With Iran agreeing to curb its nuclear program in return for the end of economic sanctions, carmakers are scrambling to the starting blocks in order to best benefit from the opening of a high-potential market to competition. If you are a regular BSCB reader, you will know that the best-selling cars in Iran are for the most part decades-old designs assembled locally as the lack of true competition in the market has stifled innovation. The domestic best-sellers revolve around just a handful of ageing staples: the Saipa Pride – in essence a 1986 Kia Pride, the Peugeot 405/Pars – a mere facelift of the original Peugeot 405 launched in 1987, the Peugeot 206, Iran Khodro Samand and the new leader: the Saipa Tiba.
We are therefore potentially on the cusp of a complete reshuffle of the Iranian car market. Freer trade with foreign countries will undoubtedly boost imports and manufacturers will make plans to build new factories in order to bypass import taxes and sell cars at more competitive prices. The prospects are looking very bright indeed for Iran. But just how much potential does the Iranian new car market hold? Car registrations ipeaked at 1.6 million in 2011 before collapsing as economic sanctions were strengthened. Domestic production also fell, by almost 1 million vehicles over the next two years – from 1.65 million in 2011 to 744.000 in 2013 – destroying more than 100,000 jobs. Since, as sanctions were partially relaxed in 2013, the market has recovered to a projected 1.2 million sales for 2015 according to IHS Automotive.
Iran’s population stands at 78.5 million – similar to Turkey or Germany – and a few indicators point to great pent-up demand in the market. The median age of vehicles on the road in Iran is over 20 years, and 55% of the population is under 30, but most haven’t had the opportunity to drive yet. With 200 vehicles per 1.000 inhabitants in 2011, Iran is, granted, well above China (113), at the same level as Thailand (206), but below other countries in the region such as Turkey (233), Saudi Arabia (336), Israel (358) or Lebanon (434). The potential is there, not just for car renewal but for new cars on the road as well. The end of the sanctions will see the market shoot up to 1.6 million sales in 2016, and we at BSCB see Iran evolve at 2 million annual registrations before the end of the decade, roughly equivalent in size to a market like France. Speaking of which, for once French manufacturers are the best placed to reap the benefit of a revival of the Iranian car market. What are the forces in place and who is most likely to win the race to Iranian market share?
Peugeot
Within hours of the announcement of the nuclear deal between Iran and Western powers, PSA Peugeot-Citroen had outlined its plan for new Iranian production to reclaim and defend the leading market position it held before sanctions were tightened four years ago – and kept unofficially since. In 2012 when General Motors took a 7% stake in PSA, Peugeot was forced to stop supplying CKD kits (complete knockdown) to Iranian factories for the Peugeot 405, Pars, 206 and 207. Overall, European and U.S. carmakers had to stop doing business in Iran during that time as economic sanctions were extended to the auto industry. However as we described in a recent Iran study (see Iran April 2015: Peugeot more than doubles production year-on-year), Peugeot’s original partner Iran Khodro managed to shift their spare parts supply to local companies and in effect sustained the production and sale of Peugeot models in Iran.
This way, Peugeot’s share of the Iranian market has remained extremely strong: just under 40% which is actually above its pre-2012 sanctions level. Peugeot insists the 350.000 cars produced in Iran in 2014 and sold mainly domestically are not booked in their accounts. Now, given the PSA-GM alliance has been dissolved and economic sanctions against Iran are in the process of being removed, Peugeot announced on 1 March 2015 it agreed to resume (“official”) local production of cars with Iran Khodro. Then last week PSA declared its intention to invest in full Iranian production of new models using its latest architectures and engines, for domestic sales first, then adding exports towards the near region later. Peugeot’s intentions are to use a different business model from before the sanctions: the group now wants 50:50 joint ventures and is willing to invest in new factories and hand over technology to partners in return for a greater share of the upside, says Automotive News.
Domestic manufacturers
Iranian carmakers Saipa and Iran Khodro are at a crossroads in 2015. The opening of their domestic market to the competition they dread but that consumers have been aching for could either kill them or make them stronger. Their respective limited ranges are based on dated Peugeot platforms, and much of their success will be dependent on how they manage to keep these existing ties with Peugeot, putting the French carmaker in an even stronger position that we argued above. With PSA-Peugeot Citroen engaged in long-term links with both Saipa and Iran Khodro, the latter two will need to work very hard to ensure at least a partial transfer of technology to remain competitive.
Up until last May, the best-selling model in Iran was the Saipa Pride, a 1986 Kia Pride sedan with only slight improvements added over the past three decades. Saipa currently holds 35% of its domestic car market with just two nameplates (the Pride and Tiba) while Iran Khodro has 14% with three (Samand, Runna and Dena). However Iran Khodro is a lot stronger in the pickup segment, where it may have played its best card yet with the launch a few months back of the Peugeot 405-based Arisun. The Arisun replaces the antediluvian Bardo, a pickup variant of the 1967 Iran Khodro Paykan which itself stayed in production in Iran for almost four decades, up until 2005.