Easing of Iranian Sanctions Provides a Much-Needed Boost to the French Car Industry

The French car industry is heavily reliant on Europe and so was particularly adversely impacted by the economic downturn in Europe. However, French producers are exploring new opportunities in the Iranian market after Iran pledged to freeze its nuclear programme.

New Opportunities in Iran

Following Iran’s pledge to freeze its nuclear programme, trade sanctions were temporarily lifted for six months in November 2013. The sanctions were eased for a list of selected goods, including car parts. However, the easing is only now beginning to take full effect.

Car production in Iran peaked at 1.4 million cars in 2011 (a large share of which was exported to the Middle East), the same year when trade sanctions were imposed. Total car sales in Iran now stand at more than 700,000 units annually, with the market’s potential remaining significant.

Following easing of the sanctions, car sales in Iran could grow by at least 50% to 2020 to reach 1.5 million units, said the CEO of Renault, Carlos Ghosn, at the World Economic Forum in Davos. This could be good news for French producers which once held a dominant share of the Iranian car market.

Comeback of French Producers

The largest car maker in France, PSA Peugeot Citroën, used to sell more than 450,000 cars in Iran annually and accounted for a third of the overall Iranian market before the trade sanctions were imposed. Trade sanctions have had a significant impact on the company. According to the financial officer of PSA Peugeot Citroën, the company’s operating profit fell by €10 million a month due to the sanctions.

Another French car giant, Renault, has also been negatively impacted by the trade sanctions. The company sold 100,000 cars to Iran in 2011, with sales then falling by half after the trade restrictions were imposed. In addition, Renault was forced to leave €200 million in Iranian banks and took a write-down on its Iranian operations in June 2013.

However, PSA Peugeot Citroën and Renault are planning on returning to the Iranian car market. The companies are now teaming up with local players Iran Khodro and Pars Khodro in an effort to restore their once strong positions. Renault is likely to benefit the most as demand for its affordable Dacia model (rebadged as Tondar in Iran) is high.

Will This Work?

Even though Iran offers enormous opportunities, French car producers still remain rather cautious. Political risk remains high and the easing of trade sanctions may only be temporary. However, the hopes of the international community are high and it is expected that talks concerning the permanent removal of trade sanctions will start in February 2014.

Even though the results might be temporary, this could still be a boost for the struggling French car industry. Iran could provide windfall profits and expand the global presence of French car producers. Euromonitor International forecasts that the French car industry will grow at a CAGR of 4% to 2017.