Chinese Invasion: The Future of Iran's Auto Industry
I have been an avid auto Iran industry watcher in recent years, and with sanctions relief on the horizon, opening the door to a more mature industry, it seems anything is possible.
Case in point is the announcement this week by Saipa, Iran's second largest auto producer, of a joint venture with a Chinese company called Brilliance. The two firms launched production lines for two new medium sized cars based on Brilliance designs.
The very announcement of the production of the Chinese cars has changed the playing field. For decades, the majority of so-called “montage” cars manufactured in Iran have been based on European designs. The arrival of Chinese designs both underscores the growing technical capacity of the Chinese auto industry, as well as the aggressive position Chinese companies are taking in Iran.
I previously wrote an article highlighting Peugeot's ultimately precarious position in the Iranian market. In that article I discussed two trends evidenced by the Saipa/Brilliance announcement. First, I mentioned that Peugeot's long standing position of de facto Iranian car maker, was becoming more precarious by the week, and secondly I pointed to the rise in popularity of affordable Chinese brands.
Perhaps Saipa's announcement of the ultra-affordable Brilliance cars (priced at under USD $10,000) is the first sign in the future dominance of Chinese brands.
The arrival of Chinese montage manufacturing now puts the ball in IKCO-Peugeot's court. Can they offer the same variety of cars at such affordable prices? A look at their new offering directly imported from Europe suggests they cannot. IKCO has touted repeatedly over the past 6 months about two specific models; The Renault Clio 4 and the Renault Captur, both originally hotly anticipated by the auto enthusiasts in Iran.
The fact remains that both of cars have failed to appear on the streets and their original estimated prices have grown incrementally with the months. The Captur has been pegged at just under 900 million rials or USD $30,000. Given the continuing hardships in Iran's economy, this price positions the Captur as a luxury model. But the fact remains that the Captur is not a luxury car.
The vast majority of car owners, desperate to offload their ageing Peugeot 206s, are definitely looking for a replacement, but will be loathed to spend three times the amount of the Brilliance design, a more direct replacement for the 206. Presumably Iran Khodro and Peugeot have other plans up their sleeves, though their reticence to push forward with offering new vehicles is giving Saipa the lead.
The two Chinese cars in question highlight the change in the markets ability to respond to need, or that or Saipa's ability to respond to demand. But, it's not all rosy for the likes of the Chinese firms, as scepticism about the quality and sustainability of their investments in Iran rises among the political and economic ruling class.
Recently, an article published in the Financial Tribune quoted the head of the Auto Parts Association of Iran, Arash Moheebi-Nejad, as saying that Iranian buyers would likely buy European cars over Chinese largely because of cultural affinity.
Besides sanctions, there is the issue of financing. As the rial has deeply depreciated against the US dollar in recent years, manufacturers' purchasing power and cash flow have decreased year-on-year, Moheebin-Nejad noted. "To boost the manufacturing sector, we need fresh financial resources so that dilapidated infrastructure can be renewed." Also, he added, "the sector must further benefit from contemporary global science and technology."
The statement by Moheebin-Nejad was a warning shot by the auto part manufacturers to the auto producers not to not jump in bed with the Chinese, who will privilege their own parts manufacturers, thereby reducing the prospects of Iran's domestic industry.
The local industry already under financial strain due to being owed money by the main auto players are now about to see their market share shrink further.
Moheebin-Nejad was not alone in his criticism of Chinese auto makers. In an news story published in April by IRNA, Sassan Ghorbanim the secretary general of the Iranian auto parts group said that Chinese cars "must reduce their prices by up to 20 percent" if they are to adequately incentivize Iranians away from more "loved European brands."
The Peugeot 301, pegged as the replacement for the Peugeot 405, with its 30 year old design, continues to be absent from Iranian dealer's lots, be it down to financial restrictions on the market, sanctions clogging up operations, or general hesitance on the part of Peugeot. In any case, the French are ceding market share to new entrants.
Looking at the rise of "Auto China" through the Iranian lens, misses the wider point. Audi, Mercedes Benz, Range Rover, BMW and a numerous other car buyers companies have set up production lines in China. This is proof of the maturity of Chinese manufacturing knowhow and integration into global supply chains. Moreover, the Chinese have already bought the Saab and Volvo brands outright.
Then one must consider Peugeot again. The April announcement that the French auto maker is undertaking a joint venture with Dongfeng motors, indicates the Chinese auto market is only going to grow in importance. Peugeot has traditionally seen Iran as their second largest market up until 2013 when sanctions were placed on Iran's auto makers. However, if manufacturing ramps-up in China, and continues to stagnate in Iran, this will no longer be true.
“It has been exciting and rewarding,” said Peugeot Chief Executive Carlos Tavares, referring to the first year of the partnership. “Our sales in China are quite significant and still growing so it’s an important contribution” to the recovery of PSA.
So Iranians should expect to see more Chinese cars on the street, and perhaps the next batch of Peugeot cars will be Chinese produced and delivered at Chahbahar. In the long run whether Iran's auto part makers like it or not, the Chinese are here to stay and the Brilliance/Saipa tie-up is just the beginning.
Photo Credit: Realiran.org