Sanctions on Iran Easing, Who’s Whooping?

Car production in Iran is expected to rev up again.

Who else is happy that the trade sanctions against Iran is easing? If Automology’s writing about it, then carmakers, of course.

Before foreign carmakers began withdrawing from dealings with Iran, the Iranian market was a juicy cash cow. The 2 largest foreign automaker with presence in the country were the French PSA Peugeot Citroen and South Korean Kia Motors. In 2011, Peugeot had sold 457 900 spare part kits that were then assembled into vehicles in Iran, which was the second largest sales volume after the automaker’s home country. But in February 2012, shipments were ceased, as mandated by the sanctions, causing Peugeot’s sales in Iran to fall 68% and losing a monthly earning of EUR10 million.

The trade embargo was akin to a kick in the groin (hitting them where it really hurts). Iran depends on the automotive industry for 10% of its GDP, making it the second most active industry, after oil and gas, of course. The US sanctions specifically prohibit “the sale, supply, or transfer to Iran of significant goods or services used in connection with the automotive sector of Iran.”

Not only did activities slacken considerably in the automotive industry in 2012, but government subsidies also ceased. It is estimated that Iran as a whole lost about USD120 billion in revenue since the US and EU sanctions took effect, in part also because the US further imposed penalties on other nations which traded with Iran. Where it once placed 5th in the world’s top car manufacturer in 2009, Iran has now declined to 18th according to statistics from OICA for the first 6 months of 2013, which records slightly more than 300 000 cars produced in the country.

The auto industry has had its fair share of ups and downs in the history of Iran. It first sprouted under the last Shah of Iran, only to decline during the revolution that overthrew his reign in 1979. It wasn’t until 20 years later, starting from year 2000, that rapid development saw annual vehicle production surpass 1 million in a short span of 7 years compared to only 200 000 during the era of the Shah, only to be slapped with sanctions in the last few years.

Most foreign automakers had entered the Iranian market via joint ventures. The largest domestic car automaker is Iran Khodro Company (IKCO), which manufactured Peugeot and Renault cars before the French companies had to withdraw or limit their dealings with Iran. The second largest automaker, SAIPA, had worked with Kia Motors since the early 90s, until the South Korean automaker had to stop exporting cars, assembly kits and spare parts to Iran because of the trade restrictions. Now that trade is opening up again, it is time for estranged friends to forgive and forget, as picking up where they left off can only benefit both parties’ economy.

Automakers stepping back onto Iranian soil might find that the situation has changed while they were gone. For instance, while there used to be some reliance on imported spare parts, conditions had necessitated the auto parts manufacturing sector to grow during the trade embargo and has elevated Iran as an auto parts exporter to regional countries. Still, the lifting of the auto sanctions is forecast to reestablish trade amounting to about USD500 million in just the first 6 months.

Goldman Sachs’ Jim O’Neill, who coined the term BRIC, names Iran as one of the next frontier markets. He notes that the population is young and finds western products appealing, making prospects for foreign businesses also very appealing.

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