When the US unleashed its most aggressive sanctions ever on Iran in August 2018, it reserved the first hammer blow for the car industry to hurt as many Iranians as possible. As expected, the US penalties disrupted and gradually cut off the supply of raw materials and auto parts on a massive scale. Foreign carmakers and part suppliers walked away from the lucrative market fearing Washington’s ire.
The auto industry is a key driving force in Iran, the operation and prosperity of which keeps more than 60 other industries moving. The industry is only second to its energy sector, accounting for some 10 percent of the gross domestic product and 4 percent of employment. More than 100,000 people are employed by the two largest local manufacturers Iran Khodro (IKCO) and Saipa, while another 700,000 Iranians work in industries related to car manufacturing.
Iran began manufacturing its own car in 1967, churning out the box-shaped Paykan which was a replica of the British-made Hillman Hunter. It imported mainly from Western Europe and the United States, which accounted for approximately 40 percent of Iran’s market.
However, the baby boom during the first decade of the Islamic Revolution of 1979 generated a young population which was almost 75 percent urbanized by 2017 and hungry for cars.
The post-war governments decided to give a new lease of life to the auto industry but opted to stop manufacturing and start assembling instead because they thought Iran could not compete with strong international carmakers. International players, meanwhile, showed interest in the Iranian market and policies were put into place that allowed car imports without technology transfer. France, a partner of Iran in the automotive industry for a long time, entered into new joint ventures with main producers Iran Khdro (IKCO) and Saipa.
To meet the demand, automotive production rose by more than 18 percent in 2017. Iran produced 1.4 million cars and commercial vehicles, ranking sixteenth in the world. However, foreign companies that made cars in Iran — including France’s Peugeot and Renault — decided to leave after US President Donald Trump announced new sanctions on the Islamic Republic.
Renewed sanctions led to delays in-car deliveries and a shortage of parts and by June 2018, a month after sanctions were renewed, car production dropped by 29 percent compared with the same month a year earlier.
IKCO Managing Director Farshad Moqimi said Iran is now producing more than 50 parts that were imported. “With the measures, we have taken in the field of domestic production and self-sufficiency… we have been able to reduce more than $50 million in production costs and planned for another $300 million in reduced costs,” he said. Moqimi said IKCO has produced more than 172,000 cars since the beginning of the Persian year in March, up 36 percent against the period last year. “When the United States has targeted the automotive industry and started its sanctions from this sector, we had to work together to maintain the flag of production in this industry flying high,” Moqimi said.
Iran is now self-sufficient in the production of some parts, “but we have a problem in supplying raw materials, and we have to supply it from foreign sources,” he said, adding domestic manufacturing of the raw materials should also be on the agenda.
Domestic production of auto parts is estimated to save Iran €300 million during the current Iranian calendar year (ends on March 20, 2021), according to official sources.
The Ministry of Industries unveiled a 10-section plan in early February for improving the status of carmakers, in which the two major car makers of the country have been ordered to support auto part manufacturers. IKCO Manager Moqimi stressed that the regulations should be in a way that remove the barriers in the way of domestic production. “When a regulation is set, it may remove a problem but creates another one. Taking this issue into account and also considering the special current condition of the country, some special approaches should be taken when setting the regulations”, the official said.
Also, domestic carmakers started a research movement titled “Domestic Manufacturing of Imported Parts”. The movement is aimed at creating the condition and opportunity for cooperation among domestic manufacturers, knowledge-based companies, and startups.
Meanwhile, as announced by the secretary of Specialized Manufacturers of Auto Parts Association in late December last year, Iranian carmakers have prepared some incentive packages to encourage investment made by the auto parts manufacturers. Arash Mohebinejad said that offering these incentives is in line with the promotion of indigenizing the manufacturing of auto parts. “Purchasing the domestically-made auto parts at the same price of the similar imported parts and making the purchase guarantee deals with the auto part manufacturers are some of these incentives”, Mohebinejad stated.
During a ceremony in mid-February, three Iranian-made cars were unveiled in the presence of President Hassan Rouhani. Speaking to the media on the sidelines of the ceremony, Reza Rahmani said “the new cars are 90 percent domestically made and just a few of their parts are imported, the minister said adding that based on the planning underway manufacturing of those imported parts will be indigenized in the present and coming years. These cars are complying with the world’s modern standards and their fuel consumption is considerably lower than the previously manufactured vehicles, he further emphasized.”
Therefore, developing technology and promoting knowledge-based industries, the development of domestic production in line with the Leader’s stresses on surge in production, managing imports and development of non-oil exports, improving the business environment, development of financing and investment and finally development of logistics were reported to be the seven major axes of the Industry, Mining and Trade Ministry’s works in the current year.