The Automotive Industry in 2015: From Sanctions on New Cars to New Contracts

The year 2015 was a tumultuous one for Iran's automotive industry, marked by hopes stemming from the nuclear agreement, followed by a shock and widespread recession in the car market, and ultimately the sanctions on purchasing new cars which were eventually broken by government loans. The year began with both the public and automakers closely monitoring the developments of the nuclear agreement. Due to positive signs, there was a sense of optimism in Iran's industry. Overall, in the first five months of 2015, car production increased by 16% compared to the same period the previous year. Starting from June 2015, the car market gradually entered a recession. Although many expected demand for car purchases to increase with the arrival of summer, the market was waiting for the outcome of the nuclear negotiations, and this expectation continued into July. With the beginning of August and the agreement between Iran and the P5+1 group, many hoped that people would turn to buying cars, but news of agreements between Iranian automakers and major Western companies such as Mercedes-Benz, Peugeot, Renault, Volkswagen, and Fiat for the production of new cars shocked the market. Some customers held back, waiting for new cars to enter the market, resulting in around 80,000 cars accumulating in automakers' warehouses over two months. Following this event, car production, which was hoped to reach around 1.5 million units by the end of 2015, slowed significantly. Due to this drop in car production, Mohammad Reza Nematzadeh, the Minister of Industry in Hassan Rouhani's cabinet, deemed the public's lack of interest in purchasing domestic cars as 'treason' to the country and labeled those supporting this campaign as 'anti-revolutionary' and traitors. Hashim Yekehzare, CEO of Iran Khodro Industrial Group, also stated in response to market reactions that people should not expect a reduction in car prices following the Geneva agreement. He emphasized that his company had no plans to reduce car prices and that the public needed to regain purchasing power after the nuclear agreement. Nevertheless, the 'Buy New Cars, Forbidden' campaign can only be considered one of the reasons for the decline in demand. Several factors cited by experts for the drop in demand include people's expectations for new models, a lack of liquidity, and public dissatisfaction with the quality and price of domestic products. After a significant drop in car production in September, car prices in the Iranian market also decreased several times, further demonstrating the impact of the 'Buy New Cars, Forbidden' campaign on Iran's automotive industry. The recession in the car market had progressed to the point that a letter from four ministers to the President also referenced it. The letter stated that over 100,000 cars were currently stored in automakers' warehouses, and financial statements showed accumulated losses of 200 billion tomans for the automotive industry. With the expansion of this recession, the government took action, and Mohammad Baqer Nobakht, head of the Management and Planning Organization, announced that the government had allocated about 200 billion tomans in subsidies for production, part of which would be provided to the automotive industry. This government assistance was proposed in the form of a 25 million toman loan, which ultimately broke the sanctions on purchasing new cars. Although this loan was expected to be ongoing, it was halted after 110,000 cars were sold from automakers' warehouses within five days. While the loan sales plan had reached its fifth day, the Central Bank sent a letter to the Ministry of Industry, Mine, and Trade stating that the financial resources needed for purchasing domestically produced cars by banks would only be provided up to a limit of 110,000 units, and if exceeded, financing future productions from this source would not be possible. Although this loan was able to alleviate the crisis for automakers in selling their cars, the shock of recession and sanctions was so severe that car production, which was expected to grow compared to 2014, actually decreased, such that by the end of February 2016, car production in 2015 had decreased by about 15% compared to 2014. However, not all events for Iran's automotive industry were discouraging, as the return of foreign automakers and the signing of new contracts brought fresh hope for the development of this industry in Iran. Following the nuclear agreement, foreign companies entered a major race to enter the Iranian market, with competition between German and French companies being particularly noticeable. But will this competition be different from before the sanctions were imposed? Hashim Yekehzare, CEO of Iran Khodro, emphasized that 'the Iran Khodro Industrial Group has adopted a completely different approach in this new round of international cooperation, emphasizing the presence and joint investment of the counterpart.' Less than 48 hours after the sanctions were lifted, the German holding company Daimler, owner of Mercedes-Benz, signed the first memorandum for the renewed production of its products in Iran with Iran Khodro Diesel. In this memorandum, Mercedes-Benz is set to invest directly in Iran and establish a joint company with Iran Khodro Diesel. Following the contract with Daimler, the second major contract was with Peugeot, which was signed during the Iranian President's visit to France. This contract fundamentally differs from previous contracts between Iran Khodro and Peugeot. For the first time, Peugeot is entering the Iranian automotive industry through direct financial investment. The establishment of a joint Iranian-French company with 50% ownership by each party is the most important part of this contract, which will lead to the transfer of the latest global technology, the production of new products, and the utilization of export markets. The production of 200,000 new models, including the 208, 2008, and 301 per year, is among the items agreed upon by both parties, with 30% of this amount to be exported to Peugeot's sales network. Besides Peugeot, Renault also has many plans for investment in Iran. Renault intends to produce the Kwid model, which is the cheapest product of this company, in Iran and introduce it as a replacement for the Pride. Renault also plans new investments in Iran up to 500 million euros and the acquisition of an automotive company and several parts manufacturing units. This company is set to sign its first contract with Saipa and its second contract with Iran Khodro. Beyond Renault, the presence of various automakers in Iran, including Volkswagen, Fiat, Suzuki, Nissan, Mazda, and Toyota, has also strengthened, with each of these automakers negotiating with various parties for car production in Iran through joint investment methods. The ban on purchasing new cars in 2015 demonstrated that the public was extremely dissatisfied with the low quality and variety of cars. Over the past four years, the Iranian people have become fed up due to a two to three-fold increase in car prices and a significant decline in quality due to sanctions. Perhaps the only way to make the public a bit more hopeful about the automotive industry in the coming years is the production of new products by prominent automakers with suitable quality in Iran, products that optimistically require two to three years for implementation.