While Iran finds itself throttled by US economic and banking sanctions that are still a far cry from being repealed, a new layer of complexity has been added to the country’s economic misfortunes – the government has put a wholesale ban on imports of home appliances from South Korea, and is gearing up to apply bans on other foreign products.
On September 29, Supreme Leader Ayatollah Ali Khamenei instructed President Ebrahim Raisi to ban the importation of home appliances, specifically from “two South Korean firms” which he didn’t name, reportedly to stave off the insolvency of domestic manufacturers.
He noted in his brief memo that the domestic firms had only just begun to stand on their feet and the government would come to their assistance.
The leader’s thinly veiled reference to two South Korean firms was seen by the public as a reference to electronics and domestic appliances giants Samsung and LG, which have been household names in the Persian Gulf country for years and fixtures of Iranian homes in the absence of serious competitors from Europe and other Asian states.
Both corporations faced critical scrutiny by Islamic Republic authorities after keeping a low profile and downsizing their activities in Iran in deference to United States sanctions in the wake of its 2018 pullout from the Joint Comprehensive Plan of Action (JCPOA).
Some unofficial estimates suggest that prior to the injunction, up to 55-70% of Iran’s market for home appliances, valued at about US$3.8 billion, was dominated by the two firms. Now, as the unanticipated ban enters force, the resulting void should inevitably be filled by local producers.
According to figures by an association of smartphone importers, in 2020, in excess of 7.14 million Samsung handsets were shipped to Iran and were worth $1.2 billion, which means a roughly 45% share of the country’s mobile phone business was held by the Suwon-headquartered producer.
The official reason given for the ban was to boost domestic production and give a facelift to the economy at a time the nation is ensnared by a full-throated embargo. Doing foreign trade has become increasingly difficult while businesses at home are jostling for survival, declaring bankruptcy one after another.
Sanctions consequences
But the ulterior meaning of the decree, as flagged by more scrupulous observers, was the establishment trying to send a message to the two conglomerates, which had made substantial revenue by operating in Iran for years, that their decision to leave a lucrative market after the introduction of maximum pressure sanctions by former US President Donald Trump in May 2018 would have consequences.
In 2019, reports swirled that the two South Korean behemoths, which had long prevailed in their largest Middle East market of some 85 million consumers, and been running assembly lines in Iran employing hundreds of people, took the initial steps of scaling down their presence on the heels of the unilateral revocation of the JCPOA by the United States.
By the end of 2019, Samsung, unable to deliver key components to sustain its production lines due to the rapid broadening of US restrictions, suspended operations. A large number of electronics shops across Tehran and other major cities took down the Samsung signs, leaving citizens shell-shocked that one of the last major foreign brands was beating a hasty retreat from the country.
But the gesture did not translate into an irreversible breakup. Samsung still had stakes in Iran to protect, and LG equally wanted to maintain its foothold. Both Samsung and LG continued their exports, though in narrower quantities, and both presently run exclusive Persian-language websites mounted on their official domains, in which up-to-date contact details for their sales offices in Tehran are available.
The Iranian government is now knuckling down and flexing its muscles with entities it deems as unfaithful commercial partners and, in its own reading, raising the costs of compliance with the extraterritorial sanctions for non-US companies not legally bound by such measures.
Sheltering local manufacturers might be a motivation, but is certainly not the only reason.
Yet there is no certainty that by ejecting Samsung and LG, it will be the South Korean corporations that will be at a loss. Instead, Iranian consumers are already peeved that the government has stripped them of credible options for their choice of domestic appliances, and they are now discovering that low-quality, inefficient homemade products are an inevitability for the foreseeable future.
Samsung, LG face small losses
In 2019, Samsung made $192.9 billion in global revenue and LG pulled in $53 billion, huge sums of money. But a total of no more than $4 billion in Iran-originated proceeds the two companies earned on average per year would be of little concern if they were to forfeit it. Their massive interests in European and North American trade may be at risk by preserving ties with Iran.
One of the immediate public responses to the ban was mounting speculation that the leader, despite having the final say on all major political and security matters, was trying to inordinately micromanage the economy. He has said on multiple occasions that he does not interfere in executive affairs.
Some analysts said he was hoodwinked by ill-informed advisers giving him false details about the capacity of domestic companies and the status of the commodity market.
The more salient ramification of the ban, however, was an outpouring of discontent by Iranians, who quickly took to the social media to share their unsavory experiences with Iranian-made refrigerators, washing machines, TV sets, vacuum cleaners, microwaves and dishwashers, in particular their energy-guzzling configuration and dismal after-sales service.
Manufacturing electronics and domestic appliances is not a sophisticated industry in Iran, and the know-how is predominantly sourced from countries such as Germany, Italy, Japan, South Korea and Taiwan, whose goods have continued to be accessible even when the sanctions were put on steroids.
In addition, the lion’s share of domestic production is monopolized by a handful of well-connected companies run by people who enjoy clout over religious institutions and security agencies.
One example is the Entekhab Group, a well-heeled firm that has more than 40% of the country’s home appliances market and is run by a 46-year-old propertied entrepreneur who is said to be an alumnus of the Qom Seminary – a clerical training institution.
The elimination of the South Korean makers of home appliances would pave the way for such factories to ramp up their interests in an uncompetitive supply and demand cycle and conquer the market without feeling the urge to improve the quality of their output or setting prices commensurate with people’s purchasing power.
Iranian-made compliances
Raj Bhala, a distinguished professor at the University of Kansas specializing in international trade law, told Asia Times that assuming that the state-sanctioned ordinance would contribute to the improvement in quality of Iran-made appliances was unrealistic.
“If past is prologue, and if case studies from other countries can be applied, then it is far more likely Iranian home appliance manufacturers will consolidate their monopolistic or oligopolistic positions rather than use the protection from foreign competition the Supreme Leader has granted them to improve their quality and raise their standards,” he said.
“What tends to happen is that infant industries, or ailing industries, do not wish to see the protection they enjoy removed. So they lobby their government to continue the restrictions on free trade for far longer than is necessary. The protected industries become mollycoddled by the government,” he added.
Local media report that emboldened by the departure of their serious rivals, Iranian home appliances makers have multiplied their prices. Akbar Pazouki, chairman of the Tehran Home Appliances Sellers Trade Union, recently said an Iranian-made refrigerator sold for at least $850, the equivalent of the salary of a mid-ranking government clerk for five months. People cannot afford such hefty prices, he added.
Earlier this month, Ahmad Alirezabeigi, a conservative MP from Tabriz, raised the alarm in a letter to the Ministry of Industry, Mine and Trade, warning that local home appliances companies, now assured that the marketplace has been vacated by foreign brands, had increased prices by 20-30%, and this has dispossessed people of the ability to purchase what they need.
Some experts thought the downsides of the ban, while Iran has been entangled in a web of taxing sanctions, certainly outweigh its benefits. They say as Iran’s rial has been hugely devalued and foreign currencies have appreciated, local manufacturers could capitalize on the absence of competition to offer affordable prices, but this is not happening.
“Currency depreciation provides price incentives for domestic producers that results in more efficient production. Ban and quota, on the other hand, generate monopolies without any positive effect on the efficiency of national industries,” said Hossein Abbasi, a senior lecturer at the University of Maryland’s Department of Economics.
“It encourages rent-seeking behavior of producers and creates a natural alliance between politicians and the lobby of industries toward strengthening the restriction. This is what we have observed in Iran’s auto industry for decades and politicians receive enormous rents from this industry in exchange for maintaining bans,” he told Asia Times, alluding to a long-standing prohibition on imports of foreign-made cars stipulated by the government.
A Germany-based academic also noted such inhibitory policies, at least in the case of Iran, do not end up giving a boost to the sovereign economy but merely compound what is already a dire situation and exacerbate the international isolation that is taking a toll on civilians.
A miscalculation
“Such strategies are very similar to the classic infant industry protection policies that are tried and tested all over the world and often fail. I would not expect an exceptional successful result in this case in Iran,” said Sara Bazoobandi, a research fellow at the German Institute for Global and Area Studies.
The University of Kansas’s Bhala considers Iran’s move to alienate South Korea, the world’s 10th largest economy, a miscalculation.
“South Korea achieved an economic miracle after the devastation of the 1950-53 Korean War and transcended the middle-income trap. Iran, which has suffered the scourge of war, is stuck, and even regressing, in its growth and development.
“Iran’s official concept of a resistance economy, redolent of what North Korea seeks, is a slogan that has failed to translate into real economic progress for most Iranians. Put differently, Iran would do well to see what lessons it can learn from South Korea’s open trade policies,” he told Asia Times.
Still, to many Iranians, the crackdown on household apparatus from South Korea is perceived as a tit-for-tat backlash to Seoul’s continued seizure of nearly $9 billion in Iran’s assets frozen in its banks. The money is South Korea’s outstanding debt to Iran over crude oil imports in the preceding years that it now refuses to discharge, citing the US sanctions.
The whopping arrears has been casting a dark shadow on the traditionally genial Tehran-Seoul relations, and the leaders of the two countries have been trading barbs publicly over the dispute as of late. Without the US sanctions being removed, it is unlikely the funds will be repatriated to Iran.