An Iranian citizen journalist, who writes under a pseudonym to protect his identity, wrote the following article on the ground inside Iran.
There are some things that only ever happen in Iran. For instance, say you buy a car, a Kia Pride — a car that is only manufactured in Iran — drive it for 10 years and decide to sell it. You will get the same money back, or possibly even more than when you first bought it a decade earlier.
In 2005 and 2006, a brand new Pride would set you back seven million tomans, the equivalent of about $2,400. You can sell that exact car today for $3,400, which is only the case because of the unique way in which the Iranian auto industry works.
The Black Market
Unlike most places in the world, car dealers in Iran effectively act like unofficial banks. For certain car models, the market price is at least twice as much as the factory price. Take the Renault Megane 2000, a car that is manufactured by Pars Khodro, an affiliate of Saipa auto manufacturer. In the factory, the vehicle costs about $26,000 but on the market you can expect to pay as much as $40,000.
This is also the case for cars manufactured by Iran Khodro, another major car manufacturer. For instance, the factory price of an automatic Peugeot 207 is about $15,000 but one of these costs over $18,000 on the market.
This is what leads numerous people with cash on their hands to invest their money into the car industry rather than in a bank, the stock market or elsewhere. And, why shouldn’t people? Buying a Megane directly from Pars Khodro could mean a profit of over $13,000 in no time at all, which is no small pocket change.
Vehicles are manufactured on a big scale in Iran. Between May 22 and June 21, 2015 alone, nearly 100,000 cars and 7,000 vans were produced. Or to give a more specific example, Iran Khodro was able to manufacture nearly 3,000 L-90 models between late March and June this year. For this model, the factory and market price vary by nearly $1,700. This means that in those three months alone, black market profits amounted to at least five million dollars.
Contrary to what one might expect, car manufacturers are relatively happy with this situation because to a significant extent they are able to control the price on the black market and benefit in the process. And, in fact, many official Iran Khodro and Saipa dealers are involved in black market dealings.
There is no actual private auto industry
After the Islamic Revolution of 1979, the automobile industry in Iran was one of the few remaining sectors that enjoyed a share of the country’s domestic gross product (GDP). After oil, although by a wide margin, the auto industry was Iran’s second biggest market, which also explains why Iran was one of the world’s top 20 car manufacturers before sanctions. But the industry fell on hard times after tough sanctions were imposed on Iran in 2010. This is evident from various statistics. For instance, the monthly production of Peugeot 207s fell as low as to 10 units in certain periods.
However, it was not bad for everyone. As state-owned manufactures struggled, so-called “private” manufacturers moved in and took advantage. Rather than working with French manufacturers like Iran Khodro, or South Korean or Japanese ones like Saipa, they turned their attention to China, particularly companies Modiran Vehicle Manufacturing Company and Kerman Motor. So while the assembly lines at Iran Khodro and Saipa became mostly idle, these manufacturing companies were able to capitalize.
Prices on the market change to the advantage of the consumer when competition is rife among suppliers, but this is practically impossible in Iran. Big car manufactures like Iran Khodro and Saipa are state-owned, which means they are not part of a bigger governing body. For example, the Basij-run Mehr Eghtesad Investment Corp owns Bahman Group, which sells Mazdas across Iran. Equally, Saderat Bank, Iran’s biggest bank, the Armed Forces Social Security Investment Organization and others own the Ghadir Investment Company.
So there is no real competition between manufacturers because they all fundamentally belong to the same entity.
Currently, Mazda 6 models are sold in free-trade zones for $24,000. But when Bahman Group sells them on the domestic market, the price jumps to over $60,000. This remarkable jump in prices is a by-product of the written and unwritten monopoly rules and regulations under which Iran’s auto industry operates.
The Pipe Dream of Life after Sanctions
The Vienna talks and their conclusion offered Iranian consumers renewed hopes that the price of cars would go down after the implementation of an agreement, and return to the levels before 2012 and 2013. It was in those years that Iranian car manufacturers decided to hike up car prices on the basis that hard currency was more expensive, despite their claim that they were making the cars domestically.
Just a short time after the agreement was reached, though, the Industry, Mines and Commerce Minister announced that car prices would not be reduced in Iran.
A Silver Lining, Hopefully
Although the Minister of industries said car prices would not be cut, manufacturers still need to change how the prices are determined. This is not for consumers’ sake but because when sanctions are lifted, more cars will be produced, something that is not unimaginable by the first quarter of 2016. This will mean the black market will become less important or even disappear altogether and the vast differences between factory and market prices will cease to exist.
If there is more supply, there must be more demand. What boosts this is either greater buying power or better terms. Banks can offer loans with better terms but manufacturers can also make it easier for consumers to buy cars. But by selling cars for less, manufacturers will struggle to balance their books this year and satisfy shareholders that are primarily government and government-affiliated institutions.
Luckily, in recent years, the main players in the auto industry have mostly stayed away from China, so there will be minimal resistance to allowing in new Western companies and brands to cooperate with domestic car manufacturers.
The Vienna agreement will mean both better quality products and better terms for Iranian consumers. But those waiting for car prices to drop would be better off forgetting about it. As the saying goes in Iran, if something becomes more expensive it will not become any cheaper.
Hamid-Reza Shafeh, Citizen-Journalist
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