Turning to Tehran: Europeans flock back to Iran

European manufacturers are flocking back to Iran, led by Daimler, leveraging its prior partnerships, and tailed by Renault and Peugeot

Iran’s manufacturing capabilities are serious, having been prompted by sanctions to make and not just assemble parts.
Iran’s manufacturing capabilities are serious, having been prompted by sanctions to make and not just assemble parts.

With the signing of the nuclear deal between the P5+1 (the five permanent members of the UN Security Council, plus Germany) and Iran, the region’s largest automotive producer appears set to be revived and to return to the international fold.

If Iran adheres to its side of the agreement, the mid- to long-term ramifications of this are immense. While sanctions have degraded the quality of vehicles produced by the industry, Iran’s material isolation has only strengthened the independence of its production facilities. The potential for tapping this latent capacity through foreign direct investment is huge.

This truth is not lost on global manufacturers and is evident in the glut of European companies already courting the country again for deals well in advance of the official timeline for the lifting of sanctions under the Iran accord — which is formalised under the so-called Joint Comprehensive Plan of Action (JCPOA).

One of the first companies off the boat has been Daimler, an old hand in the market now exploring a return to Iran’s market trucks, vans and buses with Iran Khodro Co (IKCO), the largest auto manufacturer in the region, with an annual capacity of 600,000 vehicles a year.

Daimler is one of Iran Khodro’s oldest trade partners, with the Germans previously owning a 30% stake in Iranian Diesel Engine Manufacturing (IDEM), a subsidiary that more recently hosted a delegation from Daimler in Tabriz.

However, the German company was forced to abandon its share in IDEM in 2010 and discard plans to export three-axle trucks to Iran after it exited the country in the wake of tightening US and EU sanctions on the country.

At the time, Daimler’s decision led to losses in Iran Khodro’s production of commercial and semi-heavy vehicles, and this August the Germans rebuilt the relationship by agreeing to pay $47.8m in compensation for the losses.

Daimler has subsequently re-acquired its 30% share for an undisclosed figure, and is set to resume its long-standing portfolio of car, truck, van and bus production in Iran, exploiting IDEM’s vast infrastructure for the production of Mercedes diesel engines at Tabriz.

Indeed the process is already underway, with Hashem Yeke-Zare, CEO of Iran Khodro, confirming that his company “will sign a deal soon” with Daimler for the production of luxury cars and commercial vehicles.

He added that Iran Khodro has also held negotiations with Volkswagen over potential investment into Iran, transfer of technology and the production and exports of vehicles.

The announcement came after German Economy Minister Sigmar Gabriel visited Iran at the head of a 60-member delegation including executives from both Daimler and VW.

Germany as a whole is the key trading partner of Iran: Around 50 German firms have branch offices in Iran, while more than 12,000 firms maintain trade representatives in the country Iran, including BASF, Krupp, Linde, Lurgi, MAN, Siemens and ZF Friedrichshafen.

By 2010, the value of trade between Germany and Iran reached a peak of $5.35bn.

For Daimler, the top topics of discussion include the potential production of Mercedes Benz OM 924, OM 926 and OM 457 heavy-duty truck engines, and potential technical collaboration to raise IDEM’s engine products from Iran’s typical Euro II and Euro III emission standards up to Euro V and Euro VI.

The lowering of emissions has been a priority for Iran Khodro for over a decade, and since as early as 2002, IDEM has been involved in converting Mercedes OM457 diesel engines to run on compressed natural gas.

In January 2014, Yeke-Zare reiterated that CNG was part of “IKCO’s long term strategy to reduce emission and to produce of engines meeting Euro V standards or higher.”

Driven by both fuel and the chronic air pollution issues in major Iranian cities, IKCO has also previously set out short-term plans to reduce fuel consumption within two years (from January 2014) by limiting fuel consumption to 6.5litres/100km for each car, and discontinuing models with high fuel consumption.

Hossein Izanlou, deputy CEO for research and development at Iran Khodro Powertrain Co (IPCO), an IKCO subsidiary, emphasised that it would soon be able to conduct Euro IV tests at its research and development centre.

“Iranian National Standards Organisation has recently audited our car and engine labs and we could successfully gain the confirmation for ISO 17025 in order to perform Euro IV tests,” he claimed.

Iran Khodro has similarly been pressing to develop hybrid and electric cars, and under a recent MoU with two technical universities, expects to produce the first Iranian vehicles with these features within the next three years.

Hossein Farsani, deputy head for planning and strategy at Iran Khodro, noted that Iran’s population of electric vehicles rose from just 25,000 in 2010 to 405,000 units in 2013.

Meanwhile in January 2015, a prototype two-seater electric vehicle was revealed that strongly resembled the Renault Twizy, suggesting possible collaboration with French automaker’s Iranian division.

Indeed, the car took one year to complete, coinciding with the easing of economic sanctions and the resumption of Renault shipments to its joint-venture, Renault Pars, in early 2014.

In the electric arena, the reputation of the Renault-Nissan Alliance precedes it, with Renault triumphantly selling the 250,000th unit of the popular Zoe model this June.

Across the company’s full range of electric vehicles (including commercial models) sales were up 15% year on year in May 2015.

Even Iran’s neighbour, the Royal Hashemite Court of the Jordan has taken the opportunity to place an order for 150 electric Renault Zoes, now due to be deliver before the end of 2015.

In this regard it certainly seems like Renault might have more of an edge than Peugeot, which, despite a history of collaboration with Iran Khodro and an estimated population of 350,000 vehicles in Iran, has rapidly lowering appeal alongside its stronger European rivals.

Indeed, Yeke-Zare, the de facto kingmaker of the automotive business in Iran at this point, recently took it himself to publically rule Peugeot out as a future trade partner for IKCO.

He stated: “In light of the recent nuclear deal, many companies have shown interest in doing business with Iran, and Iran Khodro has begun trade negotiations with several car makers. The company will only finalise joint ventures that serve our national interests.”

“Iran Khodro’s new partner will have to be independent, committed and with a strong global market share. French car maker Peugeot should recognise it cannot meet these requirements and hence should not expect to be our trade partner again.”

That does not mean Peugeot is down and out of the market — far from it, as the Peugeot 405 and 206 still make up and sizeable proportion of IKCO’s total production, alongside the Peugeot Pars (also a 405), and the Samand, an Iran Khodro brand built on the Peugeot 405 platform and first sold in 2000. Renaults meanwhile feature prominently in the categories of cars, and trucks, minibuses and buses.

IKCO manufactures 80% of Samand parts domestically, including an Iranian-designed engine. For export markets on the other hand, IKCO reverts to using Peugeot’s TU5JP4 engine in its Samand production lines.

This is because the TU5 is a low consumption and powerful engine and because of the ease of finding its parts all over the Europe, since the TU5 has been used for the Peugeot 206, Peugeot 307 and Peugeot 207.

Retailing at $14,500 in Turkey, the Samand is exported across North and Sub-Saharan Africa, the Middle East, central Asia, Russia, Belarus, Switzerland and even Venezuela.

Moving forward, under an MoU deal signed in January last year, Peugeot and IKCO will set up a new joint venture, granting Peugeot access to Iran’s domestic markets and IKCO access to Peugeot’s exports market.

Yeke-Zare noted: “Iran will have cooperation with companies that seek to set up joint ventures. We don’t want to simply produce cars, and it is not in the interest of our auto industry to manufacture cars under the license of French carmakers. We seek to develop production through partnership.”

IKCO also announced that it will also be expanding its ties with Japan’s Suzuki.

However, as with Daimler, Iran Khodro is first seeking compensation from Peugeot for pulling out of the business in 2012 under pressure from GM, then a shareholder. Iran’s markets accounted for about 13% of Peugeot’s annual sales at the time, and the hiatus of parts idled a large assembly line in the country.

Peugeot held 22% of Iran’s market, and the withdrawal caused huge losses for Iran Khodro.

Luckily for Peugeot, IKCO maintained its market share by quickly sourcing parts for the 405 and 206 from intermediaries.

But Yeke-Zare noted: “Peugeot must know that it has to account for its past behaviour.”

Assuming a settlement is achieved, Peugeot has proposed a 50:50 joint venture, where 30% of the vehicles produced will head to export, but according to Yeke-Zare, at a price undercutting similar brands abroad by 30%.

Regardless of the challenges, it appears most manufacturers are nonetheless giddy at the prospect of re-entering Iran’s ready market.

On top of this, due to Iran’s high manufacturing capacity, many companies view assembly and/or production in the country as a doorway to entry into the wider Middle East.

And while German and French companies may be tussling for the moment, they both possess a significant edge over General Motors and Ford, which for the moment remain bound up in a deeper layer of sanctions continuing to bar US companies and banks from Iran trade.

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