The domestic auto industry's debt to parts makers has reached a new high of 450 trillion rials ($1.45 billion), according to a member of the Iran Auto Parts Makers Association.
Reza Rezaei also told the Persian economic daily Donya-e-Eqtesad that the massive debt has built up over the years, such that around 120 trillion rials ($387 million) of the total only pertain to the previous fiscal year (ended March 2021.
Noting that parts manufacturing companies employ hundreds of thousands of people, the official warned that if the carmakers are not given a loan right away, the situation could spiral into a crisis, with many people losing their jobs.
Arash Mohebbinejad, secretary of the association – a lobbying arm of the industry and the official debt collector, said if non-payment of debt can be construed as a crisis, the chronically indebted Iranian automakers have perpetually been in crisis mode.
After US ex-president, Donald Trump, pulled out of the Iran nuclear deal and imposed crippling sanctions on Tehran in the summer of 2018, the Iranian auto industry's woes became even worse.
With nearly a million jobs at stake, the Iranian government has been more or less supportive of the automotive businesses.
Iran's automotive industry accounts for 18% of the country's GDP
Last year, the Iranian government and the Central Bank of Iran ratified an auto industry rescue package worth 100 trillion rials ($322.5 million) to help Iran Khodro Company (IKCO) and SAIPA settle their debts to parts makers and boost production, according to media reports.
Mohebbinejad chastised CBI for not being "helpful", claiming that the funds had not yet been delivered in full to the automakers.
"Parts makers were forced to lay off 150,000 workers after sanctions were imposed," he says, stressing that these people are still looking for a job and the situation may deteriorate if nothing is done soon.
Dilemma of Parts Makers
Domestic auto parts makers are having a difficult time obtaining raw materials and key parts from foreign sources, according to Mohsen Razmkhah, an industry insider.
He said the industry has fallen into stagnation due to soaring currency rates that make it almost impossible to import machinery and equipment.
Since the US sanctions were reimposed, the rial has lost about two-thirds of its value and prices of almost all goods have soared to unprecedented highs. The greenback was trading at 310,000 rials in Tehran on Dec. 11, though it hardly fetched 42,000 rials two years earlier.
Castigating the state’s poor management of the ailing sector, Razmkhah said loans act like sedatives in the struggling industry.
The government is the main shareholder of the biggest car companies, IKCO and SAIPA. The two auto ‘dinosaurs’ are living on borrowed time, despite enjoying an absolute monopoly in the face of a car import ban and charging exorbitant prices for their substandard gas guzzlers.
In fact, they have long been sinking in a sea of red ink and are always salvaged by the government.
“Borrowing has not and will not solve the deepening problems of auto parts manufacturers and an effective strategy is required to revive the industry,” Razmkhah said.
Automakers’ Losses
Despite talks about “toxic” loans, experts believe that the sector’s fiscal crisis can only be alleviated by a third party, most probably foreign investors, as the automakers say they lack liquidity. However, this is unlikely under the US sanctions regime.
According to auto news, Iran’s ailing auto sector lost 300 trillion rials ($967 million) in revenues in the last Iranian year (ended March 20, 2021).
Soheil Memarbashi, the head of Transportation Office at the Ministry of Industries, Mining and Trade, said the combined revenues of the two major automakers hit 1.5 quadrillion rials ($4.8 billion) last year, but they also accumulated massive losses.
Memarbashi said Iran's automotive industry is a critical sector, as it accounts for 18% of the country's GDP and poor decisions for the sector can have far-reaching consequences.
“With regard to the negative impacts of US sanctions on the sector’s interactions with foreign partners, Iranian automakers have been struggling to stay afloat,” he said.
Dim Future
Iran’s automotive industry has perennially faced problems even in pre-sanctions time.
But as expected, the US penalties gradually cut off the supply of raw materials and auto parts. Foreign carmakers and parts suppliers walked away from the lucrative market, fearing Washington’s ire.
Multifarious solutions have been proposed by authorities to minimize the negative impact of the US animosity and economic war, namely against Iran’s major industries. The proposals have produced nothing of essence, save for car prices going through the roof.
The Industries Ministry is in charge of regulating the loss-making automotive industry. Over the years, the ministry’s thick ties with the undeserving sector and vested interests of some state actors have impeded efforts for real reform.
Corruption scandals running into the hundreds of millions of dollars have further tarnished the auto sector’s public image. The scandals have made economic experts and informed observers wonder whether the paralyzed industry has a future.
As part of the ministry’s agenda to revitalize the sector, the localization of parts and technologies has been placed high on the agenda of the government and carmakers. However, the former simultaneously issued import permits for low tech auto parts like mudguards.
This makes one wonder whether Iranian authorities have an integrated strategy for the automotive sector.
