A production line at domestic carmaker Iran Khodro. Photo: WikiCommons

Iran is set to relax a ban on importing cars, reversing an unpopular policy in force since 2018 that has left Iranians stuck on the road with poor-quality, locally-made automobiles.

The move aims at stimulating more market competition in the large domestic auto industry as complaints grow that cosseted local producers have resorted to the worst of monopolistic behaviors.

Iran’s auto industry accounts for a large percentage of the nation’s non-oil exports and employs nearly 800,000 workers. The two major car manufacturers, Iran Khodro and Saipa, are both state-owned, while a smattering of smaller firms is privately run.

The country’s automotive sector is the biggest in the Middle East and one of the top 20 internationally, with the latest reports putting the number of cars produced by Iran’s three largest manufacturers at 867,363 in 2021.

However, the government’s protectionist policies aimed at boosting domestic production and its generous subsidies to local carmakers have spawned a monopoly of firms that feel no drive to improve the quality and safety of their vehicles.

At the same time, they are given de facto carte blanche to set uncompetitive, inflated prices in the absence of credible foreign rivals to expand and diversify the local market.

In recent months, particularly during the Persian New Year holidays in March, when intercity trips across the country were at a high and the highways were full of cars, casualty numbers from road accidents soared dramatically, and many blamed the poor quality of locally-made cars.

A reckless driving culture and engineering flaws in many roads were also factors.

According to the International Road Federation, Iran ranked 6th internationally in terms of the number of road accidents and traffic-related deaths in 2018. A total of 293,305 accidents leading to 15,998 deaths and 363,531 injuries were recorded that year, making Iran’s roads some of the most deadly in the world.

A locally-made Iran Khodro Dena Plus in 2018. Photo: WikiCommons

In recent decades, Iranian carmakers have found new avenues to export their products to other countries, and nations such as Armenia, Azerbaijan, Belarus, China, Iraq, Russia and Turkey are some of Iran’s primary car customers.

In 2019, exports totaled US$5.7 million and jumped to $7.1 million in 2020.

The Ministry of Industry, Mining and Trade has floated ambitious plans to revolutionize the automotive industry, including by extending production to 1.6 million units before the end of 2022 and leapfrogging to 3 million vehicles in the Persian calendar year starting March 2025.

Critics are taking the turbo-hyped plans with a pinch of salt, citing the deteriorating quality and spiraling prices of the cars whose credibility is at stake. Traditional allies such as Iraq and Syria recently rejected several batches of exports from Iran for failing to meet safety benchmarks.

Iran’s auto industry has seen meteoric ups and downs, due largely to the nation’s precarious relations with the international community.

In the aftermath of the signing of the Joint Comprehensive Plan of Action (JCPOA) nuclear deal in 2015, several multinational auto manufacturers rushed to initiate new partnerships, open assembly lines and launch joint ventures to capitalize on the untapped potential of a market of 85 million consumers.  

In January 2016, Germany’s Daimler and Iran’s Khodro Diesel signed an agreement to produce Mercedes-Benz trucks at an Iran-based plant. Similarly, in 2017, France’s Renault formed a joint venture with two local partners worth 660 million euros ($709 million) to produce 150,000 vehicles annually.

PSA Peugeot Citroen was the first giant automaker to pledge long-term cooperation after the removal of sanctions. In 2016, it signed a binding contract with Iran Khodro that included a 5-year investment to add up to 400 million euros ($429 million) in capacity as part of initial plans to produce 200,000 cars a year in a 50-50 joint venture.

However, the burgeoning foreign tie-ups unraveled when then-US President Donald Trump pulled out of the JCPOA and reinstated sanctions. The car corporations that had new joint ventures with Iranian counterparts were forced to exit the market to avoid potential US secondary sanctions.

The sanctions and the ensuing collapse of the Islamic Republic’s dollar-based foreign reserves meant the government had to identify cars as luxury items and refuse to give preferential treatment to imports so it could divert more funds into purchasing essentials like medicine and food.

A joint venture with Peugeot saw this model hit the Iranian market. Photo: WikiCommons

But there was also a political dimension to the 2018 decision to ban car imports. Successive governments have resorted to autarky in the face of international economic pressure and after the JCPOA’s collapse authorities were keen to prove the nation’s self-sufficiency, which galvanized a modicum of nationalistic support for the moratorium on car imports.

In the meantime, the Islamic Republic’s leadership threw its weight behind local manufacturers. On several occasions, Supreme Leader Ayatollah Ali Khamenei heaped praise on national automakers and spoke at length about the imperative of promoting domestic production.

However, it soon dawned on Iranians that all the government’s support fostered monopolistic behavior that made carmakers lethargic rather than innovative, and arguably nurtured corruption among a clique of well-connected tycoons living off state handouts and the lack of viable foreign or local competition.

Mostafa Beshkar, an associate professor of economics at Indiana University Bloomington, told Asia Times that Iran’s protectionist policies have contributed to the broader structural maladies of the Iranian economy and have resulted in increasingly unfavorable economic outcomes.

“Given the systemic problems facing Iran’s economy, it is not easy to evaluate government policies in one single sector. But it is quite clear that the government’s protectionist policies in the automobile industry have had substantially negative impacts on the environment and transportation safety,” said Beshkar, who has also taught at Purdue University and the University of New Hampshire.

“Moreover, these policies have prevented Iran’s manufacturing sector from integrating itself into the global supply chains, which would have increased its productivity in a substantial way.”

Local media have reported the prices of the most voguish cars made at home have spiked on average between 20% and 67% compared with the previous year, meaning buyers must spend somewhere between 650 million and 1.5 billion rials more on a new car than they had to pay last year, which for many households is a financial impossibility.

The annual salary of most working families comprises only a fraction of these figures.

With a rising public outcry over the waning quality of indigenously-made cars and the surge of traffic-related accidents, calls for the liberalization of imports have gained momentum.

On January 10, five people were killed in a chain collision involving 60 vehicles on the motorway connecting the cities of Behbahan and Ramhormoz in southern Iran. According to the traffic police commander, none of the airbags in the 60 domestically-produced cars inflated.

Iran has had more than its share of road accidents. Photo: WikiCommons

On May 11, the minister of Industry, Mining and Trade announced the finalization of a bylaw on facilitating car imports to respond to the growing demand and rebalance local supply chains.

It was initially agreed that permission would be granted for a total of 70,000 cars to be imported, but then the parliament decided there are more benefits involved in scrapping the limit and enabling the government to import as many cars as the public needs.

Two conditions have been set, however: the price of each car should not exceed $25,000, and the engine size should range from 1,500-2,500 cubic centimeters, a barometer of the efficiency of the automobiles.

Hossein Askari, professor emeritus of international business and international affairs at the George Washington University and a former member of the executive board of the International Monetary Fund, says Iran’s approach to its national auto industry has been misguided and that explains the public discontent with local cars.

“Iran’s overall trade policies are flawed. A country should protect industries where it has a comparative advantage for a few years and as the industry develops, you reduce the tariffs and eventually the industry can stand on its own two feet and begin to export – the true test of an industry where there is a comparative advantage,” he told Asia Times.

“This is what Japan did and it was followed by South Korea in their car industries. But in Iran’s case, these tariffs were there when Mahmoud Khayami started Iran National and the industry has not become more competitive over time, but maybe even less so. It has been a drag on the Iranian economy, but there are vested interests to keep it going,” he added.

At the same time, other experts believe sanctions are primarily to blame for the stagnation of what used to be a thriving auto industry.

“Pre-existing issues with domestic manufacturers are overshadowed, and severely aggravated, by international restrictions. Sanctions on Iran have had a devastating impact on Iran’s domestic car industry and on Iranian consumers,” said Alex Shams, anthropologist and editor of the Ajam Media Collective.

“The inconvenient truth is that US sanctions have crushed Iranian efforts to open their economy to the world, strengthening domestic monopolies and fueling the domination of the economy by companies with links to the Revolutionary Guards.

“If there are hidden agendas here, it is how US aggression and economic warfare on Iran has helped the Islamic Revolutionary Guard Corps cement its central role in the Iranian economy and suffocated independent Iranian companies,” he told Asia Times.

Shams argues sanctions have slowed industrial sector competition in Iran, including in the automotive sector: “Sanctions on Iran have cut out foreign competition that historically would have incentivized domestic innovation.

“Due to the economic impact of sanctions, foreign models have become so expensive that Iranians cannot afford them, leaving them with few choices.”

Follow Kourosh Ziabari on Twitter at @KZiabari