Will Foreign Investment Return to Iran’s Automotive Sector?

Iran produced just 770,000 automobiles in 2019, down from 1,418,550 just two years prior. The re-imposition of U.S. secondary sanctions interrupted new investment in Iran’s automotive sector, particularly by European automakers such as Renault, Peugeot, and Volkswagen.

The median age in Iran is just 32. Limited public transport options and cheap petrol make car ownership attractive and even necessary—under normal circumstances, the Iranians would purchase up to 2 million cars each year, with a total sales value of up to $20 billion. 

The rising cost of manufacturing inputs and a shortfall in production has contributed to a sharp increase in the price of automobiles, particularly in the secondary market. While Iranian policymakers consider the automotive industry as a “strategic sector,” with state-owned firms Iran Khodro and SAIPA among the country’s largest employers, the hit to output over past two years has made clear the limits of the government’s ability to grow the automotive sector without foreign partnerships. 

Over the last year, companies linked to Iran’s defense ministry have stepped in to support production at the Iran Khodro and SAIPA in an attempt to localize the production of more parts and shield automakers from the rising cost of imports. At a signing ceremony in December of 2019, SAIPA CEO Seyyed Javad Soleimani told reporters, “With Defense Ministry’s help, domestic substitutes for 35 key auto parts are to be produced in Iran to curb the industry’s reliance on the global supply chain.” 

The cooperation between automakers and defense contractors is best understood as a stop-gap solution for the automotive industry. In the short-term the goal is to raise output. In the medium-term, the automotive sector will still require the transformative investment that only foreign automakers can provide.

Foreign automakers have long understood the potential of Iran’s large domestic market and the combination of low labor costs and local parts production. Iran’s industrial workforce is skilled and experience, particularly relative to their compensation. The monthly minimum wage is IRR 18.34 million for the current Iranian calendar year—now equivalent to less than USD 100 per month at current exchange rates. Between 2009 and 2011, two out of every 100 cars and commercial vehicles produced worldwide was manufactured in Iran.

These dynamics led numerous European, Korean, and, more recently, Chinese car and truck manufactures to establish license manufacturing agreements and even full joint ventures with Iranian automakers. Iranian auto parts makers developed the supply chain to provide the local parts content on which Iranian policymakers insisted. The manufacturing of the Renault Tondar, known as the Dacia Logan in most markets, saw Iranian spare parts manufacture obtain “Grade A” certifications from Renault. Following the new investments committed after the implementation of sanctions relief in 2016, there were growing expectations that Iran would become an exporter of European-branded automobiles to regional markets. 

Notably, the new post-JCPOA investment was intended to facilitate the partial privatization of the state-owned manufacturers. Through the Industrial Development and Renovation Organization (IDRO), the Iranian state was set to become a minority shareholder in the new Renault joint venture. A similar deal was struck between Daimler and Iran Khodro Diesel for the manufacturing of Mercedes-Benz trucks in Iran. 

Allowing foreign firms to be the majority shareholders of their joint ventures was an important shift in industrial policy for the “strategic” automotive sector. Such policy was also intended to address the long-running issue of inefficiency and poor productivity among the state-owned automakers. There were also a number of deals between foreign automakers and private sector firms in Iran, such as the agreement between Volkswagen and Mammut, which has produced Scania trucks in Iran since 2008. Scania’s persistence in the Iranian market has earned it a commanding market share of over 60 percent.

Clearly, prior to the re-imposition of sanctions, Iran was set to deepen its dependence on foreign investment to drive growth in the automotive sector. In the case that sanctions are once again lifted, that drive for foreign investment would no doubt resume. Iran’s automotive market will remain attractive, but foreign automakers will want to be sure that any new round of sanctions relief will be durable.

Photo: IRNA

7 Charts That Challenge the Distorted View of Iran's Economy

Recently, a number of people have insisted to me that Iran has squandered its chance to joint the ranks of the BRICs—Brazil, Russia, India, and China—which count as the great emerging markets of the world. As sanctions return, as the rial sheds value, and as protests become routine, Iran is increasingly portrayed as an economic basket case where state collapse is just around the corner.

But even a cursory look to the recent experiences of BRIC markets makes it clear that Iran’s pains are not unique. In particular, Brazil has been in a near constant state of political and economic crisis since 2014, when an investigation called Operation Carwash uncovered massive corruption within Petrobras, a state-owned energy company, which was at the center of a “corruption machine” enriching allies of then President Dilma Rousseff. Since these revelations, millions of Brazilians have participated in protests around the country, their anger only increasing as a recession brings higher inflation and rising unemployment.

As I relayed in an interview with Brazilian newspaper Folha de S.Paolo, in January of this year, the slogans of the protests then emerging across Iran and still visible today, echo those of the protests that have been roiling in Brazil. The reason for this is simple. From a developmental standpoint, Iran’s economy is very similar to those of the BRIC countries, especially Brazil.

The policy failures of the Iranian government have garnered much attention in light of the recent protests. But they are not unique. They are the same failures that can be observed in Brazil, as well as other upper-middle income economies undergoing complex economic transitions. The frustrated cry of the Iranian protestor is the same cry as that of the Brazilian protestor. Sure, there is some local political and economic dialect. But the language of corruption and inequality is the same.

Despite this, the economic crisis in Iran has been characterized as a uniquely Iranian phenomenon, resulting from a set of political circumstances which can be traced back to the 1979 Islamic Revolution. Looking to Iran and Brazil in a comparative framework offers an important corrective to this characterization. Similar combinations of macroeconomic conditions produce similar political manifestations—protests against corruption, anger at social injustice, even calls to overthrow the government.

Put in its proper context, what is most unique about the crisis in Iran is not the economic reality, but the political reaction. Despite the clear parallels between the cases in Brazil and Iran, we do not see foreign powers “reaching for a regime change strategy” to alleviate the frustrations of the Brazilian people. No doubt, the failures of the Iranian government to create a robust economy are partially political failures. The country has an antagonistic relationship with the world’s superpower and its political elites are continually embroiled in needless scandal.

But as the seven charts below show, Iran is not an outlier when it comes to its economic performance. Governments of very different political persuasions and institutional frameworks—like those of Brazil and Iran—routinely fail to solve the fundamental challenges of economic development precisely because economic growth is difficult to achieve, harder to sustain, and insufficient to improve living standards. This is the context in which we ought to objectively understand and grapple with the idea of economic reform in Iran.

1. Struggles with Inflation

Both Iran and Brazil have long tried to keep inflation in check. Brazil suffered from extreme inflation in the early 1990s, hitting nearly 3000 percent. Iran also went through a period of chronic inflation, hitting an official rate of 50 percent in 1995. By the later part of the decade, both countries began to bring inflation under control. In 2016, the inflation rates in Brazil and Iran converged. Both are back on an upward trend, contributing to public frustration over the cost of living.

2. Stubborn Unemployment

One of the main drivers of recent protests in both Iran and Brazil has been anger over chronic unemploument. In Brazil, unemployment has risen sharply due to the recent economic downturn, and is now approaching levels seen in Iran. Revelations of deep-seated corruption in government have led Iranians and Brazilians to share the belief that their government officials are more concerned about their personal economic wellbeing than about creating jobs and tackling inequality.

3. Ease of Doing Business Rankings

Weak rule of law and the lack of transparency which enable corruption also serve as barriers to investors and entrepreneurs. Iran and Brazil are ranked 124th and 125th respectively in the World Bank’s Doing Business rankings. While the performance of Iran and Brazil varies across the constituent parts of the overall score, it is clear that conducting business in the two countries is similarly onerous and risky.

4. The Role of Foreign Direct Investment

However, despite the fact that Brazil is just as difficult a place to do business as Iran, the Brazilian economy has attracted nearly 25 times more net foreign direct investment (FDI) than Iran in the period from 1980 to 2016. Brazil’s economy has been burnished with over USD 1 trillion dollars in FDI, while Iran’s economy has secured just USD 44 billion in the same period. Brazil’s success in attracting foreign investment began around 1995, when the country was coming out of its hyperinflation crisis and when a new class of emerging market investors began to finance the new wave of globalization. Iran missed out on this emerging markets gold-rush. The passing of the Iran Libya Sanctions Act in 1996 by the U.S. Congress and the intensification of sanctions in 2008 at a time when global investors sought elusive growth in emerging markets in the aftermath of the global financial crisis, saw Iran’s FDI inflows stagnate.

5. Similar Growth, Differing Volatility

Despite missing out on FDI inflows, Iran has not been a growth laggard. Over the period of 1980 to 2017, Brazil and Iran achieved the exact same average annual GDP growth: 2.45 percent. The key difference is that Iran’s growth has been more volatile given that it is principally driven by oil revenues and is therefore tied to fluctuations in the global oil price. International sanctions have also frustrated economic growth in Iran.

6. Brazil’s Debt-Fueled Growth

But if Iran’s growth has been fueled by oil, Brazil’s growth has been fueled by its own global market—the debt market. Brazil’s external debt has skyrocketed, exceeding 70 percent of GDP, as the country has repeatedly turned to international bond markets and IMF loans in order to counteract domestic economic fragility and soften the impact of recessions. The recourse to debt allows Brazil to reduce economic volatility. While Iran’s oil buyers can be fickle, creditors are always ready to offer Brazil more financing.

7. GDP Per Capita

Iran and Brazil have seen similar overall levels of economic growth in the last four decades and standards of living, as measured by purchasing power, have likewise been improving at a similar rate. But this is all the more remarkable given that Brazil has enjoyed much greater access to international investment and financing. Even so, the average Iranian today enjoys greater purchasing power than the average Brazilian. The gap in GDP per capita widened during Brazil’s recent economic downturn, but it will likely narrow again as Iran enters its own economic crisis, marked by returning inflation and a devalued currency. Nonetheless, Iran can be said to have delivered greater economic dividends to its population than one of the vaunted BRICs, even without the stimulus of international finance.

Photo Credit: Bourse & Bazaar

Here's How the European Commission Will Allocate EUR 18 Million in Iran

For Iran, EUR 18 million represents just a drop in the bucket in terms of the foreign direct investment that the country needs for its economic development. But in terms of development funding, this amount, an initial tranche of a larger EUR 50 million bilateral allocation introduced by the European Commission and the European External Action Service this month, represents a highly significant, “first-of-its-kind,” intervention to support Europe-Iran trade and investment.

Iran is an unusual recipient for European development aid—by the usual metrics, the country is too rich. But after some internal political wrangling, the European Commission decided to proceed with a “special measure” in order to support the policy priorities of the European Union, namely the preservation of the Joint Comprehensive Plan of Action (JCPOA).

However, the funding is not primarily intended as an attempt to mitigate the effect of returning U.S. secondary sanctions. Rather, as made clear in the “action document” which details how the development funding will be distributed, the European Commission has allocated the funding “in line with the European Consensus on Development” to provide “targeted support in the areas of Prosperity, Planet and People.”

In the area of “Prosperity,” the European Commission will seek “increased and diversified trade in goods and services” by supporting better trade policy, more effective investment promotion activities, and greater support for entrepreneurship and innovation. In the area of “Planet,” the European Commission will seek “the decoupling of economic growth from environmental degradation” by supporting programs that improve waste management and reduce water and air pollution through technologies that improve efficiency and greater awareness among policymakers and the general public. Finally, in the area of “People,” the Commission seeks to support “comprehensive and evidence-based drug use prevention, treatment, rehabilitation and social reintegration” with a special focus on the use of opiates such as heroin and its role in spreading HIV/AIDS. The “Prosperity” and “Planet” areas have been allocated EUR 8 million in funding, while “People” has been allocated EUR 2 million.

The implementation of the funding differs in each area and will use both direct and indirect management, with the Commission ensuring that “that the EU appropriate rules and procedures for providing financing to third parties are respected” in all cases.

Funding in the area of “Prosperity” will be allocated through the International Trade Center (ITC), a United Nations agency. The ITC will assist Iran’s Trade Promotion Organization, a agency of the Ministry of Industry, Mine and Trade to develop a “national export strategy” with a particular focus on boosting the capacity of small and medium-sized enterprises (SMEs) as well as the internal managerial and technological capacity of TPO. ITC and TPO will also collaborate to develop a “Youth Trade Accelerator Program” which will youth-led enterprises. Initial meetings have already been held between ITC officials and Iran’s TPO and the cooperation envisioned and funded by the Commission builds on an MOU signed between ITC and TPO in 2016.

In the area of “Planet,” the European Commission will directly administer the funding on the bases of grants and will reply upon “pillar-assessed” organizations from its member states, a designation that applies to those organizations which have been pre-approved to implement resources from the European Union’s general budget. Efforts in this area will build on the EU-Iran framework for technical cooperation on the environment signed by Iran’s vice president for environment Masoumeh Ebtekar and EU environment commissioner Karmenu Vella in Brussels in September 2016. A consortium of member-state organizations is expected partner with Iranian stakeholders  to drive the implementation of pilot projects that “contribute to enhancing Iran’s self-reliance in the areas of addressing water pollution and integrated water resources management, air pollution, waste management and soil degradation.”

Finally, in the area of “People,” funding will be directly managed and dispersed via grants. The Commission will issue a single call in the “first trimester of 2019” for proposals “to finance projects aiming at comprehensive and evidence-based drug use prevention, treatment, rehabilitation and social reintegration, with special emphasis on high-risk groups.” Interestingly, these grants will not be made directly to Iranian institutions. Instead, eligibility criteria mandate that grants flow to “agency, non-governmental organization, public sector operator, local authority, international research organization, university or university related organization” from an EU member state or a small group of international organizations. While the public health benefits of these grants will no doubt be substantial, these restrictions raise the question of how much of the financial impact of the EUR 2 million in grant funding allocated for the area of “People” will be felt in Iran.

Overall, the Commission’s efforts are encouraging for their scope and the clear willingness to deepen bilateral ties between the European Union and Iran at a fraught political moment. But beyond good intentions, implementation will be key. To this end, the Commission outlines a series of “assumptions” which underpin the feasibility of the planned cooperation with Iran.

The envisaged cooperation requires that “Iran ensures the necessary human, financial and material resources to facilitate the implementation of projects as far as cooperation with national authorities is required” and—in a crucial consideration given still-unexplained arrests of Iranian environmentalists—that “technical exchanges and cooperation between public sector and civil society actors… remain non-sensitive and feasible.”

Photo Credit: European Commission

Can Chinese Investment Bring Sunshine Back to Iran's Solar Industry?

Renewable energy has been one of the brightest sectors in the Iranian economy, achieving 70 percent growth in the last Iranian year according to official data. There are currently 85 large-scale and more than 1,850 small-scale renewable power plants feeding electricity into the national grid. The overall capacity of renewable power plants in Iran reached 637 MW this month. A further 41 large-scale power plants with a total output capacity of 431 MW are currently under construction across the country.

Overall, the sector is projected to generate 1,000 MW of clean electricity annually by 2022. This additional capacity is especially important as policymakers seek to meet rising electricity demand and prevent summer blackouts in coming years. It is also a source of export revenue. Iran has exported USD 4.1 billion worth of electricity to its neighbors over the last five years, with renewable energy a growing contributor. 

The environmental benefits are also significant. Growing use of renewable energy has saved 541 million liters of increasingly precious water and replaced the consumption of 600 million liters of fossil fuels in the past ten years.

At a smaller scale, an increasing number of farmers, struggling with a chronic shortage of water supplies, are turning to solar power generation on their farms. Farmers in Esfahan who are no longer permitted to cultivate rice are taking advantage of a 20-year government guarantee for the supply of electricity. It is estimated that over 1,000 small-scale solar power plants are now installed in farms across rural Iran.

Attractive Legal Structure

But this encouraging growth is now in doubt. The Trump administration’s unilateral withdrawal from the JCPOA nuclear deal has brought economic uncertainty for local investors and made foreign direct investment increasingly difficult.

Mohammad Sadegh Zadeh, deputy minister of energy and head of the Renewable Energy and Energy Efficiency Organization (SATBA), recently announced that the sector has attracted IRR 100 trillion (USD 940 million) from local private-sector investors over the last two years. Foreign investment has been even more important, contributing USD 1.7 billion, nearly 70 percent of total investment since President Rouhani took the office in 2013.

Foreign investors completed several projects in this period. These include a 20 MW solar farm in Mahan backed by Swiss investors, five German-backed solar power plants in Hamedan with a total capacity of 38.5 MW, the first phase of a 50 MW solar plant backed by Italian investors, two Greek-backed 10 MW solar farms in Yazd and Isfahan; a 10 MW solar farm in Tehran backed by French investors, as well as further projects developed by Turkish, Austrian and Swedish companies.

However, Trump’s unilateral exit from the 2015 nuclear agreement with Iran, and his decision to re-impose sanctions against the country, pose a new threat toward foreign investments. The effects are already being felt in the sector.

British developer Quercus, which was set to develop Middle East’s largest solar power plant in Iran, decided to halt its work in the country, while other developers are reportedly re-thinking their plans for their future activities in the country, especially as even routine banking transactions become more difficult.

The depreciation of the rial and the tight foreign exchange market also pose a challenge for developers and make the incentives in Iran’s electricity market less attractive, according to Shahriar Sabet, a London-based renewable energy investor.

“Iran has created an attractive legal structure for investors which includes the power purchase agreement and FIPPA [Foreign Investment Promotion and Protection Act]... Also the feed-in-tariff (FiT) is an important factor as it remains one of the highest paid in the world,” Sabet says.

“Although with depreciation in rial, the FiT has dropped significantly but under FIPPA investors can still repatriate their capital and revenue under official exchange rate”, Sabet explains. “ The government is working hard to continue allocating the official exchange rate to the sector for the repatriation of revenues which in this climate is another positive sign,”

Sabet also emphsises that “institutionally, Iran has tried very hard to prioritize the renewable energy sector, with coordination between the Ministry of Energy, Ministry of Economy, SATBA, and local grid companies, to create a very supportive platform with clear procedures for foreign investment.”

“The current conditions, internally and internationally, have adverse effects on the market. However if Iran maintains its current structures, our view is that it is a market to invest in. I do believe those who are on the ground should not abandon their projects and confront the headwinds and new investors should also explore ways to enter this highly attractive and relatively stable sector in Iran,” Sabet insists.

The Need for Government Guarantees

But the government still has options to save the sector. Ehsan Imani, an expert in feasibility studies of renewable power plants, believes that the government needs to focus on three major issues to keep foreigners interested in the market.

“Payment guarantees could be the very first and the most effective tool to revive the market’s attraction. The feed-in-tarrif also should remain high although it is still higher than some other countries even after drops in recent months the. Investors cannot easily ignore Iran if the government reconsider its pricing policy and issue payment guarantees,” he explains.

Sabet agrees on the need for guarantees: “Issuing such guarantees for smaller projects will create more confidence and boost the flow of investment albeit at smaller scale.”

Regular settlement is also of high importance from Imani's point of view: “Late payments naturally could change the minds of those investors who are plans to enter the market.”

Until the recent currency crisis, SATBA had reportedly managed to meet its payment requirements on time. The Central Bank of Iran has offered to make payments in yuan instead of euros, a move not favored by European investors.

The Sun Rises in the East

As with other sectors of Iran’s economy, the withdrawal of European investors from Iran’s solar industry may mean that “Chinese money turns out to be the best available option while other investors have to miss the opportunity,” as Sabet puts it.

Chinese investors face fewer barriers to investment according to Imani, “They face no serious restrictions to sell facilities to Iran, and payments are easy to make–[even if it is paid in yuan].”

This is especially true because Chinese companies lead the world in the manufacturing of solar panels. Because the panels merely need to be installed in Iran, up to 80 percent of the total investment cost for a solar project in Iran can be paid directly to Chinese panel suppliers or plant designers in local currency.

Recent developments in the market suggest a growing role for Chinese investors. In July, Yazd province officials signed an agreement with a partnership of Chinese and Italian firms for the development of a transformative 500-1,000 MW of solar projects. The agreement includes installing 20,000 small 5 KW power plants in residential units across the province.

The provincial government in Qom province  signed an MOU with a major Chinese company to develop of a 30 MW power plant in the central province. Chinese firms have also reportedly reached agreements for development of large solar power plants and the local manufacturing of solar panels in Fars, Zanjan, North Khorasan and East Azarbaijan provinces.

For Iran’s solar sector, the sun may be setting in the West. But it may rise again in the East.

Photo Credit: IRNA

Sweden's Serkland To Invest in Iran Plastics Packaging Leader Moheb

A Swedish investment company is “on course” to make a landmark investment in Moheb, the leading manufacturer of plastic and laminate tubes in Iran and the Middle East. The deal represents one of the first private equity investments made by foreign investor in a growth-stage Iranian company, outside the digital sector.

Serkland Invest, founded in 2016 and headquartered in Stockholm, is focused on investment opportunities in the Iranian consumer sector. The company is primarily backed by Scandinavian family investment offices, high net worth individuals and institutions. Serkland’s first investment in Iran was completed last summer, which saw the Swedish firm invest EUR 17.5 million in one of Iran’s leading pharmaceutical companies. 

This new deal, though representing a smaller investment, sees Serkland take a significant minority stake in Moheb. Founded in 1998, Moheb Packaging & Plastic Industrial Company a family-owned business headquartered in Tehran. The company has grown rapidly to meet the packaging needs of Iran’s FMCG manufacturers and produces plastic and laminate tubes for both foodstuffs and cosmetics. Moheb enjoys 75 percent market share in Iran.

Amir Hossein Alambeigi, co-founder and CEO of Moheb, noted that the Serkland investment would enable Moheb to solidify its “market leading position” and to “capitalize on substantial opportunities ahead, both locally and in the wider region.”

The investment will see Serkland take an approximately 40 percent stake in Moheb, and will receive two of five board seats. Mohsen Tavakol, a partner at Serkland, stated that the goal is to leverage the board positions to “instill corporate governance, strategic management, operational and financial best practices” in Moheb to help improve competitiveness and develop the company into an “international corporation.”

The deal is just one in Serkland’s reported “EUR 100 million pipeline of around two dozen Iranian consumer goods companies.” The company is aiming to make six acquisitions by the end of 2018. One pending deal would see Serkland invest alongside a multinational partner in a chocolate confectionary company.

While Serkland is not a private equity fund, its investments, like that in Moheb, provide an early template for private equity in Iran, where new capital is used to enable sales growth through expanded exports.

The executives involved expressed pride that the investment is taking place at a time of political uncertainty. Omid Gholamifar, CEO of Serkland, highlighted his company’s progress “at a time when many are hesitating.”

Bakhtiyar Alambeigi, co-founder and Chairman of Moheb, echoed this sentiment, stating, “Moheb is proud [to be] one of the first private companies in Iran to have been able to attract foreign investment… after the signing of the JCPOA.” Alambeigi hopes that the deal will “will help other companies in Iran to attract foreign investments” by creating a “success story” for the business community at large.

Photo Credit: Wikicommons