January 2003 / No. 21

Auto Industry

"As long as I am minister, I will exert my utmost effort to enhance the Iranian auto industry, to increase its quality and decrease its price."

Minster of Mines and Metals, Eshagh Jahangiri declared that for as long as I am minister, I will exert my utmost effort to enhance the Iranian auto industry, to increase its quality and decrease its price. I will continue my policies, and not permit the excessive import of foreign automobiles – which would be a gross disregard of our immense domestic capabilities. It would also jeopardize the future of the auto industry’s 500,000 employees. With the policies we have implemented, Iran will become the region’s pole of auto manufacturing in the near future. With such capability and potential it is our country’s irrefutable right, which we will not deny it.

Jahangiri stated that from 1991 to 2001 the policy of Iran’s auto industry was to replace imported cars with domestically manufactured ones. Auto manufacturing is a more complicated industry than, for example, steel or petrochemistry whose products are in fact raw materials for other industries. In auto manufacturing 14,000 components are assembled into a single product. For the first time ever, the third development plan lifted the ban on auto imports, but imposed tariffs. Auto makers have consented to this system and consider it fair. Up until two years ago, you could not import some 2200 items without the approval of the Ministry of Mines and Metals, but now the items on that list are merely 100 health products.

He continued that some argue that Iran imposes exorbitant tariffs, but that is not the case, as from our list of 4,200 items only a mere handful have what can be considered a high tariff. Nonetheless, efforts are underway to set more realistic tariff rates; but when many countries – even those without an auto industry – fix tariffs at 150% to 220% how can some expect us to adopt low tariff rates? I believe tariffs should be balanced and reasonable and next year our foreign automobile import will be proportional to our export.

Jahangiri believes that auto imports should follow a clear plan, rather than become a way to cover budget deficit. Until last year, auto makers paid a 10% state tax on every car that left their production lines. We were against this practice, arguing why should the government receive a 10% tax over and above the numerous tolls and tariffs it already receives? The answer we got was that the government needs money and there is plenty of that circulating the auto industry. The government-appointed managers of Iran’s few auto manufacturing companies, as you can imagine, did not voice much of an objection. Last year we changed this practice and advised the government to obtain the same money by imposing tariffs on those domestically manufactured cars that use foreign parts. The more foreign parts the more tariffs. The auto manufacturers who used at least 50% domestic parts only paid a tariff of 10% rather than the usual 60%. As a result the tariff on some cars like Maxima, Peugeot 206 and Mazda increased while that of Paykan, Pride and Peugeot 405 decreased.

The Minster said that the Ministry of Mines and Metals welcomes competition and the entry of the private sector into the auto industry. However, any new car introduced to the market must have an assembly and repair center and the manufacturer is responsible for its quality. Traditionally, when a defect was found in a domestically manufactured car the finger has pointed at part manufacturers. This is no longer a valid excuse, as auto makers are now allowed to import the parts they need if they are not satisfied with the quality of the domestic ones. Still, in most cases domestic parts – for which tariffs are not paid – are preferred. Notwithstanding, in the year’s outset we presented the Cabinet with a projected import of $150 million worth of cars and parts. This year that figure is expected to double – and continue its drastic growth in the years to come. The proponents and opponents of the policy continue to battle it out in the state commissions.

He announced that it is our policy to see car prices determined by the market interference-free. We intended to use the factory prices for Paykan, Sepand and Persia cars, but market factors overcame and the prices were determined by such economic parameters as inflation rates. We cannot force the auto makers to sell their products at the lower prices we desire when it is worth more in the market. This would create a gap between the company and market prices, open to exploitation by economic opportunists.

On fuel prices Jahangiri said that the policies on car imports and fuel in Iran are different from those adopted in the rest of the world. Consumer energy prices are more or less reasonable worldwide, but in Iran, even prior to the Islamic Revolution, they have been very low. In recent years there have been some efforts to gradually raise energy prices in an attempt to narrow the price gap, which is still very profound. Such low energy prices have encouraged excessive energy consumption, especially of gasoline. Efforts are underway to deal with this problem. During President Mohammad Khatami’s first term in office a more reasonable price for gasoline was proposed by government, but rejected by Parliament. In 1998 there were renewed efforts to increase the price to 750 rials (about $0.1) per liter but that too was turned down. Given our limited financial resources, we cannot construct new oil refineries or continue to import such a high volume of gasoline, so taking restrictive policies will become inevitable sooner of later. It is notable that domestic auto makers support a fair gasoline price, but it is political and social considerations that determine energy prices, not economic planners and policymakers.

Jahangiri continued to say that as a member of Cabinet, I back the idea that gasoline prices should approach a realistic level, but realize political and social consideration play a decisive role in this aspect. We must not forget the riots that ensued when the government of former-president Hashemi Rafsanjani increased the price of gasoline. When arsonists attacked a number of gas stations, the government retreated and revoked its policy. Policymakers stand to lose their very policies if they neglect the country’s social realities.

He said Iran’s auto industry is looking to expand its activities until it becomes a pole of regional export and to this end it has conducted negotiations on investment and co-production with a multitude of credible multinational auto companies.

Jahangiri went on to say mergers among auto makers is a growing trend worldwide, because it reduces costs. Iranian auto makers have adopted this practice among themselves to an extent, but we have diverted their attention to co-producing a car with a dual natural gas and gasoline engine with such foreign companies as Fiat, Hyundai, Renault and Nissan – who are already present in the Iranian market. When an agreement is reached, monopolies will be dealt with. Iran, with its immense domestic and regional market potential, feels the void of the major auto companies, especially in the field of manufacturing.

In his meeting with Peugeot Citron CEO, Jahangiri identified France and Peugeot Citron in particular, as Iran’s strategic ally in the auto industry and, while stressing the mutual benefit of joint ventures, welcomed continued cooperation with Iran as a partner, rather than a mere consumer of technology or a market opportunity to be taken advantage of.

The Minister, while further highlighting Iran’s remarkable capacity and capabilities in auto manufacturing reminded Peugeot Citron of its relatively long history of cooperation with Iran, which served to advantage it over other foreign auto companies and said in order to benefit from these opportunities Peugeot should understand Iran’s policies and considerations in view of its current situation.

Jahangiri attributed the rapid rise in auto demand to Iran’s young population, who want high-tech, low polluting and inexpensive cars – a matter foreign companies who are interested in future cooperation with Iran should bear in mind. He then announced a new policy for the replacement of decrepit cars and assured foreign investors that, while due to increased oil revenue Iran is experiencing a currency influx, the fluctuation of oil prices would not affect any of its economic policies.

Peugeot Citron CEO, while acknowledging the magnitude and multiplicity of its cooperation with the Iran Khodro and Saipa companies, expressed his understanding of the policies of Iran’s auto industry and said that Peugeot Citron will act in conformity with Iran’s current circumstances in an attempt to operate on a common platform with its companies.

The CEO expected to see the exportation of Iranian cars not long after the development of new infrastructure.