Iran Autos Report Q2 2008

Iran's automotive sector is being plunged into uncertainty due to Tehran's cool relations with Western governments, threatening the future of the industry, according to BMI's latest Iran Automotives Report.

Iranian politicians announced in February 2008 that they were prepared to cut all economic ties with France in response to Paris's alleged 'hard line against' the Iranian government, threatening an end to carmaker Iran Khodro's relationship with French autos majors. Peugeot and, more recently, Renault have provided the basis for the Iranian carmaker's development in recent years. Iran Khodro's flagship Samand model is based on the Peugeot 405 platform. Iran Khodro manufactures the 206 model as well as the Tondar, which is based on Renault's budget Logan model.

Iran imports over EUR1bn of automotive parts every year from France. BMI expects any cut in ties to be temporary, although it will severely damage investor relations in the automotive industry. We believe the threats to the link between Iran Khodro and its French partners are likely to be resisted vigorously by the Iranian firm's management and its allies in parliament. But even the threat of Iranian sanctions against France will act as a deterrent to future licensing and will dash industry bosses' hopes of privatisation.

Added to this is the continuing threat of sanctions on Iran, particularly the possibility of full implementation of unilateral US sanctions. The US government could theoretically cause significant problems for European firms with a presence in Iran, but has yet to move against Peugeot or Renault. The impact of sanctions, applied by or against Iran, would hold back technological advances in Iranian automotive manufacturing and limit Iran's ambition to expand its car export market. An end to foreign involvement could lead to a serious set-back for the future of Iranian carmakers.

Any sanctions that severely undermine the Iranian economy will have an impact on consumer demand, potentially leading to a fall in sales. According to BMI calculations, if annual private consumption and gross fixed capital-formation growth - of 6% and 8% respectively - fell by 50% in reaction to a sanctions regime, our GDP growth would more than half, causing automotive sales growth to fall by a similar amount.

BMI expects overall automotive industry growth of 10.7% by the end of the 2007-2008 Iranian year, with output at 1.14mn units. Growth is encouraged by new model launches, notably new Samand variants and the Tondar-90, which is the name of the Iranian-manufactured budget Renault Logan model. The Samand is enjoying some success in foreign markets and is particularly attractive to emerging markets due to its affordability, which could give it a strong foothold in the fast-growing Eastern European and Commonwealth of Independent States (CIS) markets.