Iranian carmakers’ good fortune unlikely to trickle down

By Alireza Ramezani, for Al-Monitor. Any opinions expressed are those of the author, and do not necessarily reflect the views of Iran Business News.

A majority of car consumers in Iran complain about the low quality and high prices of vehicles produced by local manufacturers, according to a poll conducted by news website Khabar Online.

Citing another poll, leading economic newspaper Donya-e Eqtesad reported Aug. 11 that more than half of Iranian car consumers think that the vehicles’ quality does not justify their prices.

The two leading Iranian automakers Iran Khodro Co. (IKCO) and SAIPA both saw a sharp decline in sales last year. The situation began to deteriorate after a nationwide campaign called on citizens to boycott new domestically produced cars in protest of their low quality.

Eventually, the government offered a stimulus package providing loans for potential consumers of Iranian-made cars. The package boosted sales without manufacturers needing to cut prices.

IKCO and SAIPA recently displayed their new car models in an automotive exhibition in the city of Mashhad, unveiling prices that critics say are still high. IKCO, which signed a 400 million euro ($446.5 million) joint venture with Peugeot a few months after the nuclear deal’s January 2016 implementation day, announced earlier this month that prices for Peugeot‘s 208, 2008, 301 and 508 models will range from 500 million rials ($16,000) to 1.8 billion rials ($57,900). Meanwhile, SAIPA revealed that prices for its Citroen models C4L, C3, C4 Aircross and C6 will start at 600 million rials ($19,300) and go up to 1.3 billion rials ($41,800).

Critics say the new cars are too expensive to be affordable to a majority of potential Iranian customers. “The price of a car may substantially increase for having what [automakers] call extra options,” mechanical engineer and businessman Mehdi Jabbari told Al-Monitor.

Of note, Mashhad quoted an IKCO official as recently saying that the Peugeot 301 model, for instance, could be sold between 470 million rials ($15,100) and 600 million rials ($19,300), depending on the installed options. Jabbari added, “It is an abuse of their monopoly. The options are in many cases essential parts of the car, like its airbags. The way they charge customers is not fair at all. They’ve been able to increase prices as they want, simply because they don’t have any real rival.”

IKCO and SAIPA, however, claim they do have rivals: Chinese companies hold about 10% of the Iranian auto market. These Chinese makers offer some 20 models, most of which are assembled by smaller companies in Iran. Ghadir, who works in a repair shop in central Tehran, talked to Al-Monitor on condition that his surname be withheld.

Chinese carmakers are in fact not serious rivals of local manufacturers, he said, explaining, “Their cars are full of problems, technically speaking.”

Although demand for automobiles has not yet substantially increased since the sanctions relief rolled out early this year, Entekhab News reported that prices rose by up to 10 million rials ($320) per vehicle in the last month.

Iran has so far signed agreements to set up joint ventures with Peugeot and Citroen to produce new models. However, the appetite for creating a regional car manufacturing hub in the country has pushed authorities to also pursue negotiations with other European carmakers, including Renault, Volkswagen and Fiat.

The looming arrival of these vehicles is good news for the Iranian automotive industry, which is set to be among the fastest growing sectors in the coming decade. At the same time, low- and middle-class consumers in Iran may increasingly argue that these developments will not benefit them unless competitiveness is restored.

Ali Shahindoust, an accounting manager at a private company, rhetorically asked Al-Monitor why Iranians “should pay double” the price of a European-made car for locally assembled vehicles with “poorer” quality.

He said, “Sanctions are an excuse to cover up their corruption and mismanagement,” in a reference to claims by Iranian carmakers that sanctions had a negative impact on the quality of their products. “We faced the same problems for long years even before sanctions intensified.”

The Iranian government protects the domestic auto industry through various means, including a tariff system, which increases prices of foreign-made vehicles by up to 150%, according to Ali Khaksari, a car market expert and lecturer from Allameh Tabatabai University.

“In comparison with global standards and given the average income of Iranian households, car prices in the country are 15 times those on global markets,” Khaksari said in a recent interview with the semi-official ISNA news agency.

The official car import duty is 40% for cars with up to 2000 cc motor capacity and 55% for 2000-2500 cc motors. However, additional costs, as listed in the following table, could drive prices for imported cars as high as double the original price, auto market analyst Farbod Zaveh told ISNA.

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The monopolistic practices and the decisions made by the state-run auto-pricing council, in which IKCO, SAIPA and auto parts companies have representatives, could be blamed most for the high prices.

One policy that could establish a balance in the market is the lowering of tariffs. However, it is not clear whether the government and the market players that benefit from the high import duties are supportive of such an idea.

With the administration of President Hassan Rouhani having failed so far to come up with an effective solution, consumers can only hope that Iran’s accession bid to the World Trade Organization will gain more international support in the coming years, so that the government will be forced to cut import tariffs in line with the organization’s trade rules.

As this process could take as long as a decade — in the most optimistic scenario — it appears that Iranians will have to wait a while for a “fair” auto market.

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