◢ SAIPA and Citroen deal heralds new chapter for Iran's auto industry, but underlying technology transfer is the same as in previous IKCO/Peugeot deal
◢ The government has approved usance letters of credit to help automakers manage cash flow in the absence of long-term financing
SAIPA and Citroen Open New Chapter
SAIPA and Citroen have opened a new chapter of cooperation with a joint-venture set to invest more than EUR 300 million. The first joint product will enter the market by 2017. SAIPA’s Kashan plant will be 50% owned by Citroen. The cooperation will cover the entire value chain, from the design stage, part production and vehicle marketing, to sales and after sale services. In addition, it has been mandated that Citroen will export 30% of the products.
The Citroen brand was last present in Iran through a collaboration launched 12 years ago to produce the Xantia sedan. At the time, only 35% of the parts using in the assembly of the Xantia were produced domestically, including seats and batteries. The drivetrain and mechanicals were however all imported by Citroen. The new agreements reflect the maturation of Iran's auto industry, with a greater proportion of parts set to be produced domestically.
Importantly, Citroen is part of PSA Peugeot Citroen, the French automotive group. The new agreement with SAIPA covers the production of the Elysee sedan, which is built on the PF1 platform. Peugeot has signed its own agreement with Iran Khodro to produce the Peugeot 301, a car also built on the PF1 platform. In effect, these two agreements represent a single package of technology transfer to Iran's auto-industry. The main differentiation is in the presence of multiple French brands in Iran once again.
New Finance Option for Industry
The Rouhani administration has opened another avenue for financing automakers and auto parts suppliers to help them survive poor economic conditions. In their last meeting, the government approved automakers and producers of capital goods to use usance letters of credit, deferring payment on contract for us to 18 months but with interest added. This move will help the auto industry to manage cash flow. As it stands, the interest rates on offer from usance LCs in Iran is too high, but this may be one place where foreign banks can step in to provide defined financing solutions for Iran's auto industry.
Private Sector Chips Away at Marketshare
According to the Standard and Quality Inspection Company of Iran, the three major stated-owned automakers including SAIPA, Iran Khodro, and Pars Khodro maintain a combined 86.5% of the market share, down from 90% in the previous year. Private-sector manufacturers held 11.4%, up from 7%, and imports accounted for 2.1% of the market. Private sector producers will continue to make headway in the domestic market. Although Iran Khodro and SAIPA are bringing new products to market, private firms have capitalized on the latency of the state-players to earn a reputation based on newer cars and features, higher quality, and better after sales service. In the case of Chinese cars, aggressive pricing will also continue to drive growth in market share.
Automakers To Sell Off Their Subsidiaries
As foreign automakers eye the Iranian market and plan a fresh presence in Iran, domestic automakers are making reforms to prepare themselves for mutual cooperation. Across the industry, Iranian auto markets are streamlining their operations and balance sheets by selling-off subsidiaries that are operating at a loss or assets that are unrelated to the core business.
Iran Khodro is drafting plans to sell 28 subsidiary firms to help reduce the company debt and reduce the cash flow challenges in the company. Part of the reason for this move is the unwillingness of Iran's banks to further finance expansion in the auto industry, which is already debt-laden.
At this stage, the streamlining is not going so far as to break-up the vertical integration of the industry. The immense economic influence of Iran's auto sector led to a large degree of horizontal acquisitions over the years that did not directly support the core business of producing and marketing cars. This is where the first assets will be sold.
But it also extends to subsidiaries that have standalone potential. Both SAIPA and Iran Khodro are considering selling their "Diesel" divisions which produce trucks and other commercial vehicles.