Iran offers historic opportunities for global automotive industry

13 April 2016

The lifting of international sanctions levelled at Iran, as well as a number of demographic, normative and economic conditions within the Iranian economy, are good news for international automotive players seeking to supply vehicles to the country’s 79 million people. Successfully capitalising on the historic opportunity will, however, require a clear strategy and roadmap.

Iran's history as a nation dates back to 3,200 BC, making it the oldest country in the world today. The country, whose public finances were in 2013 for 50-60% dependent on oil and gas exports, found itself in an isolated position in recent years – the result of international sanctions that prevented it from selling oil and gas, as well as a range of other market access impeding sanctions. At start of 2016 an agreement was reached that saw many of the sanctions affecting its markets lifted. The move has seen global corporates swarming around the opportunities of accessing the country’s more than 79 million potential customers.

In a new report from Roland Berger, titled ‘Iran – A historic opportunity for automotive OEMs’, the consulting firm considers the prospect for international automotive industry players within the market. On the back of the opening market, the consultancy also looks into a number of key economic, demographic and market structure trends that are expected to impact corporate sales prospects.

The effects of sanctions on the Iranian economy were stark, resulting in a two year recession, with GDP growth of between -7% and -3% noted in 2012 and 2013. At the same time, high inflation, at well above 30%, created a daunting environment for the Iranian people. The lifting of the sanctions brings the country out of the economic doldrums, with long term projected growth to be sustained at around 4% until at least 2017. Inflation too has seen a drop to around 16%, where it will be sustained for the time being until, for instance, cheaper foreign goods enter the market. According to the report, the increase in economic activity, coupled with a decrease in inflation, bodes well for corporates seeking access to Iran’s market.

The country’s demographic profile too is changing, as its still growing populace begin to age. Following the 1979 revolution, birth rates saw the country’s population increase by 3.7% annually, although this was slowed to around 1.4% from the 1990. Since the 80s, the total population increased from 39 million in 1980 to around 79 million today. The large majority of the population today is under 30, with the coming three decades projected to see continued low population growth, at 0.4%, while at the same time the population continues to age. Given the relative youth of the largest segment of the population, many, while entering middle and late age, will need to purchase a range of essential and non-essential goods – including cars.

Foreign interests
The report further highlights that for many in the Iranian market, foreign companies and goods are viewed favourably. When asked how good, in terms of quality, they believe the goods of foreign companies from a number of different countries are, 87% consider German goods favourable, 85% US products and 80% Japanese products. The report also asked respondents about the specific reason for importing goods from overseas, finding that 66% believe that they are of superior quality, 9% cited their design and 9% cited more choice. In terms of the kinds of goods Iranian respondents are most interested in, 49% said car/motor, 40% said personal electronics and 38% cited computing.

Iranian automotive market
The state of the Iranian automotive market is volatile, find the consultants. Since 2011 the number of car sales has decreased dramatically, falling 53% from 1.5 million to 0.7 million in 2013. The market has picked up only slightly in recent years, averaging 0.9 million between the start of 2014 and the end of 2015. The coming five years will see the market accelerate and grow strongly at 16% per annum, to hit between 1.4 million and 1.8 million car sales by 2020.

Passenger car sales in Iran by segment

The Iranian middle class, which has grown significantly over the past decades to around 30% of the population, may be of particular interest to the premium international automotive industry. The preference for imported vehicles, mixed with sufficient funds to acquire premium propositions will, according to the report, see the premium segment grow by 66% per annum until 2020 in a best case scenario – from 7,000 sales in 2015 to more than 90,000 by 2020.

According to Philipp Grosse Kleimann, Partner at Roland Berger and study co-author, the time is right for global automotive players to make their mark in Iran. “A historic opportunity”. Yet while the overall market profile for the country is positive, a number of factors will need to be taken into careful consideration by corporates seeking to provide for the country’s demand for foreign cars. “Economic success in Iran cannot be taken for granted”, he says. “The follow-on effects of isolation continue to be a burden on the state budget and the current low price of oil is reducing income. At the same time, the Iranian tax system is extremely complicated with a high degree of state regulation. Additionally western companies are faced with a 5,000 year old culture which is largely unknown outside of Iran.”

In order to successfully take advantage of the opportunities in Iran, foreign companies will need to do their homework thoroughly. Among the necessary preparations is a knowledge of the country's complex customs and tax regulations and new emissions rules. In addition, OEMs need to decide whether importing or local production is the better option for their business model and whether or not to prioritise a greenfield approach over cooperating with local partners. They also need to know the competitive environment and be familiar with the local customer needs. Furthermore, success in the Iranian market hangs crucially on companies' ability to establish close relationships with local institutions and authorities.