The Iranian government has set up a fund to invest in joint ventures between Iranian and foreign firms. Indeed, French suppliers are ready to benefit from the expansion of Renault and PSA Peugeot-Citroën’s already special relationships with Iran.

Even as Renault is preparing to produce 300,000 units of its Logan in Iran, rival PSA is strengthening its long-term ties with an agreement to provide a new body style of the Peugeot 206 to Iran for “the most important export programme in Iranian automotive industry history,” according to Peugeot.

Iran is devoting at least $US1 billion to its automotive industry in an attempt to diversify its petroleum-based economy.

Reza Veyseh, Iran’s deputy minister of industry and mines and the Chairman of IDRO, the Industrial Development and Renovation Organisation, has predicted automotive production of one million units a year in 2006.

He says Iran needs 850,000 new vehicles each year for its own consumption, which puts Iran in a position to export cars to Asia, Africa, the Middle East and Eastern Europe.

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He says Iran would begin lowering import tariffs, now at 170%, to intensify competition and encourage local carmakers to improve.

Two years ago, Iran began looking for foreign investment where it had earlier relied on state oil revenues.

“We can no longer continue to produce expensive and shoddy cars,” Veyseh told Iran International magazine. “We require investments of $1.5 billion in auto manufacturing and $2 billion in parts manufacturing to become a station for design and production of cars for the global market.”

The Logan deal

Renault won an international “common platform” competition to provide technology for an inexpensive family car – the Logan – and in May 2004 it created the Renault Pars joint venture.

Renault has 51%, in partnership with IDRO and the two large state-owned automakers, Saipa and Iran Khodro, which together control 90% of the national market.

Each automaker will assemble 150,000 units a year of the Logan and sell the car as a Renault Logan through their dealers. Renault Pars will be in charge of purchasing, engineering, quality, logistics, and coordinating marketing policies.

If, in a few years time the companies reach their capacity, Renault Pars could construct a new assembly plant to add 200,000 units of Iranian production.

While the Logan will essentially be a kit car in Columbia, Russia and Morocco supplied from Dacia’s Romanian factory, it will start with almost 50% local content in Iran in 2006, according to Andreas Gabriel, chief executive of Renault Pars.

Iran’s goal is to grow that figure to 60% within two or three years.

Iran is pushing the Logan idea because higher volumes will help consolidate and modernise its industry, allowing it to become an exporter. In the past, contracts have been for small volumes, often with dual sourcing.

A peculiarity of Iran’s auto industry is that both Saipa and Iran Khodro have had separate engineering-purchasing organisations that develop parts and suppliers. Renault Pars will manage the engineering and purchasing functions for the Logan.

Pushing partnerships

IDRO has been encouraging Iranian suppliers to form joint ventures with western suppliers.

IDRO has a cash fund to invest in joint ventures between Iranian and foreign firms, and it has a policy of privatising state-owned industries: the goal last year was €191 million worth of industry.

Companies based in France have been in a favoured position because of long-term connections between PSA and Iran. When Peugeot bought Simca, the European operations of Chrysler in 1978, it acquired business in Iran.

Through the years, PSA became Iran’s key automotive partner, supplying parts for several of Iran’s best-selling cars, including the Peugeot 405 and the Samand, which uses locally-supplied 405 mechanical parts, with a body designed and built by Iran Khodro.

The Iranian companies build dozens of models under licence with foreign automakers. Veyseh was quoted recently saying that a deal was close for producing the Mercedes-Benz E-Class in Iran.

Saipa makes the Kia Pride with locally made parts, and the Citroën Xantia. The Peugeot 405 and 206 account for 80% of Iran Khodro’s production, and Iran Khodro has 60% of the Iranian market.

High tariffs encourage local sourcing. Autos with less than 50% Iranian parts pay a 60% tax to the government, while those with more than 50% pay a 10% premium.

Thus, cars like the Nissan Maxima, Mazda 323 and Peugeot 206 have a price disadvantage compared to the all-Iranian Paykan, Kia Pride and Peugeot 405 variants, as well as the coming Logan.

Liberalising imports

Car imports, banned for many years, still face tariffs of at least 170%. The government plans to liberalise import restrictions only when automotive exports grow.

France rose from Iran’s 13th biggest source of imported goods in 1996 to the No. 3 partner in 2001 based on the growing production of French cars.

On 16 June 2004, Peugeot and Iran Khodro agreed to production of the new 206 – likely a three-box sedan – and the 307, both to arrive in 2006 or 2007.

PSA is not investing capital, although it will provide engineering support to work with Iranian engineers in designing the new 206 body.

Renault, in contrast, is investing €300 million in tooling and local facilities for the Logan project. The prize is the potential of winning a third of the Iranian market in a few years time if production matches company expectations.

Suppliers go to Iran

Among the biggest suppliers to the Logan in Romania, at least two – Valeo and Johnson Controls – already have Iranian investments.

FIEV, the French suppliers organisation, polled its 134 members last year – many of them French subsidiaries of international companies – and found 75 accords with Iranian companies, although 41 of them had not yet borne fruit.

Most of the deals were for parts for the Peugeot 405 variants and Paykan. FIEV organised a supplier trip to the Tehran auto show and encouraged members to pursue the opportunity.

“Iran has taken a risk in putting all their eggs in a French basket,” says FIEV executive director Jacques Monnet, referring to the position of PSA and Renault in the market. “It is our obligation to make it succeed.”