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Iran Looks To Car Exports To Power It Through Sanctions

Iranian President Mahmud Ahmadinejad waves to the press as he sits in a car during an inaugural ceremony for Saipa group's All-Iranian Automobile production line, Miniator, in Tehran in December 2008.
Western sanctions may be sapping Iran's economic strength, but Tehran believes it still has an ace to play: its automotive industry, the country's second-biggest export earner after oil and gas.

As Iran starts its new fiscal year this month, it views automotive and other industrial exports as its best hope for making up some of the billions of dollars Tehran loses from sanctions that target its international oil sales.

Edward Bell, an Iran expert at the London-based Economist Intelligence Unit, says finding alternative income is a priority for Tehran.

"This year's budget shows that even the Iranian authorities themselves are realizing the impact that U.S. and EU sanctions have had on the oil and gas sector, so the Iranian economy can't rely on that as its bread and butter in terms of export capacity," Bell says. "So the government would be interested in prioritizing the export capacity of a lot of the other sectors in Iran."

Reversing Decline

Whether Iran's manufacturing sector is up to the task is an open question.

The flagship automotive industry has itself been hit hard by Iran's economic turmoil. The halving of the value of the rial, Iran's currency, has increased costs for foreign-made components essential to Iran's automotive production. And some foreign partners, such as Peugeot, have withdrawn from joint ventures altogether amid souring EU-Iranian relations.

The "Financial Times" reported in February that Iran's automotive output fell to 677,000 in the first nine months of Iran's fiscal year, half the level of the same period in the previous year.

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That makes reviving the automotive industry a difficult game of catch-up. And reversing the production decline is only one of the challenges.

Another is how to make cars that compete with those of Western and Asian producers. Much of the equipment on Iran's automotive assembly lines is 16 years old, compared to an average of 11 years old in the West and 12 1/2 years old worldwide. The outdated technology contributes to Iranian cars' reputation for poor quality that, in some markets, is hard to overcome.

Belarus is one example. Iran's state-run Khodro Company already has an assembly plant near Minsk to produce its Samand cars for the local and Russian market. But when it recently announced it planned to increase output, the popular reaction in Belarus was tepid.

"Iran's Samand, as described to us, in its make-up, is the technology of the 1990s. It is, in fact, a product of the 1990s," Ales Herasimenka, an economic analyst for the newspaper "Ekonomicheskaya," says. "You know what the competition in the consumer car market is like today. Even though customs duties are high, the market in Belarus, Russia, in the whole of the Customs Union, is quite full of modern, high-quality foreign cars."

Systemic Obstacles

International sanctions intended to force Iran to give up its controversial nuclear activities began to take an economic toll in 2011. But Iran's manufacturing difficulties started years earlier.

Again, the Belarus venture provides an example. When Khodro and the Belarusian government signed their partnership deal in 2006, the plan was to jointly produce some 30,000 cars annually. But in February 2012, Belarusian First Deputy Prime Minister Uladzimir Syamashka said only 1,000 cars had been manufactured in five years.

There are multiple reasons behind the failure, including legal disputes between the two sides and mutual charges of lack of investment. But some analysts say the problem on Iran's side is a larger systemic failing that afflicts Iran's heavily state-run industrial sector in general. That is, top-down management that is more preoccupied with Iranian domestic politics than industrial competitiveness.

Mehrdad Emadi, an Iranian economic specialist with the London-based Data Matrix Systems, says Tehran sought once before to boost its industrial production. The effort, starting in 2003, was intended to make the country less reliant on oil-and-gas exports by further diversifying the economy. Among the goals were increasing the output of cars for export to the former Soviet republics, manufacturing pipeline components for sale to Turkey, and increasing the export of processed food to the Persian Gulf states and Pakistan.

The initiative started promisingly but soon ran afoul of other government priorities. One was to begin removing state subsidies of energy prices and of consumer staples as part of a drive to make Iran's economy more market-based. The other was to open Iran to cheap imports from China and India to ease popular anger over the rising price of local goods due to inflation.

Emadi says the results were catastrophic for manufacturers.

"Typically, for a manufacturing unit in Iran, the price of energy went from $1.20 per cubic meter of liquid natural gas to $6, more than a 450 percent increase," Emadi says. "This was a real shock on the production side. And when we add to this the parallel shock that came from the import of cheap goods, with almost no import duties and no value-added tax, domestic manufacturing was not able to survive."

Emadi says among the hardest hit were Iran's fledgling producers of assembly-line parts and car components, derailing plans for them to eventually replace foreign suppliers.

Empty Promises?

Considering the added hardships presented by sanctions, observers find it hard to believe official promises that exports will soon soar.

One such promise concerns Iraq.

Last year, Khodro's chief executive, Javad Najmeddin, said the company exported more than $400 million worth of cars to Iraq in 2010 and 2011, and planned to manufacture 30,000 cars a year there in the near future.

But the Iraqi government office tasked with getting foreign partners to develop its auto-manufacturing sector says no firm plans for Iranian production yet exist.

Hayder al-Shimmari, spokesman of Iraq's state-owned General Automobile Company, told RFE/RL's Radio Free Iraq this month that Baghdad had not yet agreed on its foreign partners and that they could as likely be "Korean, Chinese, or French" as Iranian.

"At present, we have no direct dealings with any Iranian or any other [individual foreign car manufacturers]," Shimmari says. "There are international investment brokers dealing with us and the producers."

All that makes Iran's plans to boost its exports and cars and other goods look like a long, and uncertain, road ahead.

Ahmed al-Zubaidi of Radio Free Iraq and Ihar Karnei of RFE/RL's Belarus Service contributed to this report