BY: Ebrahim Fallahi

Iran’s turbulent auto market: will prices calm down?

May 15, 2020 - 14:24

TEHRAN – Over the past few weeks, car prices in Iran have been skyrocketing despite claims of the market being stagnant.

The astonishingly high prices come despite the fact that the industry minister and chairman of the National Competition Council had announced, earlier this year, a new formula for car pricing, promising that prices will probably drop by 30 to 40 percent.

Some government sources have blamed rising prices on "organized brokerage", while those active in the car market believe the closure of some representative dealership offices to be the main reason for this situation; others believe that the recent rise in prices is due to general inflation.

Whatever the reason, the question is what the government should do to calm the turbulent market and pull the prices back to a normal level.

The reasons

The reduction of the output of the country’s major automakers has been pointed as one of the main reasons for the recent price hikes

Some experts also believe that the surging prices for some auto models like SAIPA Group’s Pride - which was traded at 900 million rials (about $21,430) in late April - were only valid on paper and cars were not actually traded at that price in the market.

In late April, Saeed Motameni, the president of Tehran’s Auto Dealers and Exhibitors Union, told IRNA: "When there is little supply from carmakers, people who have already bought a car as investment become the main players in the market and they are the ones who determine the prices [at least] on paper."

According to Motameni, in the first two months of the year, automakers, as in previous years, are pursuing a strategy for raising prices by intentional reduction of supply to the market.

“There is no monitoring and supervision on the auto dealership companies and agencies, and they price the car arbitrarily and impose their prices on the market.”

In early May, the head of Consumers and Producers Protection Organization, Abbas Tabesh was quoted by the press as saying that "According to statistics, [the country’s] car production currently is about 760,000 and car imports are also banned; this insufficient production disrupts the supply and demand."

Based on the Industry, Mining, and Trade Ministry data, the country’s auto output stood at 831,334 in the previous Iranian calendar year of 1398 (ended on March 19) which was 13 percent less than its preceding year 1397.

Earlier this month, President Hassan Rouhani blamed "hoarders" and "web sites that release daily car prices” for the turbulence in the auto market and called on the authorities to deal with them.

The reduction in the value of the national currency and the problems caused by the U.S. sanctions, including rising raw material prices and the issues regarding the banking transactions over the past two years have been also mentioned as major factors that pushed the car prices up.

The solution(s)

The government has been introducing various methods of pricing and distribution for the country’s auto industry, hoping to stabilize the market.

However, the ever-growing prices are a clear indication that these methods have been doomed to failure and the issue must be dealt with from a more fundamental perspective.

There are three major factors contributing to the high prices of automobiles in Iran: one is the totalitarian power of the country’s two major automakers that rule over 80 percent of the market, the second is the ban on the imports of foreign cars with the aim of supporting domestic production and finally the third factor is the weak auto parts sector which is not getting the support it needs and deserves from the government.

For many years, experts and scholars have warned against the monopolization of the auto industry in Iran, however, the government has not been willing to listen, claiming to support domestic production.

Giving the sole power to the government-owned companies has deprived the market of the right of healthy competition and the result has been low-quality cars with skyrocketing prices.

According to Motameni, Iran Khodro and SAIPA are imposing their policies on the market and that is not healthy at all.

“The balance between supply and demand means the balances in the market, so if automakers are unable [or aren’t willing] to increase supply, the government must allow car imports,” the official says.

With all the above being said, one important issue that should be taken into consideration is the fact that Iran is moving away from being a dependent economy, and domestic production is of great importance in the country’s current situation. That means importing cars will be great harm to the country’s auto industry, and against the national interest.

So, how the government is supposed to approach the issue? The answer is by supporting the private sector and backing the automakers.

If the capable private sector is given an opportunity they have the potential to grow and compete with the two giants that have grown beyond their competence on the lack of competition in the market.

Although by introducing new pricing methods the government might be able to calm the market in the short term, this ill industry needs a permanent remedy that is “healthy competition”.

Of course, monitoring and supervising the market is the very basic duty of any government so that should not be neglected as well.

EF/MA

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