Iran Aims to Privatise its Motor Vehicle Industry

New opportunities have emerged for foreign investors, following the lifting of sanctions against Iran in early 2016. Motor vehicles, the largest manufacturing industry in Iran, is particularly tempting for foreign companies. As we predicted, French car companies are paving the way in Iran, but more opportunities are expected to arise as Iran aims to privatise and liberalise its automotive industry.

New opportunities for car manufacturers in Iran

Following Iran’s pledge to roll backs the scope of its nuclear activities, economic sanctions were lifted in 2016, providing new opportunities in this untapped market. Iran’s attractiveness for foreign investors was further boosted by President Rohani’s (an active economic reformer) supporters’ victory in elections.

Motor vehicles, with production value at US$23.7 billion in 2014, is the largest manufacturing industry in Iran and is particularly attractive for foreign companies. Car production in Iran peaked at 1.6 million cars in 2011, declining to around 980,000 units in 2015 due to economic sanctions being imposed.

Yet Iran remains the largest car producer by volume in the Middle East and Africa and is expected to provide future gains for car producers. Car production in Iran is forecast to reach 1.6 million units by 2018 and 2.0 million by 2022. A large share of this production is expected to be exported to the dynamic Middle East market.

French car producers pave the way for investments in Iran

As we predicted, French car manufacturers were the first to re-enter Iran. In January 2016 PSA Peugeot Citroën (PSA) announced a joint venture with Iran Khodro. PSA will invest €400 million in manufacturing facilities and research and development over the next five years. PSA plans to manufacture Peugeot 208, 2008 and 301 models in Iran and turn the country into a regional export hub.

Another French car producer, Renault, also has a joint venture in Iran, together with Industrial Development and Renovation Organization of Iran. The joint venture is able to produce 10,000 Renault Sandero cars per year. In 2016, following the removal of sanctions, Renault plans to further expand production of Logan and Sandero models, as well as introduce two new Renault models in Iran.

Other car manufacturers are expected to follow French companies once the political situation in Iran settles. For example, Fiat Chrysler Automobiles (FCA) has expressed interest in producing commercial cars and buses in Iran. US car producers are also likely to follow, tempted by Iranian consumers’ preference towards American products, with US-built cars and trucks already making a comeback in the Iranian new car market.

Iranian authorities aim to privatise car industry, but several roadblocks remain

Even though Iran offers enormous opportunities, the Iranian car industry is characterised by outdated technology and production methods. Since the imposition of sanctions in 2011, the Iranian car industry has suffered from a chronic lack of investment. Furthermore, the Iranian car industry remains largely state-owned, which is hindering the industry’s modernisation and growth.

Yet Iran is determined to reboot its car industry. In March 2016, President Rouhani expressed plans to privatise the industry and encourage joint ventures in order to make the Iranian automotive industry more technologically-advanced and efficient. More importantly, Iran aims to remove government protection on domestically-made cars, although this goal might be harder to achieve due to resistance from political opponents.

Several other hurdles, such as complicated legislation, bureaucracy and generally fragmented supply networks remain, and might hinder foreign investment, at least in the short-term. Despite this, Iran remains an attractive market for car producers due to its vast untapped potential, where early entrants can reap major gains.