TEHRAN - With the global financial crisis, more and more consumers are postponing big item purchases, e.g. cars, houses, etc. For the auto industry, this is bad news. The three major American automakers in Detroit, which have ruled the industry for the major part of the last century, are hoping to survive through mergers and government bailouts. Even the world’s number one automaker, Toyota Corp., which overtook GM just recently, is in trouble.

Apart from the global financial crisis, more and more auto manufacturing plants are being set up in emerging markets like China, India, Malaysia, etc., which are hard to compete with.
Iranian automakers are not immune to the global financial crisis or the competition from the ultra-cheap cars coming from the emerging markets. Furthermore, protectionism and mismanagement are taking a toll on the industry.
Today, Iran Khodro Co. (IKCO) is on the verge of bankruptcy. The general annual meeting of the shareholders of IKCO was held on Saturday, with Mr. Roghani, a member of board of directors, presiding.
The chairman of the IKCO Board of Directors, Manouchehr Manteqi, who was also the company’s former managing director, was expected to preside over the meeting. However, he failed to attend and Roghani was his replacement.
During the meeting, IKCO Managing Director Mohammed Javad Najmeddin released IKCO’s fiscal statements for the last Iranian calendar year 1387 (March 2008-March 2009). Based on the annual report, the total annual cost for the company amounted to 940 billion tomans ($940 million) and the forecast for the 1388 cost is $950 million.
Najmeddin said that the accumulated loss for last year amounted to $123 million. However, to compensate for this loss, he forecasted a profit of $110 million for the current year.
He added that due to the loss, IKCO was unable to pay dividends to its shareholders. Jamshid Imani, the deputy director in financial and economic affairs, told Mehr News Agency that according to the Iranian law if a public shareholder company loses money it is not allowed to pay dividends to its shareholders, even from its savings.
In order to avoid mass selling of IKCO shares and retaining its popularity in the stock market, and not breaking the law, the deputy left an option for the shareholders. Imani said that for the purchase of each IKCO vehicle the shareholder will receive a discount of ten to twenty tomans per share in the value of the car. In case the shareholder decides not to make a car purchase he will be provided between ten to twenty tomans per share in cash.
Shares of IKCO in TSE were traded for 138 tomans on Sunday. Ten to twenty tomans per share account to 7 to 14 percent per share.
Najmeddin also announced that the company plans to introduce eleven new vehicles, most of them will be produced under the license of foreign factories or the domestic models will just have a face-lift. Therefore, Najmeddin added that there won’t be much additional cost for the auto maker.
After meeting panel
Shareholders asked the directors the rationale behind introducing new models when the company is running up loss. One of the directors responded that based on Iranian law, which encourages automakers to improve the quality, IKCO has to optimize the technology, improve vehicle utility (e.g. mileage), and make the cars competitive.
The Money Credit Council of Iran has accepted to inject $1 billion into IKCO this year. However, the total IKCO’s debts and financial commitments amount to over $9 billion, mainly to public banks, according to the economic daily “Sarmayeh”. The daily added that this debt is more than nine times the company’s registered capital assets, signifying that the company is effectively bankrupt.
In order to meet its financial obligations the company has announced plans to sell IKCO’s shares in Parsian Bank. IKCO owns one-third of the bank’s shares with an estimated value of about 500 billion tomans ($500 million). Imani added that the company also plans to auction some 50 subsidiaries which are non-strategic, without naming them. He estimated that some one billion dollars can be raised this way.
Another plan in the pipeline is to convert some $2 billion in short-term liabilities with state banks into long-term liabilities. Imani added that the company is applying for more loans from banks in order to survive the financial crisis.
Auto industry experts have also suggested a merger with SAIPA Group, which has had a better financial year. Similar strategies have been used to save the ailing U.S. auto industries.
Experts also believe that IKCO’s investment in some countries is not profitable. IKCO has built manufacturing plants in Egypt, Senegal, and Syria. In addition, IKCO export destinations are Algeria, Jordan, Lebanon, Saudi Arabia, Venezuela, and several former Soviet states.
When analyzing the ailing European, North American and Japanese auto industry, most experts believe that the future of auto industry lies in third world countries, like China, India, and the like. It is no longer feasible to have the auto industry in the first world countries.
The question is if Iran establishes manufacturing prices in Syria, how is it able to compete with the ultra-cheap cars from other third world countries.
Shareholders expressed concerns over losses from setting-up auto-manufacturing plants abroad and exporting on subsidized prices.
In response, Najmeddin promised that the company will not have any exportation loss in 1389 and afterwards the exportation will be profitable implicitly stating they want to keep their presence in the foreign market. Plan to reduce the transportation cost of vehicles was also mentioned as a strategy to reduce the running cost.
In conclusion, the main reason the Iranian auto industry is not internationally competitive is because of the excessive protectionism it gets from the government. An example is the 100 percent duties (and sometimes even more) on foreign made cars.
This reduces competition within the country and provides the domestic auto industry with easy and monopolized access to the Iranian market.