The world's carmakers have been plotting their assault on Iran for several years. But when they arrive in the newly opened country - marking a long-awaited return for some - they will have to share the spoils with aggressive Chinese competitors.
After world powers reached a historic deal with Iran to limit nuclear activity in return for lifting sanctions, several international brands from Britain's upmarket Bentley to volume manufacturers like France's PSA Peugeot Citroën, are jostling to win lucrative business.
Among those looking to enter the once-closed economy is Lotus, the small British sports car maker, which has highlighted potential dealership locations. Bentley, the Volkswagen-owned luxury carmaker, is also studying the potential to open its first outlet in the country - possibly as soon as next year.
But industry insiders say the German and French volume manufacturers, which built up significant business in Iran before sanctions, will lead the charge into the country.
"Things could explode overnight," says Vikas Sehgal, global head of automotive at Rothschild, the investment bank.
Iran is the biggest car market in the Middle East, selling 900,000 passenger units last year and building 1.1m. Mr Sehgal believes Iran has the capability to create a “regional industrial powerhouse” building 3m-4m units annually within this decade - versus production of 1.4m forecast this year, according to LMC Automotive - with a substantial, educated middle-class driving the sales market on the back of pent-up demand. “On the sales side, it will catapult,” Mr Sehgal adds.
For some carmakers, the timing could not be better, as they scour the globe for new markets that can help offset other slowing or declining emerging economies, such as China, Russia and Brazil. UBS last week almost halved its forecast for global sales growth to just 1.3 per cent, the slowest rate since 2010.
"Iran has tremendous potential," says Bill Russo, managing director of consulting firm Gao Feng Advisory. "If you're looking for 'white space' - places where you haven't sold before - this is one of the best opportunities in the world right now."
French in dominant position in the past
Iran's car market was previously dominated by the French carmakers Renault and Peugeot, which shipped "complete knockdown" (CKD) kits into the country to be assembled by local manufacturers such as Iran Khodro and Saipa.
Peugeot alone sold more than 450,000 vehicles in the country in 2011, about a third of the sales market, before sanctions and an alliance with General Motors of the US prompted the French carmaker to pull out.
The road back will not be easy. Competitors, including the price-competitive Chinese, whose cars have found little or no traction in developed markets overseas, moved into fill the void when sanctions were imposed.
"Western carmakers … will find the landscape changed by new competitors from China," says Zakia Subhan, an analyst at LMC.
She says the likes of Chery Auto, Lifan Industry and Jianghuai have benefited from the "vacuum" left by Peugeot and Renault.
Zhejang Geely, parent company of Volvo and namesake brand Geely, is in advanced discussions to open a CKD plant in Iran with initial capacity of about 20,000 units a year. That would be its first assembly operation in the country having already established sales activities in the country.
Iran was the top export destination for Chinese autos in 2014, with the world’s biggest economy shipping 114,000 commercial and passenger vehicles into the Middle Eastern country, according to Bernstein Research.
"They've long had their sights set on that region," says Mr Russo. "Now, with the rest of the world taking an interest, China sees a wider opportunity. Now is the time to act."
New aggressive Asian rivals
Competition from Asian and local brands has not deterred Peugeot from pressing ahead with its plans. The French carmaker in April signed an agreement to re-start production with former partner Iran Khodro, the country’s biggest carmaker, as soon as possible. The French company, which is trying to reinvigorate sales and profitability under a turnround plan, has already signed a distribution agreement to sell its luxury DS brand in the country.
But analysts think VW, which offers both German pedigree and a collection of brands across all price-points, could be the biggest beneficiary. The Holy Grail for the western carmakers would be the discovery of a new Skoda or Dacia - an indigenous, low-cost challenger brand that could be acquired and taken worldwide.
Iran’s automotive sector, which accounts for about a tenth of gross domestic product in the country, was one of the first to benefit from normalising relations with the west after an interim nuclear agreement was signed in late 2013, by which point annual production had fallen from 1.6m to about 700,000.
Scarce imported parts, export bans, controls on car prices, high interest rates on loans as well as a lack of consumer purchasing power had all taken a toll on the country’s industry, according to Ms Subhan.
But light vehicle production was up 31 per cent year-on-year in the first quarter. A wider lifting of sanctions is expected to extend that run.
Copyright The Financial Times Limited 2015
