FDI in Iran's auto industry picks up speed

It's a case of deja vu all over again. The Americans and Europeans and the French, in particular - are taking opposite sides in a standoff over a hostile state in the Gulf region, which one side claims to be part of the axis of evil and the other sees as a lucrative trade partner.

This time, however, the country in question is Iran rather than Iraq, and, at least for now, the Europeans appear to be winning the diplomatic battle. In the meantime, European firms - and especially auto manufacturers - are moving fast to sign major deals with local Iranian companies.

Growth potential

According to French automaker Peugeot, Iran has one car for every 21 inhabitants. Turkey has one for every 12. Western European countries and Japan have nearly one car for every two people. That indicates tremendous market growth potential, and in part explains substantial foreign car manufacturer interest in the Iranian market.

Iran's domestic vehicle production is growing quickly. In the first quarter of the Iranian year starting March 20th, Iran produced 187,135 light and heavy vehicles, including 165,000 automobiles; 52,500 Pride models were manufactured, followed by 31,100 Paykan cars and 19,500 Peugeot 405 injection models.

In July, Iran resumed the importation of foreign cars following a 10-year break. The import arrangement includes 130 percent customs fees, and a 10,000-car total to year-end. The customs fees are intended to support the domestic car industry, as well as facilitate the import
of cars to meet the chronic shortage of new vehicles.This fits with the stated interests of Iranian manufacturers.

Iran Khodro Industrial Group (Iran Khodro) managing director Manouchehr Manteqi said the company is not against car importations, but that it should be done through appropriate channels, also urging support for the domestic car manufacturing industry. According to one source, import orders have been placed by the representative of the large foreign car manufacturing companies in Iran.

The import fees will generate some 6 trillion rials ($760 million) for the government in the current Iranian fiscal year.Joint ventures. Over the last few years several major automobile manufacturing companies from have traveled to Iran to explore opportunities there.

In May, French company Renault-Nissan formed a joint-venture car manufacturing company called Renault-Pars to produce light passenger vehicles in Iran. Fifty-one percent of the company's shares are owned by Renault-Nissan, and the remaining 49 percent by the Automotive Industry Development Company, a concern owned by the Iran's two main government-controlled carmakers, the Saipa Group and Iran Khodro.

In 2006, Renault-Pars will produce the Logan under Renault license, a vehicle based on Type B of the L90 series of Renault automobiles. Currently manufactured in Romania, there are also plans to produce the Logan in Russia, Morocco, Colombia and possibly China.

The Iranian Logan will feature a 16-valve 1.6-liter engine producing 107 horsepower. According to Andreas Gabriel, managing director of Renault-Pars, the Logan will be sold in the Iranian market for 65-80 million rials.

Chairman of Iran's Industrial Development and Renovation Organization, Reza Veiseh, said at the launch of the Renault-Pars company that it constitutes a turning point in the Iranian automobile industry. Veiseh said: Half the L90 production volume will be targeted for exports
to 26 countries.

Chairman of the Renault-Nissan Group, Louis Schweitzer, said the company has a startup production capacity of 150,000 units per year with an initial capital of 300 million euros. Schweitzer said that production is expected to increase to 500,000 units in the coming few years.

He added that the Iranian market has the capacity to absorb up to 300,000 L90 units per year. Our final objective is to turn Iran into a hub for the export of the Renault L90, said Schweitzer, who is anticipated to be succeeded by Lebanese-born Carlos Ghosn, head of Nissan, which has a 40 percent stake in Renault. According to Renault, the Logan could eventually be introduced in markets in Western Europe as well.

French company PSA Peugeot-Citroën, Renault's key domestic competitor, already has an established presence in Iran. Under a licensing agreement, the company sells kits for several models, including the Peugeot 206, a sports car that according to Iran News has become a status symbol in Tehran. As an indication of local input, Peugeot employs just 15 people to oversee the assembly of its cars, with local employees in the government-owned factories doing the bulk of the work.

PSA Peugeot-Citroën has signed deals with Iran Khodro to make new versions of its 206 and 307 cars in Iran, the PSA Peugeot-Citroën unit said. An agreement has been signed to make a new version of its compact 206 car within two years, and a new version of the 307 in two to three years.

In July, Germany's Volkswagen (VW) stepped forward and finalized a deal with Kerman Automotive Industries to manufacture cars in Iran. The deal was signed in the city of Bam, which suffered a devastating earthquake on December 26, 2003. As part of the deal, an automobile manufacturing plant is to be built in the city by the end of 2004.

VW plans to produce more than 20,000 cars each year in Iran. The factory will produce VW's Gol model, with parts imported from Brazil. If the partnership is successful VW will consider plans to launch local manufacturing within a few years.

Export markets

The cars will be assembled by BAMCO, a subsidiary of Kerman Automotive Industries, and will be sold in Iran by an exclusive dealer network owned by Modiran Pars Co., another Kerman subsidiary. The 1.8-liter four-door Comfortline version of the Gol is essentially a stripped-down version of the VW Golf developed in Brazil.

VW also sells Gol with some success in Argentina, Mexico, China, South Africa and Eastern Europe. In its tie-ups with foreign car manufacturers, Iran hopes for technological exchange.

Toward the end of July, Minister of Industries and Mines Es'haq Jahangiri in a meeting with the managing director of Renault-Nissan Alliance called for cooperation between the research departments of France's Renault and Iran Khodro as well as Saipa. We need the expertise of the French Renault Company in designing the automobile body, he added.

In response, Schweitzer said: 'It is a joint undertaking for full transfer of technology to the Iranian partner.' The size of the Renault-Pars investment at 300 million euros is a significant gesture of faith in Iranian industry.

The amount nearly equals total foreign investment in Iran by French companies in 2002. Renault's investment is the first large-scale, long-term direct investment in Iran by a French company since the 1979 revolution. It could help pioneer further foreign investment flows into the country.

If the foreign tie-ups prove successful ,Iran could also graduate into becoming a substantial car exporter. In June, Veiseh said Iran plans to export $150 million worth of automobiles by the end of 2004, $350 million in 2005, and $1 billion in four years.

Besides partnering foreign companies in Iran, the country is also exploring opportunities for partnerships in other developing countries. During a May visit to Iran, Syrian Industry Minister Muhammad Safi Abu-Dan praised developments in the Iranian auto industry and urged expansion of cooperation between Tehran and Damascus in the sector.

Inspecting the production line of Samand sedans, he said they have negotiated with the company's officials to launch its manufacturing line in Syria. According to the preliminary agreement signed between the two countries' officials, some 5,000-15,000 vehicles are to be manufactured in the first and second phases respectively.

Indian car manufacturers are also in the mix, although there are some difficulties. In August Iran Khodro announced that it is starting negotiations with Indian companies for outsourcing cars, saying that the pace of its discussions with initial target Tata Motors is unsatisfactory.

Iran Khodro had started negotiations with Tata Motors to outsource cars in the A and B segments. This would have meant Indica cars being shipped to Iran. The company is reportedly still interested, but Iran Khodro has started looking at other potential suitors in India.
That Tata Motors may have second thoughts about cooperation with Iran is understandable.

In August, the vice chairman of the Majlis Industries and Mines Commission, Hamid-Reza Katuzian, said that the L90 project jeopardizes the country's industrial independence and should be scrapped as soon as possible. This is hardly a comment to reassure potential foreign partners and investors.

Trade politics

Katuzian criticized the L90 project as a step backwards to the assembly era, which arguably it is. However, assembly that demands international quality vehicles can filter learning and competitiveness into Iran's homegrown manufacturing industry.

The commission vice-chairman also said it would be better to improve the quality of domestic auto manufacturing technology rather than blindly adopting the imported L90 technology. Whether the Majlis will interfere further and block fruition of the L90 project, or other foreign car manufacturer interest, is unclear.

Given that the Seventh Majlis is far more conservative than its predecessor, owing to the hardline Guardian Council disqualifying thousands of liberal candidates from the elections held earlier this year, it hardly leans toward greater foreign economic involvement in the country.

If the foreign partnerships do pan out, Iran will be in pole position to serve as the key regional car manufacturer serving the Middle East.

Other countries in the region, notably Egypt, have substantial car assembly arrangements with companies including Daimler-Chrysler and BMW, but Iran has a more substantial automotive components sector that could underpin attainment of the country's status as a truly international manufacturer and exporter.