Home > 1999-2002 from Middle East, Iran > IRAN: Production drive as demand takes off

IRAN: Production drive as demand takes off

June 14, 2000

With imports restricted and the four protected manufacturers producing just half of domestic requirements, buy-back deals are being stuck with foreign partners. By Guy Dinmore

A Hollywood director seeking an authentic film-set for a 1960s or 70s car chase need look no further than the congested streets of Tehran.

Amid clouds of smoke that make the Iranian capital one of the world’s most polluted cities, ancient Buicks and Cadillacs from the days of the last Shah battle for space with the ubiquitous Paykan – a local version of the old British Hillman Hunter – as well as 2-CV Citroens and wobbly Land Rovers.
orteza Alviri, the city’s mayor, has suggested 200,000 cars, about a tenth of Tehran’s total, should be consigned to the scrapheap.

But just as tenders to exploit Iran’s rich natural resources are drawing strong competition from foreign oil-giants, the emerging car industry is starting to attract European and Asian auto-makers.

US companies have also reopened contacts, although sanctions imposed by Washington currently block their investment in Iran.

With a population of more than 60m, cheap labour and raw materials, Iran is an attractive market with an estimated domestic demand of 500,000 cars a year. In the year to March 21, 2000, Iran produced only 240,000 vehicles.

With imports close to zero, the consumer is not happy. As the industry magazine Sanat-e Haml-o-Naql comments: “Nowhere else in the world do people have to pay such high prices for cars, wait a long time for delivery, pay 3 per cent extra for after-sales services (which they do not receive) and then drive cars with high fuel consumption and non-standard emission of pollutants.

Against this background, Manouchehr Gharavi, managing-director of Iran Khodro, by far the largest of Iran’s four main car producers, is a frequent target of press criticism. His support for the official policy of tight protection of Iran’s car-makers, modelled on the Malaysian experience, has been fiercely attacked.

So much so that government recently announced it would consider allowing imports of foreign cars amounting to 10 per cent of domestic production.

r Gharavi is ambitious and powerful. Iran Khodro, he told the FT, holds 67 per cent of the car market, is Iran’s biggest corporation and the biggest car producer in the Middle East.

The bulk of production last year was taken up by the old-fashioned Paykan (Arrow), originally assembled from kits imported from Britain but now 97 per cent of Iranian content.

Iran Khodro survives financially on down-payments for the Paykan. The waiting list, once five years, has been cut to 14 months. Gradually, the Paykan, the workhorse of Iran, is to be phased out.

Iran Khodro has a close relationship with Peugeot, producing the 405, and has plans to assemble the 206 later this year.

Prototypes of Iran’s locally designed and produced national car, known as the X-7 but to be called the Paykan 2000, are being tested by Mira in Britain. Production from a robotised assembly line, built with European and South Korean assistance, is to start this year.

The roomy saloon has a Peugeot powertrain and could represent Iran’s first serious attempt to break into the export market. A compact, a mini-Paykan is also being designed at Iran Khodro’s impressive design centre.

ercedes is also an Iran Khodro partner in diesel engines for bus production.

r Gharavi says it has invested $500m in the past four years. “Our plan is globalisation: to increase production to worldwide levels. Our 10-year target is 1m units a year at world standards. Peugeot and Mercedes will be our strategic partners.”

For the moment, no foreign car partner has yet taken a shareholding in an Iranian company. Similar to the “buy-back” contracts negotiated with oil companies, Iran pays for foreign technology and parts in cash and components, in “buy-back” type deals. Mr Gharavi forecasts Iran Khodro will sell more to Peugeot than it buys in three to four years’ time.

Some analysts question his optimism, given the well-known problems with quality control. Iran Khodro is nominally a public company, quoted on the Tehran Stock Exchange. But 45 per cent of its shares are owned by IDRO, a state holding company for nationalised industries, with the managing director appointed by government.

r Gharavi’s closest competitor is Saipa. In March, Saipa joined with the state-run Social Security Investment Company to buy 85 per cent of Pars Khodro, Iran’s third largest car maker, for about $82m.

The sale of Pars Khodro, owned by General Motors before the 1979 Islamic Revolution, was the biggest privatisation sale conducted through the Tehran Stock Exchange.

Saipa, is effectively controlled by the government, which owns 48 per cent. It assembles a compact car under licence from South Korea’s Kia. This year it also reached agreement with Citro�n, Peugeot’s sister company, to assemble the Xantia.

Production is scheduled to start in November with 10,000 to 15,000 units a year. Saipa avoids publicity and turned down requests from the FT for interviews.

Industry analysts question Saipa’s financial strength and suggest it needs a strategic foreign partner, rather than signing assembly “buy- back” agreements.

Fiat had been negotiating taking a stake in Pars Khodro before its sale to Saipa. However, talks continue with Saipa on a deal to assemble the Palio.

Negotiations between Pars Khodro and Volkswagen on assembling a Skoda model broke down. Other car producers in Iran include Kerman Khodro, which assembles the Cielo under licence from Daewoo, and the Bahman Group, which has an assembly licence from Mazda.

Little publicity has been given to Kish Khodro, a private company that has built a car plant on Kish Island, one of Iran’s three free trade zones. The Sinad is said to be “100 per cent” Iranian, except for its Renault engine, and the plant has an annual capacity of 5,000 units.

The official inauguration of the plant has been delayed, although it is not clear why.

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