Iran‘s home-grown auto market

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It’s an ill wind that blows someone some good. Tehran’sinfamous traffic congestion may clog its roads and the lungsof its 12 million inhabitants, but it means big business forIran’s car makers.

Total production of new vehicles reached nearly 1 millionfor the Iranian year ending March 20, according to Ali RezaTahmasbi, the minister of industries and mines, makingIran’s output higher than Australia and three times that ofIndonesia.

The sector accounts for about 4% of GDP and 500,000 jobs,giving it a pressing importance for Iran’s rulers, whilefacing an unemployment rate officially at 11% and theprospect of further international sanctions over thecountry’s controversial nuclear and missile programs.

The strength of Iran’s car industry results not from avibrant competitiveness geared to a tough world market, butrather from a mixture of high import tariffs, stateownership and petrol subsidized to the knock-down pump priceof around 9 cents a liter (rising to 11 cents in May).

The government is keen for Iran to become a regional if nota world-wide auto manufacturer, and so Saipa and IranKhodro, the main domestic companies, are expanding businessthrough exports, setting up overseas production lines andenticing foreign partners into joint ventures at home.

Renault returned to Iran in March after a 20-year absence,investing $150 million in a 51-49% partnership with Saipaand Khodro to make the Tondar-90, a version of the Logan, asmall family car first made by Renault’s Romanian subsidiaryDacia.

The car will have 60% local parts, rising in time to 80%,and Renault and its partners aim to make 300,000 units overthree years. As the car went on pre-sale in March, withthree models ranging from 82 million rials ($8,870) to 108million rials, Khodro claimed to be registering 22 buyersevery minute. Business at the Khodro’s Tehran sales officeswas certainly brisk, with customers relying more on memoriesof Renault’s past reputation in Iran than any detailedinformation on the new car.

The move is a clear challenge to Peugeot—the biggest foreigncar manufacturer in Iran, assembling 400,000 cars a year inpartnership with Khodro—and Renault has also decided toproduce 15,000 Meganes, another small family car, in 2008,rather than importing the model from Turkey.

Renault’s decision raised eyebrows in Washington, whereofficials are trying to discourage international investmentin Iran. But such was the French company’s commitment to thedeal, first signed in principle in 2004, that it agreed tothe Iranian demand that 20% of the 300,000 cars could besold for export.

For the Iranians, such deals bring access to Europeantechnology, helping Iran in its aim to boost its non-oilexports.

Parviz Davoudi, Iran’s first vice-president, inaugurated afactory in Syria in March as a $60 million joint venturewith Al-Sultan to make the Samands, Khodro’s budget familycar, which will be re-branded as the Sham. Target productionis 10,000 a year, a useful boost for the Samand, Iran’s onlyentirely indigenous model since production stopped in 2005of the Paykan, the model famously based on the UK’s HillmanHunter.

Iran also signed three auto making contracts valued at morethan $1 billion with Russia and China during the Iraniancalendar year ending March 20. Khodro agreed to export 6,000Samand cars to Russia every year and to produce 30,000 inChina. Iran Khodro Diesel is to assemble 12,000 of a versionof the Gazelle van, made by the Russian GAZ (GorkovskyAvtomobilny Zavod) company, beginning with importedCompletely Built-up Units (CBU) and gradually switching to50% of parts from domestic production.

Although the basic strength of the Iranian manufacturersremains a protected home market, there has been some easingof restrictions on imports.

Iran did lower slightly tariffs on imported vehicles in2006-7, allowing an increase from 10,000 to 26,000 andleading top-range manufacturers such as BMW and Mercedes-Benz to step up their limited efforts.

And domestic manufacturers have also brought in some modelsfrom their overseas partners Renault, Citroen and Hyundai.Khodro plans to add the Peugeot 407 to its sales line-up in2007-8, and will import a total of 2,000 Peugeots, with eachpriced at 300-400 million rials ($32,500-$43,500).

In another sign of improved fortunes for importers, Hyundaisigned a contract to supply 13,450 CBUs worth about $227million to Iranian government agencies and official taxioperators, a move that came as a blow to Kerman Motors,which manufactures Hyundai models.

The relaxation of restrictions seems to have resulted fromwidespread public, media and even parliamentary criticism ofthe quality of Iranian-made cars.

But there is no sign of any serious challenge to the basicdevelopment model based on restricting imports. Parliamentdecided in February to keep a hefty 90% tariff in place forthe coming year, ending March 2008.

Hence the cars clogging Tehran’s streets will likely for theforeseeable future, continue to be Iranian-made, even ifsome of the parts and a growing part of the technology thatmakes them are imported.


Gareth Smyth has reported from around the Middle East for more than two decades and is the former Financial Times correspondent in Tehran.