Dec. 11 (Bloomberg) -- Iran’s auto industry may offer President Hassan Rouhani the best prospect of a rapid peace dividend from his nuclear accord with world powers.
Output at Iran Khodro Co., which makes the Runna and Dena models, and other local carmakers slumped after sanctions made it harder to get parts from abroad. The restrictions are set to ease under the nuclear accord reached in Geneva last month. Companies including Renault SA showed up at an auto industry event in Tehran as they gear up to do business again with the Islamic Republic.
Carmakers can help Rouhani as he seeks tangible gains from his diplomacy to shore up support. He was elected after campaigning on promises to end Iran’s global isolation and revive its shrinking economy. Critics at home accuse Rouhani’s negotiators of displaying weakness at the nuclear talks.
Investment in the auto industry “yields results fast, within a few months it can contribute to GDP growth,” said Saeed Laylaz, a former economist at the Ministry of Industries and Mines. Removing sanctions will raise the carmakers’ potential output by 20 percent if their foreign partners return to the country, and help them create 600,000 jobs, he said. Obstacles include surging prices that have deterred buyers.
The Geneva agreement will lift some sanctions for a six-month period while diplomats work on a final accord. The Tehran Stock Exchange’s Tedpix index has surged 9 percent since it was signed on Nov. 24, and the rial gained about 2 percent on unofficial markets.
Unemployment ranked as the top political priority in a Zogby Research poll of Iranians published last week, with 29 percent of respondents saying it’s their biggest concern. About a quarter of Iranians aged 15-29 are jobless, according to official figures.
Led by Iran Khodro and SAIPA, Iran’s car industry employed about 2 million people at its peak two years ago, out of a population of 80 million. It produced 1.6 million vehicles and generated about 3.5 percent of Iran’s $500 billion economy.
At Iran Khodro, production has dropped by about 30 percent as the company struggles to obtain the parts it needs, according to an executive who asked not to be identified because he’s not authorized to talk to the media. It will take at least a year to return to pre-sanctions levels, and the company will need to sign new deals with partners and be allowed to set prices freely, he said.
That didn’t always happen under Rouhani’s predecessor, Mahmoud Ahmadinejad. His government pressured carmakers to maintain their prices even as a declining currency and the removal of energy subsidies pushed costs up, according to industry officials including Ahmad Nematbakhsh, the secretary of the Car Manufacturers Association. The companies piled up debts to banks and suppliers.
Prices surged as governmental controls loosened, and a typical car now costs more than twice as much as two years ago, according to Laylaz.
The manufacturers can’t cut prices in the near term, and may even need to raise them, the Iran Khodro executive said. That may clash with public expectations, because Iranians expect prices to drop as a result of the sanctions deal, and could postpone buying cars till they see that happen, Donya-e-Eqtesad newspaper reported Dec. 3 in a survey of the industry.
‘Why Not Wait?’
There are signs of a similar dynamic elsewhere in the economy.
“Business isn’t as good” since the Geneva deal, shop-owner Javad said in an interview last week at his store selling bags and shoes in the Tajrish Bazaar in northern Tehran. “People think, ‘sanctions will be lifted, prices must come down, why not wait?’”
Reza, a salesman at a leather-goods shop near Haft Tir Square in downtown Tehran, reached the same conclusion. “People seem lost,” he said. “They don’t know if the dollar will come down, if prices will decrease. It’s a wait-and-see situation.”
He said his own business is caught in the same dilemma. “We don’t know whether we should buy leather to make new products for the Iranian New Year,” or wait for prices to drop. Both men declined to give surnames on concern over reprisals.
It’s not clear how long the wait-and-see will last.
Renault is still waiting for “clarifications” on the new sanctions regime, expected next month, before restarting sales of car parts to Iran, Gilles Normand, head of the Asia-Pacific region at the French carmaker, said in an interview at the Tehran conference.
He said curbs on financial transactions, which remain in place under the Geneva deal, will also need to be eased for full business to resume.
Renault has a joint venture in Iran with partners including Iran Khodro and SAIPA, and sold more than 100,000 vehicles there in 2012. As well as producing cars in Iran, it also imported kits for assembly, before halting that trade in June because of the sanctions, Normand said.
Iran Khodro, which also makes versions of Peugeot’s 206 and 405 models, is urging its partners to resume business.
The nuclear deal represents a “good opportunity,” Managing Director Hashem Yeke Zare told the Tehran conference. “Those who were here before and were absent for a while, and others, we welcome them all.”
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