Iran Automakers Face Rocky Road as Output Falls While Demand Rises
Iran’s automakers have pre-sold more than 1 million vehicles, most of which are earmarked for delivery to customers in the current Iranian year that started in March. But with vehicle production declining at a steep rate, fulfilling these orders will be no easy task.
Following the reimposition of US secondary sanctions in November of last year, the Iranian economy has begun to contract. Inflation is driving up the price of goods, including automobiles.
For instance, the cheapest vehicle in the Iranian market, SAIPA’s Pride sedan, is now sold at IRR 450 million, just over USD 10,000. The same model was offered for just IRR 200 million one year ago. Despite the sharp increase in prices, demand for cars has also increased.
With the rial losing around 70 percent of its value over the past few months, many have rushed to convert their cash into safe-haven assets—including foreign currency, gold coins, real estate and even cars. Iranian consumers see cars as a safe investment and it is not uncommon for used cars to actually appreciate in value during periods of high-inflation.
Pre-orders for entry-level models like the Pride have also increased as consumers typically interested in more expensive models, such as locally produced Peugeots, are priced out of the luxury bracket.
With US sanctions taking a toll on the country’s auto industries, Iran’s automakers face an uphill battle to deliver the pre-ordered cars on time.
In order to service mounting debts, state automakers Iran Khodro and SAIPA sought permission from authorities to launch extended sales periods in which they racked-up 1 million preorders, with cash being injected into company balance sheets.
But just as the orders are becoming due, sanctions are restricting the import of critical parts and raw materials needed for the automakers to produce sufficient vehicles. Production output has declined significantly.
During the 11 months to February 20th, Iranian automotive companies produced 873,243 cars and commercial vehicles, indicating a 38 percent year-on-year decline in output. Output at Iran Khodro fell to 386,523 vehicles compared to 653,593 at the same period last year, reflecting a 41 percent decline. Meanwhile, total vehicle output at SAIPA has fallen to 381,085 from 605,348 at the same point last year—down 37 percent.
Foreign exchange rates have hit all-time highs and production costs have soared, forcing car companies to increase prices. With production plummeting, prices in the automotive market have been further distorted by dealers and middlemen who have sought to raise prices in the secondary market.
Iranian automakers must therefore strike a balance between supply constraints and robust demand. Pre-sale deposits are an important source of cash flow for car companies, but delays in delivery can cause negative publicity and also add to financial pressure. In a quirk of #Iran’s automotive market, pre-sale terms entitle customers to get back their deposit with accrued interest in the event they decide not to take delivery of the vehicle—in effect customer deposits are a kind of loan made to the automaker.
Given these pressures, Iran’s automakers must aim to sustain output despite headwinds. Firms have actually targeted increased output in the coming year. Leading automakers plan to produce at least 1.2 million vehicles in the 2019-2020 fiscal year, leveraging their experience in the previous sanctions period to boost local capacities and establish new supplier relationships.
Iranian car companies have tried to forge new ties with international automakers like Russian car company AvtoVAZ. SAIPA is in talks with AvtoVAZ to import auto parts and completely knocked down (CKD) kits from Russia to restore production to normal levels.
Iranian automakers have also sought to expand operations outside of Iran to help earn much needed cash. Earlier last week, a joint venture between Iran Khodro and Azermash OJSC started pre-sales of a jointly-produced Peugeot 206 in Azerbaijan.
The joint venture was inaugurated during a state visit to Baku by President Hassan Rouhani last March. In addition to the Peugeot 206, two sedan models designed by Iran Khodro, the Dena and Dena+, will be produced at the Khazar Car Factory, located in the Neftchala Industrial District in southeast Azerbaijan.
With an initial annual production capacity of 10,000 vehicles, the Khazar Car Factory will increase output to 15,000 vehicles. The joint venture partners hope to produce 6,000 vehicles this year.