Masters of Montage: Peugeot and Iran's Auto Industry

Masters of Montage: Peugeot and Iran's Auto Industry

Earlier this month, Iran's leading auto manufacturer, Iran Khodro (IKCO), announced the re-entry of its French joint venture partner PSA Peugeot Citroen into the Iranian automobile market. The new deal carries special significance as it brings with it the potential for new models to be introduced into an Iranian market where designs created in the 1980s are still produced and sold. Additionally, the announced deal would see 30% of Iranian produced Peugeot cars exported to regional markets. As Iran Khodro’s managing director Hashem Yekke-Zare emphasized, the deal promises to create a regional auto manufacturing hub in the Persian Gulf.  

Speaking to the breadth of the deal, Yekke-Zare said "the terms and conditions of the contract are not comparable with any of the previously signed agreements with Peugeot." The news of the revised auto-production deal even managed to get Iranian investors excited as shares of Iran Khodro nudged up despite a stock market still sluggish given the lack of positive indicators from the ongoing nuclear negotiations.

While news of the new joint-venture was only reported in the Iranian press, leaving its veracity unclear, the importance of a possible nuclear agreement to a resurgence in automobile manufacturing in Iran, particularly by Renault and Peugeot, has been long anticipated in the international business press.

As part of the new deal, Iran Khodro would be expected to meet Peugeot's production guidelines in an effort to bring the Iranian-made cars in line with the overall international standard. The Peugeot 405 GLX and Peugeot Pars (405 variant) remain big sellers among locally produced cars for their low price and plentiful supply of locally produced spare parts. But the overall build-quality lags behind the French-made versions, and a new manufacturing agreement would seek to remedy this.

Iran’s auto industry has typically relied on the domestic assembly of foreign models, a process known locally by the French term montage. In the mid-twentieth century, Iran Khodro democratized car ownership in Iran by producing the tough and affordable Paykan, which was based on the British Hillman Hunter design. In subsequent years, French brands became more popular.

After the Islamic Revolution of 1979, both Iran Khodro and its main competitor Saipa, struggled to sign contracts with foreign joint venture partners. Eventually, Saipa would begin the domestic assembly of the much maligned, but now ubiquitous South Korean designed Kia Pride. Iran Khodro produced a more premium product in the form of the French designed Peugeot 405 sedan and 206 hatch. All three of these models have been produced in their millions in Iran (IKCO's top year of production was 2011, with 1.7 million vehicles produced).

The sanctions relief permitted for Iran’s automotive industry as part of the 2013 Joint Plan of Action agreement did enable a 43% rise in production in 2014 (after an effective industry shut down in 2012-2013), supported by increased demand due to a stabilizing economy. In terms of market share, available figures from January 2015 suggest that the Peugeot 405 was the top selling car in Iran, outpacing the much cheaper Saipa Pride. The higher-end version of the 405, the Peugeot Pars, was also a strong seller, with a 54% increase in production.

Usually, such strong sales figures would be a signal of a healthy auto industry. But in Iran, the huge demand for these dated models speaks more to an overall dearth of options. 20 year old designs continue to roll off assembly lines, having had only minimal upgrades. Iranian consumers are ready for newer, safer, and more efficient models.

For this reason, excitement over a new deal with Peugeot serves as a reminder of the tough times that had befallen the Iranian automotive production industry over the last decade. If the reports in the Iranian press are to be believed, Peugeot is angling to take advantage of their market dominance by offering new models for montage. Yet, despite the fact that the Peugeot lion logo is affixed to so many cars in Iran, it is hard to say whether Iranians will remain brand loyal when more options arrive in the market. Already, Chinese, Korean, and even domestically designed IKCO models are chipping away at Peugeot’s traditional market share.

Time is not on the company's side. Sooner or later a nuclear deal will be reached, and Iranian car companies small and large, new and old are likely to be offered a wide variety of contracts to produce a wider range of models. How will the Iranian car auto manufacturing look in five years? The jury is out on the direction of the industry, but a look into the state of the competition serves as a potentially useful guide.

Renault, Peugeot's largest competitor in both France and Iran, has also prepared itself for an eventual easing of sanctions. The company recently offered two new "affordable" models to Iranian consumers in the way of the latest versions of the Renault Clio and Captur models.

Renault is actually the French company to most recently introduce a new model to Iran, providing complete knock-down-kits (CKDs) of its Tondar model, sold in Europe as the Dacia Logan. Significantly, Renault’s strategy offers a different look into how cars are produced and sold in Iran. Renault has not employed the same JV tactics that Peugeot has favored, rather licensing its Tondar model for production by three Iranian companies.

Further, the Wall Street Journal reported in January that Renault last year wrote off about €500 million (roughly USD $580 million) that it had accumulated over the years from sales in Iran, stating that under current banking restrictions it cannot repatriate the money. In what would be a bold strategic move, Renault executives have discussed buying a stake in Iranian manufacturer Pars Khodro using some of those stranded funds, according to people familiar with the matter.

Saipa, Iran's second largest producer has also been on the offensive in recent years. The company most notable for the multiple iterations of the 1980's boxy Kia Pride or Saipa 131 has begun producing knock-down-kits from a range of Chinese car manufacturers–nine models in all–along with a four locally produced small cars. The jump in the number of models with Chinese automotive makers underscores the tenuousness of Peugeot’s market advtantage.

Consumer reports suggest that Iranian car buyers will quite happily make the jump to other car brands, and increasingly to Chinese brands. Iranian car buyers have tired of the cars offered by the oligopoly of local producers and yearn for newer models (updated dashboard and facelifted headlights no longer suffice). Moreover, apprehensions of the quality of Chinese cars are slowly diminishing due to the continually improving safety ratings of the updated models.

Modiran Vehicle Manufacturing (MVM) produces local versions of popular low cost models of China's Chery Automobiles. MVM sought to compete directly with IKCO and Peugeot with inexpensive cars for Iranian consumers. Appreciating the up-to-date styling and features, Iranian drivers took up their offer in their droves. These days, many of the smaller vehicle manufacturers in Iran have either started producing or hope to produce  variants of Chinese cars. This is likely the largest threat to Peugeot and Iran Khodro in the next 5 to 10 years. This also explains Saipa’s stance of doing away with expenditure on R&D and throwing its lot in with Chinese manufacturers.

The future of Iran’s automotive industry will drive the country’s manufacturing sector at large. Iran’s ability to both diversify its economy, and capitalize on its strong consumer base will depend on the capacity for companies like IKCO and Saipa to produce desirable cars. The principal question is whether the bulk of those cars will be of French, Korean, Chinese, or even domestic designs. The longstanding prevalence of Peugeot may be fortified in the aftermath of a nuclear agreement, but inroads by France’s Renault, Korea’s Kia and Hyundai, and Chinese brands like Chery, may change the composition of Iran’s streets and highways for good. 



Photo Credit: Ran When Parked

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