMS looking to access Iran’s market. Furthermore, following the 1979 revolution, records has shown an increase in birth rates, which equates to a population growth of up to 4% annually, which declined in subsequent years to 1.4%. In less than 40 years the total population increased from 39 million to fewer than 80 million with over 65% of its population under the age of 40 with a desire to purchase a range of high quality goods including cars, electronics and accessories driven by a positive attitude to foreign companies, services and products.
The Iranian automotive market has had a volatile state with car sales suffering dramatically since 2011, falling from 1.5 million to 0.7 million in 2013. The market then recovered to 0.9 million between 2014 and 2015 with strong accelerated growth predicted for the end of the decade with automotive sales coming in at 2 to 3 times the 2013 low. The Iranian middle class has grown significantly to around a third of the population and has captured the interest of the premium international automotive industry.
This remarkable desire for imported vehicles, combined with sufficient funds to acquire premium propositions will no doubt see a spike in the sale of premium cars. Iran as a regional hub possesses low cost labor and abundant raw materials with proximity to markets that have a combined population of up to 400 million and recent changes to Iran’s export tax system make it very attractive indeed.
The auto giant PSA Peugeot Citroen has become the first foreign company since the January 16 implementation of the Joint Comprehensive Plan of Action to take the necessary steps in obtaining a license from the Iranian government to invest in Iran Khodro Co. (IKCO), the biggest car manufacturer in the country. There is much history between PSA Peugeot Citroen who used to be a partner with IKCO because of the nuclear-related sanctions but they have put aside their differences and come to working agreements.
Another IKCO initiative that is looming on the horizon for the motor industry involves arrangements with Mercedes-Benz to manufacture commercial vehicles and passenger cars in Iran also. Negotiations will allow the German titan to begin its operations in upcoming months. Mercedes-Benz is also aggressively negotiating the local production of trucks and power-train components, negotiations with firms such as Iran Khodro Diesel and the Dubai-based Mammut Group and with further engagements as a shareholder in the Iranian Diesel Engine Manufacturing Company, situated in the north-western city of Tabriz.
Not wanting to be left out of the party; Volkswagen and its Skoda brand have also approached Iranian car makers and is in the market positioning process of selecting a local partner in its bid to capture a market share in Iran. The Italian firm Fiat has also been on the ball with negotiations taking place for IKCO to own shares in the firm and establish a roadmap for joint enterprise in a few months.
Iran’s auto industry also boasts of other car manufacturers including SAIPA, which is the second-largest car manufacturer in the country, it has revealed its own development plans as part of the broader national effort to boost the auto sector with the PSA striking deals with SAIPA to also build Citroen cars in Iran. Nissan. Kia, and Renault have also expressed significant interest in partnerships with SAIPA over the coming months.
Without a doubt the market outlook for the country and its auto industry is a positive one but we must not forget the challenges that still cast a shadow on the demand for foreign cars such as the current low price of oil that is affecting income, the extremely complicated Iranian tax system which is highly regulated by the state and the mysterious five millennia old culture compounded by the influences of isolation and previously strained relationships with Western corporations.
Considering the aggressive labors to kick-start the Iranian auto industry, the Iranian Parliament has forecasted an up to thirty-five percent increase in car import tariffs in the budget with predicted figures coming in at over £0.5Billion. Critics of the Iranian parliament have cited the forecast as over-ambitious as domestic demand for expensive cars has already fallen.
We will let the 65% population with an itch for high luxury cars show their hands.