Q IRAN AUTOS REPORT INCLUDES 5-YEAR FORECASTS TO ISSN Published by:business Monitor International

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1 Q IRAN AUTOS REPORT INCLUDES 5-YEAR FORECASTS TO 2018 ISSN Published by:business Monitor International

2 INCLUDES 5-YEAR FORECASTS TO 2018 Part of BMI s Industry Report & Forecasts Series Published by: Business Monitor International Copy deadline: March 2014 Business Monitor International Senator House 85 Queen Victoria Street London EC4V 4AB United Kingdom Tel: +44 (0) Fax: +44 (0) subs@businessmonitor.com Web: Business Monitor International All rights reserved. All information contained in this publication is copyrighted in the name of Business Monitor International, and as such no part of this publication may be reproduced, repackaged, redistributed, resold in whole or in any part, or used in any form or by any means graphic, electronic or mechanical, including photocopying, recording, taping, or by information storage or retrieval, or by any other means, without the express written consent of the publisher. DISCLAIMER All information contained in this publication has been researched and compiled from sources believed to be accurate and reliable at the time of publishing. However, in view of the natural scope for human and/or mechanical error, either at source or during production, Business Monitor International accepts no liability whatsoever for any loss or damage resulting from errors, inaccuracies or omissions affecting any part of the publication. All information is provided without warranty, and Business Monitor International makes no representation of warranty of any kind as to the accuracy or completeness of any information hereto contained.

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4 CONTENTS BMI Industry View... 7 SWOT... 9 Political Economic Business Environment Industry Forecast Production Table: Iran Automotive Production, Sales Table: Iran Automotive Sales, Trade Passenger Vehicles Table: Iran - Top 5 Best-Selling Manufacturers Macroeconomic Forecast Economic Analysis Table: Iran - Economic Activity Industry Risk/Reward Ratings Middle East And North Africa Risk/Reward Ratings Table: BMI Industry Risk/Reward Ratings - Middle East And North Africa Autos Company Profile Company News Alert Iran Khodro Company (IKCO) Saipa Diesel Societe Annonyme Iranienne de Production Automobile (Saipa) Regional Overview Middle East And North Africa Overview Compete Or Complement In The GCC? North Africa Becoming A Viable Alternative Still Cautious On Iran Global Industry Overview Table: Passenger Car Sales November 2013 (CBUs) Europe On Road To Recovery Tax Hike Skews Japan's Outlook; US Hits Sweet China Is BRIC Bright Spot Demographic Forecast Business Monitor International Page 4

5 Table: Iran's Population By Age Group, ('000) Table: Iran's Population By Age Group, (% of total) Table: Iran's Key Population Ratios, Table: Iran's Rural And Urban Population, Methodology Industry Forecasts Sector-Specific Methodology Sources Risk/Reward Ratings Methodology Table: Automotive Risk/Reward Ratings Indicators And Weighting Of Indicators Business Monitor International Page 5

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7 BMI Industry View The medium-term outlook for Iranian auto production remains cautiously optimistic, reflecting the temporary deal reached between the US and major powers over the future of its nuclear programme in November BMI's Country Risk team's core view remains that talks will continue over the coming years, with the potential for a long-term agreement to be found, although we cannot preclude a breakdown in talks over the coming quarters, which could unleash a Western military response. Over the very near term, there is the chance that the six-month interim arrangement agreed in November 2013, which expires on July , could be extended by an additional six months should both parties agree. Data reported by Iran's IRNA news agency in January 2014 suggest that there is cause to be less bearish in our estimate for 2013 full-year vehicle production. For the first 10 months of the Iranian calendar year, ending March , the industry produced 576,663 units, down 10.5% from the previous year. We consequently believe there is good reason to upgrade our production estimate for 2013, while the return of French carmaker Renault, and the potential for others to follow suit, creates significant upside potential for at least the early part of This supports our forecast for a return to positive production growth of at least 10% for passenger cars in 2014, although this will be subject to revision based on sanction developments. Based on a poor first half of 2013 and perceived ongoing headwinds, we had previously projected a 50% decline in vehicle output for the calendar year 2013 (January to December), as based on OICA reporting periods. We believe that the moderation in the output contraction over the Iranian year so far can be attributed to the return of some models to the country's line-up as national manufacturers source domestically produced parts, as well as the ramping up of production of the 'national cars', such as Iran Khodro Company's (IKCO) Runna. As such, we have upgraded our output estimate for 2013 to a 28% contraction. Looking ahead, the temporary deal reached with the P5+1 group to ease sanctions on the country provides the opportunity for a number of international carmakers to return to the market and restore at least some lost output. With the initial deal in place for just six months, while a more long-term solution is negotiated, we would expect the most significant uptick to be in the early part of the year until we know more regarding the future beyond the six-month period. Business Monitor International Page 7

8 Early signs are promising, as Renault has already recommenced shipments of parts for its Tondar model for assembly in the country. At present the shipments are 'very low' in numbers, according to Renault's head of Asia Pacific (including the Middle East), Gilles Normand. However, it is a step towards normalising operations in the country. Fellow French carmaker PSA Peugeot Citroen has also signalled its intent to return. Looking forward, although it is still unknown how long these companies will be able to remain operational in the country, we would expect them to make the most of their time, eventually ramping up output in what Normand called 'a window of opportunity for the next six months'. There is potential for other carmakers which previously had operations in the country to return, as Kia Motors, which had a tie-up with Saipa, is also reportedly monitoring the situation. In a further encouraging development, in December 2013 it was reported that more than US$1bn in foreign direct investment has been approved for Iran's automotive manufacturing industry, according to the head of the Organisation for Investment, Economic and Technical Assistance of Iran, Behrouz Alishiri. Some US $300mn has already been invested. The government wants to turn Iran into an automobile production hub by extending legal support and special privileges to overseas investors. Alishiri says the government will provide a long-term plan to the Iranian automobile sector to help find reliable foreign investors. In 2013, local car producer Saipa remained the dominant player on the Iranian new car sales market, selling 237,724 units, according to figures on the Focus2Move website. This equated to a market share of nearly 40%. Saipa manufactures Iran's most popular car, the Pride. In second place is French carmaker Peugeot, on 181,051 units (30% share), followed by Iran Khodro Company on 102,051 (17%). In fourth and fifth place were Renault (45,221; 7.5%) and Chinese automaker Chery (23,610; 3.9%) Business Monitor International Page 8

9 SWOT Iran Auto Industry SWOT Strengths The largest car-producing market in the Middle East. Domestically developed engines, as well as vehicles, reduce the country's reliance on imports. Growing middle class that should provide high demand for new cars over the medium term. Weaknesses Local parts and components manufacturers face capacity constraints, which will mean greater reliance on foreign imports in car assembly. Production likely fell over Opportunities Should a permanent deal on Iran's nuclear programme be reached and sanctions ended, then we would expect the domestic economy to grow rapidly over the medium term, which in turn would boost demand for new cars. As Iran's car sector grows, it will increasingly rely on outsourcing for parts and components. Agreements with Chinese manufacturers brings new business partnerships and uses for capacity. Threats Should talks between Iran and the West collapse in 2014, then the country would remain subject to US trade sanctions, which would continue to cut the country off from international investment. Political instability remains a key concern for the whole Iranian economy. Business Monitor International Page 9

10 Political Political SWOT Analysis Strengths Since the overthrow of the Pahlavi family in 1979, there has been some reduction in the level of political corruption, while wealth distribution has improved marginally. The Revolutionary Guard and Basij militia are fiercely loyal to the supreme leader, helping to maintain social stability. Weaknesses The country has one of the poorest human rights records in the region, and authorities do not hesitate to quell dissidents. A number of journalists and antigovernment protesters are being held in custody. While decision-making ultimately rests with the supreme leader, the regime is heavily fragmented, and consensus is hard to reach. Widespread perceptions of electoral fraud during the course of June 2009's presidential elections have damaged the regime's legitimacy in the eyes of many Iranians. Opportunities The Majlis (parliament) is more than just a rubber stamp; the move by 150 parliamentarians (out of 290) to hold former president Mahmoud Ahmadinejad accountable for his handling of the economy in March 2012 is a positive indication that checks exist. The victory of moderate cleric Hassan Rouhani in Presidential elections in June 2013 is leading to a significant improvement in relations with the West. Threats Despite progress in nuclear talks, the prospect of further US and EU sanctions and the possibility of a military strike by the US or Israel cannot be dismissed entirely. Youth unemployment is high. The strong influence of the Revolutionary Guards within the political and economic arena may present a challenge to reform over the long term. Business Monitor International Page 10

11 Economic Economic SWOT Analysis Strengths Iran has the world's second largest proven oil reserves after Saudi Arabia, and the world's second largest proven gas reserves after Russia. Oil and gas aside, Iran is rich in other resources and has a strong agricultural sector. Weaknesses Local consumption of hydrocarbons is rising rapidly; this, coupled with ageing technology in the sector, will have a negative impact on its oil and gas exporting capacity. International sanctions discourage foreign oil companies from bringing much-needed technical knowledge and equipment to maintain oil output levels. Opportunities The gas sector remains underdeveloped, and there is considerable room to maximise this source of revenue. A growing population, combined with a shortage of housing, provide opportunities for investment in residential construction. Threats A decline in global oil prices would have a marked impact on the economy. Although an Oil Stabilisation Fund exists to protect the economy at times of weaker oil prices, it has increasingly been used to fund government overspending and could be close to empty. Capital flight could continue, particularly should negotiations on the nuclear programme fail. Business Monitor International Page 11

12 Business Environment Business Environment SWOT Analysis Strengths The Foreign Investment Promotion and Protection Act gives some protection to foreign investors and now allows relatively good terms for the repatriation of profits. Although stifled in the years since the Islamic Revolution, Iranians have traditionally been renowned for their entrepreneurial skills - a factor that is potentially a strong pull for foreign investors. Weaknesses Progress on the privatisation front remains slow despite some recent encouraging signs. Foreign firms are currently unable to own Iran's hydrocarbon resources. The resultant 'buy back' deals offer less advantageous terms than those elsewhere, limiting hopes of new investment. Opportunities As part of the fourth five-year development plan , the government ended tax and customs concessions afforded to the country's quasi-statal bonyads, or foundations. Threats UN, US and EU sanctions on Iran's banking and energy sectors are making it very difficult for foreign companies to undertake financial transactions with Iranian entities, and much riskier to invest in the hydrocarbon sector. Central bank supervision of charitable funds will be stepped up sharply after it emerged that a number of these funds had collapsed due to indiscriminate lending practices. Business Monitor International Page 12

13 Industry Forecast Production Table: Iran Automotive Production, f 2013f 2014f 2015f 2016f 2017f 2018f PRODUCTION: Vehicles, units 1,648, , , , , ,907 1,060,133 1,148,876 PRODUCTION: Vehicles, units, % chg y-o-y PRODUCTION: Passenger cars, units 1,413, , , , , , ,779 1,064,689 PRODUCTION: Passenger cars, units, % chg y-o-y PRODUCTION: Passenger cars, % of total domestic vehicle unit production PRODUCTION: Commercial vehicles, units 235, ,850 71,950 74,109 77,073 80,926 83,354 84,188 PRODUCTION: Commercial vehicles, units, % chg y-o-y PRODUCTION: Commercial vehicles, % of total domestic vehicle unit production e/f = BMI estimate/forecast. Sources: OICA, UN Comtrade Data reported by Iran's IRNA news agency in January 2014 suggest that there is cause to be less bearish in our estimate for 2013 full-year vehicle production. For the first 10 months of the Iranian calendar year, ending March , the industry produced 576,663 units, down 10.5% from the previous year. Over the first 11 months of the current Iranian year, auto production rose to 656,990 vehicles. The country made 557,013 sedans, which accounted for 84% of the total output in the reported period. The country produced 93,183 vans, 6,324 trucks, 379 autobuses and 92 minibuses in the same period, reports Shata. The report added that Iran made 80,476 vehicles from January 21 to February 19, of which 68,107 were sedans. During this period, the country made 11,713 vans, 607 trucks, 38 autobuses and 11 minibuses. We consequently believe there is good reason to upgrade our production estimate for 2013, while the return of French carmaker Renault, and the potential for others to follow suit, creates significant upside potential for at least the early part of This supports our forecast for a return to positive production growth of at Business Monitor International Page 13

14 least 10% for passenger cars in 2014, although this will be subject to revision based on sanction developments. Based on a poor first half of 2013 and perceived ongoing headwinds, we had originally projected a 50% decline in vehicle output for the calendar year 2013 (January to December), as based on OICA reporting periods. We believe that the moderation in the output contraction over the Iranian year so far can be attributed to the return of some models to the country's line-up as national manufacturers source domestically produced parts, as well as the ramping up of production of the 'national cars', such as Iran Khodro Company's (IKCO) Runna. As such, we have upgraded our output estimate for 2013 to a 28% contraction. Looking ahead, the temporary deal reached with the P5+1 group to ease sanctions on the country provides the opportunity for a number of international carmakers to return to the market and restore at least some lost output. With the initial deal in place for just six months, while a more long-term solution is negotiated, we would expect the most significant uptick to be in the early part of the year until we know more regarding the future beyond the six-month period. Early signs are promising, as Renault has already recommenced shipments of parts for its Tondar model for assembly in the country. At present the shipments are 'very low' in numbers, according to Renault's head of Asia Pacific (including the Middle East), Gilles Normand. However, it is a step towards normalising operations in the country. Fellow French carmaker PSA Peugeot Citroen has also signalled its intent to return. Having been one of Iran's leading foreign brands before sanctions were tightened, a return to the market for Peugeot would help to offset the ongoing slump in the group's European business. Indeed, looking to the longer term, the resumption of business in Iran could be a lifeline for the PSA Group. The country had been Peugeot's second-largest market after France before the sanctions. As a result of such a significant market being removed from its operations, CFO Jean-Baptiste de Chatillon said the company has been losing EUR10mn a month in operating profit. Combined with the slowdown in Europe, this saw the PSA group post an operating loss of EUR510mn in H113, following a EUR1.5bn loss in Although it is still unknown how long these companies will be able to remain operational in the country, we would expect them to make the most of their time, eventually ramping up output in what Normand called 'a window of opportunity for the next six months'. There is potential for other carmakers which previously had operations in the country to return, as Kia Motors, which had a tie-up with Saipa, is also reportedly monitoring the situation. Business Monitor International Page 14

15 This period of increased international activity will be backed by domestic carmakers ramping up output of their own models, which are increasingly targeting the export market - also in need of a boost since sanctions hit. In the first nine months of the Iranian year, exports fell 88.9% year-on-year (y-o-y) to just 4,824 units. Shipments were largely limited to three main markets - Iraq with 2,542 units, Azerbaijan with 1,147 units and 612 vehicles exported to Egypt. Here too there is upside potential, however, as Saipa has announced that production of its Taiba car grew 74.7% y-o-y in the first 10 months of the Iranian year on the back of increased exports, and more markets have recently been added. In 2012, the model passed the Euro 4 tests allowing it to be sold in Ukraine. In January, it was granted permission to be sold in Russia, which will also open up the Kazakhstan and Belarusian markets through their customs union. As a result, Saipa is aiming to export 20% of its output a year by As a result of the country's depleted production, imports show the only sign of positive growth in the market, rising 49.2% y-o-y in the first nine months to 44,647 units. The bulk of imports, some 33,899 units, came from the UAE, which is a traditionally strong re-export market for the region. Interestingly, however, one of the next biggest import sources was China with 7,099 units. This supports BMI's long-held view that, as Chinese carmakers look to diversify their overseas growth markets, the Middle East will become a key region. Among domestic automakers, Iran Khodro Company (IKCO) is also likely to benefit from the potential return of its former partner, although the domestic carmaker had been making progress in producing its own components for models such as the Peugeot 206 following the French firm's withdrawal. Local production of Peugeot models in September and October 2013 topped 10,000 units a month for the first time in three years. According to data from the Iran Vehicle Manufacturers Association, the Peugeot Pars claimed second place in terms of output in October 2013, with 10,533 units produced. In total, we still forecast a 50% decline in vehicle production in 2013, however. Indeed, there remains a great deal of 'wait and see' sentiment in the industry, until the full details of future operating in the Iranian market have been made clear. South Korea's Kia Motors, which had a partnership with domestic producer SAIPA until it withdrew from the market in 2010, said it will wait for more information before commenting. Germany's Daimler, which used to have a 30% stake in a diesel engine joint venture with IKCO before starting to cut back its Iranian business in 2010, said it will 'closely monitor' the situation, but has no plans to return to the market. Business Monitor International Page 15

16 In a further encouraging development, in December 2013, it was reported that more than US$1bn in foreign direct investment has been approved for Iran's automotive manufacturing industry, according to the head of the Organisation for Investment, Economic and Technical Assistance of Iran, Behrouz Alishiri. Some US $300mn has already been invested. The government wants to turn Iran into an automobile production hub by extending legal support and special privileges to overseas investors. Alishiri says the government will provide a long-term plan to the Iranian automobile sector to help find reliable foreign investors. Iranian vehicle production ended calendar year 2012 down 40% on the previous year, and registered a similar decline for the Iranian year ending March Although the latter months of the Iranian year showed signs of improvement with year-on-year declines shrinking, BMI believes there are still too many risks to manufacturing - not least the shortage of capital and Western sanctions - to expect a full recovery in the current year. New opportunities have also arisen in the form of an agreement reached in March 2014 between Saipa and Chinese automaker Chongqing Changan Automobile Co. to manufacture cars jointly, reports ISNA. Under the agreement, two models of car will be manufactured by Saipa's subsidiary Saipa Kashan. This subsidiary has the capacity to make 180,000 cars on a yearly basis. Meanwhile, 502,273 cars were produced in Iran in the first three quarters of the current Iranian calendar year, which commenced on March 21. In addition, the Iranian government intends to reduce car import tariffs to zero in two year period, according to a member of the Iranian parliamentary Industries and Mines Committee, Ali Ali-lou. The move is expected to enhance domestic production and make the auto industry competitive with its counterparts across the globe. Further long-term upside potential comes from a new plant in the planning stages due to open in According to ISNA reports, the plant will have an annual production capacity of 5mn units and will produce the first fully national car to be sold for US$10,000-12,000. If this projected capacity is correct, BMI believes it will be incredibly ambitious to achieve and as such we have not factored this full total into our forecasts. We have raised our outlook for 2015 and beyond to take new capacity into account, but await confirmation of the new plant's projected capacity. Business Monitor International Page 16

17 Sales Table: Iran Automotive Sales, f 2013f 2014f 2015f 2016f 2017f 2018f SALES: Vehicles, units 1,590,000 1,030, , , , , ,723 1,063,395 SALES: Vehicles, units, % chg y-o-y Source: BMI Information on latest sales data is more difficult to obtain. However, BMI surmises that sales will move largely in line with domestic production over the forecast period, ending at around 925,000 units by Much will depend on how the talks between Iran and the major powers progress over early Should sanctions be permanently eased, then there is scope for more rapid growth in new car sales as the Iranian economy - especially its key oil sector - regains access to the world's markets. However, if the talks fail and new sanctions are imposed, then the future of the few remaining international carmakers - such as Renault - still operating in Iran would be called into question. Turning to the macroeconomic backdrop within the country, BMI forecasts Iran's economy to expand by 2.8% and 3.4% in real terms in 2014 and 2015, respectively, from an estimate of a 3.5% contraction in Iran and the 5+1 powers (the United States, Russia, China, France, Britain and Germany) clinched an interim deal on the Islamic Republic's nuclear programme on November 24, including gains of approximately US$7bn in sanctions relief. This will result in an improved outlook for exports, as well as increased confidence among investors and consumers. In addition, we see macroeconomic management improving significantly during the presidency of Hassan Rouhani, which will lead to a gradual decline of price pressures over the coming years. Encouragingly for the auto sector, we see private consumption and fixed investment as the major drivers of growth in 2014 and Trade Vehicle exports from Iran fell 94.3% y-o-y for the first five months of the Iranian year, which started March , according to Iranian news agencies. BMI believes there are a number of reasons for this, making it difficult for domestic producers to rectify the situation in the near term. The biggest cause is the parallel Business Monitor International Page 17

18 slump in production, brought about by the withdrawal of several international carmakers from their local assembly agreements. The decline in production outline above is perhaps the biggest driver of the decline in production. Combined with this is the fact that sanctions are also hitting imports, which means more output is required to accommodate the domestic market. Although imports of fully built cars are not actually included in the latest round of US sanctions, which took effect in July, carmakers have still chosen to suspend exports to the country. However, a lack of reliable sales data makes it hard to judge to what extent domestic models are filling the void left by imports. Iran's major export market for its cars remains Iraq, despite occasional reports of Iraq trying to ban Iranianbuilt cars on sometimes spurious grounds, such as poor quality standards. Indeed, Iraq was the largest market for Iranian cars in the six months of the current Iranian year started March 21, according to a report by the Iraqi Customs Department in October The report showed that the Iraqi share of Iranian sedans equalled 59.2% in the reported period, while Azerbaijan and Egypt were second and third with a share of 13.5% and 9.2% respectively, ISNA reported. Iran exported 2,218 sedans worth US$16mn during the period. While this may have contributed to the drop in exports, the decline is not totally negative. IKCO has turned to a domestic assembly line in Iraq, which is due to have an annual production capacity of 30,000 units, reducing the need to export to the country. Industry-wide, however, Iraq accounted for over 90% of exports in the previous Iranian year and this will be a big loss to offset. Carmakers have sought new markets to expand their export operations, however. In September 2013, IKCO announced it will begin exporting the Samand, Runna and Soren models to Tunisia. The company plans to ship 100,000 units by 2014 and will use the country as a base for exports to Libya and Algeria. IKCO has already expanded exports to Ukraine and Kazakhstan in the current year to date. According to CEO Javad Najmeddin, after shipping 95% of exports to Iraq in the last Iranian year, Kazakhstan, Venezuela, Turkmenistan and Ukraine were the main export markets for the first quarter of the current year. Business Monitor International Page 18

19 Passenger Vehicles In 2013, local car producer Saipa remained the dominant player on the Iranian new car sales market, selling 237,724 units, according to figures on the Focus2Move website. This equated to a market share of nearly 40%. Saipa manufactures Iran's most popular car, the Pride. In second place was French carmaker Peugeot, on 181,051 units (30% share), followed by Iran Khodro Company on 102,051 (17%). In fourth and fifth place were Renault (45,221; 7.5%) and Chinese automaker Chery (23,610; 3.9%) According to Focus2Move, the total number of light passenger vehicles 'produced and shipped to dealers in Iran' over 2013 stood at 601,407 units, up by 17% year-on-year (y-o-y). Table: Iran - Top 5 Best-Selling Manufacturers Manufacturer Sales Market Share (%) Saipa 237, Peugeot 181, Iran Khodro 102, Renault 45, Chery 23, Source: Focus2Move Business Monitor International Page 19

20 Macroeconomic Forecast Economic Analysis BMI View:We project Iran's economy to expand by 2.8% and 3.4% in real terms in 2014 and 2015, respectively, from our estimate of a 3.5% contraction in Improving relations with the West and better macroeconomic management, coupled with low base effects, will lead to an improved outlook for exports and increased business and consumer confidence. That said, the macroeconomic outlook will remain highly susceptible by developments in negotiations on the nuclear programme. We forecast Iran's economy to expand by 2.8% and 3.4% in real terms in 2014 and 2015, respectively, from our estimate of a 3.5% contraction in Iran and the 5+1 powers (the United States, Russia, China, France, Britain and Germany) clinched an interim deal on the Islamic Republic's nuclear programme on November 24, including gains of approximately US$7bn in sanctions relief (see 'Interim Nuclear Deal: Key Implications', November ). This will result in an improved outlook for exports, as well as increased confidence among investors and consumers. In addition, we see macroeconomic management improving significantly during the presidency of Hassan Rouhani, which will lead to a gradual decline of price pressures over the coming years. We see private consumption and fixed investment as the major drivers of growth in 2014 and Business Monitor International Page 20