January 2003 / No. 21

Auto Industry

Auto Industry’s Attempt
to Go International 

"In general, companies brought into being by mergers have an eye on new or growing markets in third world countries as well as the existing vast markets in North America, Europe and Japan."

The Iranian automobile industry has seen a lot of changes, fluctuations and successes its time. In fact, the industry has witnessed big transformations that came in the wake of major investments from mere auto assembling from imported kits to becoming a full-fledged manufacturer. Even though sometimes the Iranian auto industry's production dropped due to its lackluster supports or had to deal with hard currency shortages during the Iran-Iraq War, remarkable developments have taken place in the industry since 1994 following major investments that went hand in hand with the efforts of technicians, parts manufacturers, and management. It was due to these developments that the industry came up with increased domestic production, foreign exchange economy, new auto designs and improved quality. The role of design and engineering companies along with that of parts manufacturers in this leap forward by the domestic auto industry cannot be underestimated.

This article will examine the role of auto industry both nationally and internationally, the evolution of design and engineering companies as well as growth in domestic parts manufacture which together have had a major share in this development.

The world auto industry is now 120 years old, and the production of automobiles reached 58 million units per annum in 2000. There are around 100 million people involved in this industry directly or indirectly and in one way or another. The total worldwide sale by the industry reached $1.3 trillion in 2000 of which $32 billion was net profit. The $1.3 trillion constituted 7.3% of the overall gross international productivity, or 12% of the developed countries’ gross national productivity.

The number of cars presently running worldwide is estimated at 700 million, raising the auto industry to second place in the industrial manufacturing sector and third place in world economic activities following banking and oil refining in 2000.

The continuing investments in the auto industry, have led to the emergence of a spare production capacity that will stand at around 86 million per annum by 2008 from 80 million in 2000. Even though the spare capacity is showing a tendency to decline – having dropped from 24 million to 20 million – there is nevertheless a 20 million spare production capacity that will continue to exist by the year 2008. The existing global spare production capacity has prompted major world auto manufacturers to go after new markets, trying to lower the unengaged production capacity rate from below 70% to above 75% by 2008. One of the consequences of the existing excess production capacity has been market instability and increased market competitiveness that generally calls for high-speed innovation to meet the needs of the insatiable demand market. The existing spare production capacity followed with increased market competition have forced manufacturers to try to carve out a bigger segment of the market to maintain their share there. The industry is presently faced with a 28% drop in profit earning despite a 6.2% market growth and 5.5% production rise due to intensified competition.

"Six major world auto manufacturers – namely, General Motors, Daimler-Chrysler, Ford, Toyota, Volkswagen, and Renault-Nissan– together enjoy around 85% of the world auto market."

Merger Trend: To deal with the problems being faced now and in order to maintain market share and insure survival, the industry has turned to mergers as one possible remedy. 1998 saw 618 industry mergers – valued at $80 billion. There were also 546 and 580 deals valued respectively at $71 billion and $45 billion in 1999 and 2000 in the continuing merger trend. The industry continues to witness mergers despite 37% drop in their overall level and 40% drop in the average value of every merger deal. The industry, including its giant parts manufacturers, tries to take advantage of the economy of scale brought about by a major company in the wake of a merger move. Underlying merger moves by various companies is the desire to realize increased revenue from lower cost in procurement and distribution activities and increased efficiency.

In general, companies brought into being by mergers have an eye on new or growing markets in third world countries as well as the existing vast markets in North America, Europe and Japan. Indications are that major companies coming out of the mergers are after raising their present 158 million units production to 168 million by the end of the current decade. They also want to raise the proportion of the emerging markets’ share that stood at 25% in 2000 to 39% by that time. In other words, there is a potential 8% untapped demand in developed countries as compared to 20-60% potential demand in the emerging markets.

Six major world auto manufacturers – namely, General Motors, Daimler-Chrysler, Ford, Toyota, Volkswagen, and Renault-Nissan – together enjoy around 85% of the world's auto market. If the next four biggest international auto manufacturers’ names were added to the first six, the world's top ten auto manufacturers would dominate around 95% of the overall global market. These major auto companies seek bigger markets to improve their revenues and increase efficiency via mergers.

Auto Industry in Iran’s Economy:  The history of Iran's auto industry can be divided into three sections: 1969-1978, 1979-1993 and 1994 up to the present time. The time span in the first category, falling before the 1979 Iranian revolution, is called the period of “incomplete support” during which the industry depended heavily on oil-related hard currency revenues and its activity was mostly of assemblage nature. The time span in the second category partially coincided with the Iran-Iraq War (1980-1988). In this period cars were regarded as luxury items and did not receive the necessary attention due to the country’s preoccupation with war and the shortage of hard currency – as a result of which the production of cars dropped significantly. When the war ended, there was a brief time span, viewed retrospectively with regret, and referred to as the period of “lost opportunities” during which a huge sum of money, about $2 billion, was spent on importing 164,000 cars. The $2 billion could have been spent constructively to improve the auto industry and the opportunity was lost.

However, in 1993 a new move was launched in the industry which could truly be called auto manufacturing activity. But there must be a distinction made between this truly goal-oriented activity and activities taking place in other industry sectors. Auto manufacturing usually begins with assemblage in most countries  – that is the construction of domestic manufacturing bases for mass production. In between these two phases are parts design, auto design, manufacture of production line machinery and such.

The Iranian auto industry moved forward step by step up until the third phase, and due to the intense backwardness existent at the time, all domestic auto manufacturing units tried to move in a parallel course, in an attempt to compensate for the backwardness within a reasonable time.

Iran Khodro, a forerunner in the Iranian auto industry, produced around 60,000 cars in 1993 that rose to 360,000 units per annum by 2001. A comparison of the Iranian auto industry’s growth rate with other sectors of the national economy would show its remarkable leap forward in the less than a decade long period. It registered an average growth rate of 28% per year. The average growth rate for the country’s overall industry during the period in question was around 4.9%, while for the overall Iranian economy it was around 4%. One induction from the above comparison is that the average growth rate for the auto industry during the period considered was five times more than the industry at large and seven times more than the entire economy.

Improved productivity along with diversity helped bring about the long-sought-stability of the domestic market with the firm footing of the Iranian auto industry. Over the years the growth rate in the price of domestically manufactured cars has generally been below that of the inflation rate, helping auto prices enjoy relative stability. The industry even witnessed a decline in prices for a brief period in 2001. A comparison of the Iranian auto industry’s product quality in early 2001 with the corresponding period in the year before would draw attention to the improvement in the number of “very good” cars, thus substantiating the claim on better quality of domestically manufactured cars. This does not mean that the industry’s products are on par with established international auto standards – that will have to be realized in the future.

If the trend in the production of cars had not been realized in the way it was, the country would have had to pay around $7 billion to import its needed cars from abroad. And this goes to prove the degree of self-sufficiency and economy in the auto industry in the six year period between 1995 and 2001.

Characteristics of Iranian Auto Market: One of the characteristics of the Iranian auto market is the old age of the cars now running on the country’s roads. Some 40% of the country’s cars, or about two million units, are more than 20 years old. However, increased production in the second half of 1990s improved the age problem and lowered the age of 28% of the cars running to one to five years. Some 85% of the products by the Iranian auto manufacturing units pertain to the production of sedans. The production of pickups, minibuses and trucks fall lag behind sedans in importance. Iran Khodro company possesses around 60% of the Iranian sedan market. Adding the share of Iran Khodro Diesel division to that of the mother company, the two companies combined share will rise to 61% of the Iranian auto market. The Saipa group, with 23.7% of the Iranian auto market, is second to Iran Khodro.

Studies indicate that the Iranian market’s potential demand for cars stands at around half million units per year. The relatively high Iranian market demand is due to the country’s young age composition. Add to that the large number of cars with an average age of above 20 years that make up 40% of the total number of running cars. It should be mentioned that the per capita car consumption in Iran – standing at one unit for every 20 people – is low compared to other countries. The per capita car use stands at one for every 9.8 persons in neighboring Turkey, one to 1.3 in the United States, one to 5.7 in the Persian Gulf state of the United Arab Emirates, one to 1.8 in Japan and one to two in Europe. Consequently, there is plenty of room for improving Iran's per capita car consumption by boosting the public’s purchasing power and the national economy at large.

Iranian Auto Industry’s Plan: The Iranian auto industry is after the production of some half a million units in the fiscal year that begins on 21 March 2003. The path to realizing this production target is through improved design and engineering capability for the production of new models with quality parts, establishment of technical inspection companies, setting up research and development centers along with the expansion of auto industry products’ exports. Accordingly, the industry is projecting to raise its production to 950,000 units by 2006. Industry observers believe that the realization of the target production plan will depend to a large extent on a strategy that will be able to equip the industry with the drive to become a producer with international dimensions. The industry’s drive to materialize its target goal will require investment in the still novitiate part manufacturing sector, need for legal protection against auto imports from abroad and the absorption of foreign investment for the purpose of lowering auto technology transfer periods.

Industry observers believe achieving the target goal will depend on the realization of  added value in the entire production chain to make the Iranian auto industry a credible competition. If the above-mentioned requirement is partially met, then the industry’s credibility will come under question. Many developing countries in different parts of the world assemble European, American or Japanese cars but they are not regarded as auto producers. The Iranian auto industry needs to pay careful attention to such things as market tests to determine needs, classification of market demands, auto design, assemblage, production, sale as well as after-sale services. It must be borne in mind that the Iranian auto industry would not be regarded as a viable one if it produces and exports foreign brand cars. The realization of an auto manufacturing industry with a viable and competitive status will be possible only upon exercising control and discretion over all the different aspects of production.