Iran’s important car sector buckles under impact of sanctions

Iran’s authorities were confident that the country’s car industry would prove a bastion of economic resilience against the sweeping US sanctions imposed after Tehran’s nuclear deal with world powers collapsed.

But hopes that imports from countries such as China would compensate for the impact of the US curbs have not been realised. The plunging rial and shrinking state revenues have created a widespread shortage of crucial inputs and a sudden increase in prices, which have hit the industry hard and scuppered the hopes of would-be car owners.

“I can’t even think of it for the rest of my life,” said Mohammad Reza, a construction worker who had been saving for years to buy a Pride, Iran’s cheapest car. “Before it was difficult, now it’s impossible.”

Iran’s car industry is the country’s largest sector outside oil and gas, and was a big beneficiary of the optimism that followed the 2015 nuclear accord, as foreign auto companies, notably from France, began exploring Iran’s market.

But the sanctions that were imposed in 2018, when then-president Donald Trump’s pulled the US from the deal, ended that by devastating Iran’s economy, and in particular its auto industry that accounts for 4 per cent of the country’s gross domestic product and employs some 500,000 workers.

The French companies that had jumped into Iran’s market following the nuclear agreement began to pull out. PSA cancelled production deals worth €700mn, while Renault abandoned a plan to lift output to 350,000 vehicles a year.

The industry initially sought to fill the gap with domestic production and imports from China. Iran continued to produce some Peugeot models with half the parts sourced from the Chinese market, according to one industry executive.

However, carmakers have still been unable to meet demand at a reasonable cost. Production reached 1.5mn units in 2017, one of the highest levels ever, but from there the number fell below 1mn annually.

“As long as US sanctions continue, the gap between supply and demand will remain wide,” said Siamak Ghassemi, managing director of Tehran-based consultancy Bamdad Institute.

The cheapest unused locally made Peugeot 206 model on sale in a Tehran showroom this month cost IR5.2bn ($10,800) — some 15 times higher in rial terms than in May 2018, when sanctions were imposed, and 5.5 times more than the average annual wage of labourers in Iran.

In a bid to curb prices, Tehran has revised its own ban on car imports. It recently allowed in a limited number of new vehicles from China and is considering whether to permit the import of second-hand cars.

Iran’s defence industry did step in to produce some components, such as airbags and electronic control units, boosting production to 1.2mn vehicles in the most recent Iranian year that ended in March. Prices have also fallen slightly over the past two months as supply subsequently increased.

But such are the shortages that those with money to spend are limited to unused older models made by popular global vehicle brands, but offered at astronomical prices.

One Tehran showroom was selling an unused 2017 Mercedes-Benz E 200 class for IR170bn rials — about six times the price of this year’s model in western markets.

Even used foreign cars fetch premium prices. “Iran is perhaps the only country in the world where you buy a car, drive it for 100,000km for years and then sell it for double, triple or even quadruple the original price,” said a western diplomat in Tehran.

Some Iranians see buying a car that can at least hold its value as a way to insulate their savings against inflation that currently stands at 49 per cent, say analysts. The Iranian rial has lost more than a third of its value over the past year.

Many have put their savings in special bank accounts set up by the government to support domestic industries, including the car sector. Savers register their intention to purchase a product and successful applicants are chosen at random in the style of a lottery.

It is unclear how long customers generally wait before being able to buy a car from a local manufacturer such as Iran Khodro or Saipa. The companies declined to give details of their output or comment on any production problems.

Analysts have suggested the crisis in key industries such as the auto sector could prompt the Islamic republic to seek at least a temporary new nuclear agreement with the US to ease the economic pressure.

Saeed Laylaz, an analyst specialising in Iran’s political economy, did not rule out such a deal but said the country’s political isolation would remain a major problem for the car industry.

“How can an Iranian carmaker make profits and provide after-sale services when the country is fighting with other countries all the time?” he said. “Politics have overshadowed the economy. The car industry can only thrive if it can increase production beyond Iran’s market, and that needs a change of attitude in foreign policy.”