Homasa exclusive: Analysis of Iran Automotive Components Market,
Author: Jalal Y. Azari, Senior Consultant,
Homasa Consulting Group [Contact email: azari(at)homasa.com]
Iran Automotive Industry Overview
The Iran automobile industry has been active for past 60 years since 1958 when the production line of Jeep was established. That time most of vehicles were imported from USA and England. In 1967, Rootes (known as Peykan in Iran began exporting Hunters) to Iran Khodro (Formerly named Iran national industrial group) in “complete knock down” (CKD) kit form, for assembly in Iran. By the mid-1970s, full-scale manufacture of the car, less the engine, had started in Iran. That industry has suggestively increased during the past several years with fast growth in population and need for vehicles. As an impartible segment of this industry auto parts manufacturing started to grow based on needs on mother companies. It has been reported that there are more than 1200 registered manufacturers and 800 unregistered production shops are active in field of automotive parts with $3.0bn investments. No doubt the automotive parts industry is bound to see significant increases in demands for replacement parts during the next couple of years as older model vehicles begin to show signs of wear and tear.
Automotive components and parts opportunities & challenges
Let’s take a look at some of the key drivers and major challenges of the automotive parts industry dealing with in the current Iran markets:
| Key Drivers | Major Challenges |
| Sanctions towards trade & bank transactions lifted Iran’s young educated workforce Government supportive plans for industry sector400 million consumer market of neighbor countries Untapped market for new brands High potential of private sector investment World class vehicle brand JV with Iranian automakers Less energy prices, Less final costs Iran logistic advantages | Insufficient financial resourcesManagement structures & systemsMonopoly competitionOut-dated production facilitiesLimited production capacitiesToo many small shopsA few distinguished national brandsTraditional methods of design & manufacturingExcessive imports |
Recent change in political world toward Iran, has changed the atmosphere of many industries. Local and international business entities are thinking a great potential growing market. As noted in last report of World Bank, Iran will experience a GPD growth of 5~6 percent in 2016 and 2017, likely Iranian officials are think the same. Iran government’s resistance economic policies in order for increasing share of non-oil sectors income in next years could mean one sided business with Iran has ended and companies must follow the policies supporting the growing capacities for exports in next years. A young, educated population is the key factor for a rapid growth, higher unemployment rates may interpreted as a chance for companies that can easily recruit ready to work human resources.
Challenge for local manufacturers who wish to join international markets?
One the main challenge is about production capacity. In the international market place the production rate is playing critical role, where only those auto parts makers can enter those market with 200~300 thousand units per year production capacity. Recent status of manufacturers show a very few of local manufacturers can reach international minimum capacities while some products are not manufactured due to high manufacturing cost (Crown wheel & pinion) or high technology (like ECU). Most of local automotive parts manufacturers are small and medium sized companies with a limited production capacity, not flexible production lines and out dated technology. Suppliers of mother Vehicle Company are having challenge for on-time delivery, payment delays, lack of cash flow,
Monopoly producing is one of main challenges to enter this market which has avoided new entrants for this market.
As trend for several years for local manufacturers, “reverse engineering“ has been playing a significant role as one of the main procedures of manufacturers. That caused a big gap for design and development of parts from the beginning, a great potential for technological mutual contracts. High competitive mood of market will lead to potential growth in industry.
Know-how is what Iranian manufacturers are seeking about!
Automotive parts market foresight:
This sector can be divided to two main parts OEM and after sales, although there are manufacturers of tractor and agricultural machineries, bicycle and motorcycle.
OEM (Original Equipment Manufacturer)
As one of the major segments of automotive parts market, we can see some focused OEM suppliers.
Passenger cars:
30 existing models of locally manufactured cars and 10 new brands/models will be assembled soon as the results of JV with international vehicle brands (IKCO, Saipa, Bahman group, … )
Commercial vehicles:
25 existing models and more than 15 models are on the way.
After Sales Suppliers:
With growing demand for service parts due to the increasing usage of vehicles and reduces number of new cars production and a great Potential of supplying parts into neighbor countries markets, shows a possible high profit sectors for investors. Iran has potential to be one of the world’s automotive industry suppliers, most probably mega suppliers in order connect with international supply chain which opens the doors for JV cooperation.
As shown in the picture above Iran is neighboring with twelve countries with total population of nearly 400m. A target market of 400 million population will need excessive effort to have some share with saturated and high competitive environment for vehicle exports, however an easily and reachable target for automotive components. That unique opportunity can be reached with a new strategic outlook for those markets, although limited capacities of local manufacturers won’t let them to have international foresight in practice at least for recent years.
Suggested solutions for existing enterprises, new comers and international investors:
Technology & Know-how purchase:
This would be most accessible and urgent solution. Companies need to renovate their physical equipment, likewise collaborate with the world leading technology enterprises in order to enhance the knowledge of mechanical design and analysis meanwhile production in high efficient and effective way. The production capacities have to increase up to international market needs nearby minimum 200k annually for each company.
Merger & Acquisitions:
That may sound strange but internationally such strategies have been implemented before where Toyota has put a massive effort to reduce its OEM suppliers decrease from 1600 companies down to 700 during last years. It’s very important for auto manufacturers to develop and maintain a sustainable relationship with their suppliers. You can find several small companies which produce exactly the same goods with a limited capacity and high production costs that they could reach a unique situation if they merge. Even for after-market you may very difficultly find a well-known, national brand, because of shortage of capacity and budget for branding.
Joint-Venture:
A few of internationally distinguished brands in automotive industry has enter Iran market like ZF or Mercedes Benz (diesel engine) – both located in Tabriz- and were among most successful joint-venture contracts before sanctions reached at their maximum level. Now with a great tendency of Iranian investors and manufacturers it’s estimated a good area of expansion for international automotive parts manufacturers in Iran.
Foreign direct investment:
With thanks to Iran national regulations, foreign investors can directly invest in land of Iran with ownership of 100% company. In this regard international automotive component brands would be able to establish their facilities and start in house production with having access to local suppliers (especially cost efficient process like forging, molding, heat treatment and etc.)
Recent movements :
As a one of successful stories, it worth to note recent movements from Tabriz manufacturers, as observed in international Automechanika Istanbul (7-11 April 2016), for the first time Tabriz manufacturers joined expo as unit group TAMMA which stands for Tabriz Auto Parts & Machine Manufacturers Association. Tabriz located in North West of Iran is among the biggest industrial cities. This association as the first Iranian official automotive association, with more than 20 years of experience and 200 members has been supported by government and private sector and during the last years the whole group was dedicated to develop and extend members commercially and technologically affairs. TAMMA has been officially started since 1992. This association has been established on the basis of technical and commercial support for members. It has succeed to make relation with many official and companies locally and internationally during its actives. Many companies like Iran Tractor Manufacturing Company (ITMCO), Iran Diesel Engine Manufacturing (IDEM), Bonyan Diesel, Pumpiran and etc. as mother industries are all located in this region. Therefore Tabriz would be among leading manufacturers in this industry is preparing fundamentals for mutual cooperation with enterprises from all world.
