|Rouhani seeks to turn around Iran's auto sector||
On Feb. 18, Ali Ali-lou, a member of the Iranian parliamentary Industries and Mines Committee, said Iran was planning to cut car import tariffs to zero in two year’s time. He said the measure was necessary to boost domestic production and make the auto industry competitive with its counterparts worldwide. The lawmaker urged the government to abandon support for the struggling sector, whose products are largely criticized in Iran for low quality and high prices.
The automobile industry, the biggest non-oil sector in the Iranian economy constituting around 10% of gross domestic product (GDP), boomed over the decade ending in 2011 due to the backing of the government and the absence of international rivals. The administration of former president Mahmoud Ahmadinejad increased car import duties as much as 90% last year, a measure that experts believe led to a marked deterioration of quality in the Iranian market monopolized by three major car manufacturers: Iran Khodro, Pars Khodro and Saipa.
The domestic carmakers are asking the new administration to not only keep the tariffs high, but also bail them out to save the sector, which owes local banks as much as 100 trillion rials ($4 billion).
In the fiscal year ending March 2013, Iran’s vehicle production fell to 920,000 units, down from 1.65 million in the previous 12 months. Over the past 11 months, production has declined even further to about 655,500 due to external shocks, stemming from the intensification of trade and financial sanctions since 2011, coupled with macroeconomic and microeconomic mismanagement.
Iranian auto manufacturers hope that the sanctions relief announced in January will provide a breath of fresh air to the sector, which has shed 115,000 to 130,000 workers since July 2011.
Sassan Qorbani, secretary of the Iranian Auto Parts Manufacturers Association, said downstream industries have also been hurt. Hundreds of car parts manufacturing units have gone bankrupt, Qorbani said, leaving about 470,000 workers unemployed in one year alone — the year ending March 2013.
But some reports suggest that Iran’s economy, including the automotive sector, has improved a bit since the interim Geneva deal reached in November between Iran and the five permanent members of the UN Security Council plus Germany, the P5+1.
On Feb. 12, the International Monetary Fund (IMF) published a news release on Iran’s economy, saying that stability “prospects” have improved in the country “but still remain highly uncertain.” This uncertainty continues to damage the auto industry, pushing Iranians toward imports rather than production.
According to the latest government data, Iranian traders have imported more than 61,000 cars, worth $1.27 billion, over the past 11 months ending Feb. 20 to meet the growing appetite in the country for Western-made cars. The figure shows a 60% growth compared with the same period last year. The cars, mainly imported from the United Arab Emirates (77.4%) and China (14.9%), sell for 2.5 times more than their original price.
Iranians are traditionally good traders rather than producers, so the administration of President Hassan Rouhani has a difficult job to do within the next few years. Rouhani must be cautious in dealing with tariffs because high duties could turn Iranian manufacturers into traders only, a shift that could hurt Rouhani’s production-oriented strategy in a significant way. On the other hand, low import duties could cause further damage to the country’s fragile automotive sector, which is not yet prepared to compete with international giants, even in the domestic market.
In fact, the administration doesn’t favor a sudden change in the tariffs but prefers gradual changes so that the industry will have plenty of time to recover from crippling sanctions, and so that the government, too, will be able to make comprehensive reform plans happen to address complex challenges in the sector. Such measures ideally would boost production and foster employment.
Last month, the Competition Council, affiliated with the Ministry of Economic Affairs and Finance, prepared a draft list suggesting car import tariffs for the upcoming year, starting March 21, 2014. Ranging between 30% to 70%, the tariffs show only a 5% to 10% reduction compared with the duties previously applied. The council does have plans to cut the customs tariffs to near zero, but that could take longer than Ali-lou suggested.
Many believe that Rouhani is preparing for a return to former president Mohammad Khatami’s era, when foreign investors were largely involved in joint venture projects with Iranians. The moderate president, along with top administration officials, has already invited giant manufacturers to avail opportunities in different sectors, including the automotive one.
Soon after the Geneva deal was implemented, France's PSA Peugeot Citroen and Renault tried to resume their business, suspended by sanctions, in Iran. In 2011, Peugeot sold 455,000 cars in the country, making Iran its second-largest market after France. Renault is said to have resumed component shipments to Iran and expects its car production in the country to be resumed throughout the next few months.
Subscribe to our RSS feed to stay in touch and receive all of TT updates right in your feed reader