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11/14/08

Iran Autos Report Q4 2008: Economic Sanctions to Impact Growth

Iran Autos Report Q4 2008 (Business Monitor International)

www.companiesandmarkets.com

Market: Automotive and Parts

Published Date: 02/10/2008

Market Research Report Title: Iran Autos Report Q4 2008

Table of Contents: View

Report Type: Market Report

Country: Iran

Number of Pages: 69

Summary: Iran's state-dominated investment climate will continue to suffer from economic sanctions, a problem that will soon start to weigh on long-term growth in the automotive sector according to BMI's latest Iran Automotives Report. The business environment continues to be adversely affected by the uncertain political backdrop and international sanctions. Like other sectors, the automotive industry is suffering from a lack of foreign direct investment (FDI) and capital imports. The privatisation process is moving extremely slowly, while Iran looks set to face a summer of power shortages, a result of a lack of diversity in power-generation

International sanctions, high inflation, exacerbated by fuel price hikes, and dampened consumer demand have depressed growth in the passenger car segment, but industrial growth coupled with infrastructural development is spurring demand in the commercial vehicles segment. BMI believes the Iranian automotive market will contract in the 2008/09 Iranian year (running from 20 March) and that annual domestic sales are unlikely to exceed 1mn units over the next five years. BMI expects overall sales to fall by 7.4% to just under 960,300 units in 2008 and will not be significantly higher than this by 2012

The downturn in the market will have a negative impact on production, owing to manufacturers' heavy dependence on domestic sales. The situation will vary across models, depending on the level of local content, with the commercial vehicle segment the most insulated from external shocks. With the Iranian market stagnating, growth will depend almost entirely on exports. Carmakers have come to realise the importance of external markets and are seeking export opportunities both for CBUs and CKD kits supplied to assembly lines, mostly for Iran Khodro's Samand model, which is assembled from at least 80% Iranian-made parts. The opening of the country's largest car assembly plant in Khorassan in July 2008 will increase automotive capacity with the ability to turn out 100,000 vehicles per annum by end- 2008/09, However, it will not necessarily increase production. BMI is not convinced the demand exists in either domestic or export markets to lift output to full capacity. Export opportunities are restricted to relatively low volumes. Nevertheless, they should help push up output to 1.13mn units by 2012

The decline in automotive production is likely to be sustained due to the impact of UN and US sanctions, which are aimed at forcing Iran to give up its nuclear programme. Sanctions have raised the risk premium for international financing, with borrowing rates now 15% or more in comparison with 2% in the presanctions era, and as a result businesses are looking to the central bank, flush with oil revenues, to raise funds. However, as a result of the sanctions covering dual-use technologies and the failure to provide letters of credit due to US pressure on European banks, Iranian carmakers are struggling to import parts from Europe. The high level of risk means that foreign majors are unlikely to seek further involvement in the Iranian automotive industry. Although Italian carmaker Fiat's announcement in July 2008 of plans to begin production of its Siena sedan in Iran later in 2008 may be portrayed by the government that the car industry is still able to shake off US attempts to isolate the country, the project is at least three years overdue and there is no guarantee that production will start in the immediate future

Iran scores 41.3 points (out of a theoretical maximum of 100) in the BMI automotive business environment rating this quarter, putting it eighth place, 0.7 points ahead of Nigeria and 5.6 points behind Egypt. Iran may have the largest automotive market in the region, but its ratings have suffered greatly as a result of UN and US sanctions. With serious structural deficiencies in the economy and the heavy protection of the car market unlikely to be change in the forecast period, the only hope Iran has of raising its score is to ensure growth in automotive output. This is contingent on an easing or lifting of sanctions related to dual-use technology that is used in both the automotive and nuclear industries and seeking new avenues of finance and investment to bypass US sanctions

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