Executive Briefings

Nuclear Agreement Could Mean Market Surge for Iran's Automotive Sector

A draft agreement, reached between Iran and the P5+1 countries - China, France, Russia, the United Kingdom, and the United States, plus Germany - which would see the former reduce its nuclear activities in return for the gradual ending of economic sanctions, would have a positive impact on the future of the Iranian automotive industry.

On the sales front, IHS Automotive will revise up its expectations for the Iranian market. Having previously estimated that light-vehicle sales in the country would grow by around 12.5 percent year on year (y/y) to 1.3 million units during 2015, IHS now anticipates that there will be a surge in "unofficial" imports into the country. Among the beneficiaries of this are likely to be Chinese automakers, which already have a strong network of importers in Iran set up prior to the embargo being brought into force. Other Asian manufacturers such as Hyundai, Kia, and Toyota also look set to benefit given their strong position in neighbouring Gulf states, while premium OEMs may also see a lift because of this. However, official imports may take longer to take off as automakers wait for the "adoption and implementation phase" of the agreement, which is expected to take a minimum of 90 days, before they reinvest in their local dealer networks. Because of the relatively low ratio of imports in the market, IHS Automotive preliminary forecast shows only an additional two or three percentage points of growth for 2015, so up to 15.5 percent y/y.

A more significant impact is expected from mid-2016 or from 2017. IHS Automotive forecasts that the deal could add an additional six to eight percentage points to previous growth forecasts for these years, resulting in an average 10 percent y/y growth rate until the end of 2017. However, this is a cautious baseline as several elements could affect the situation on the market. These include the unstable political situations in Syria, Iraq and Yemen, which could frighten off some investors. IHS also takes into account the current economic situation in Iran, where there is a 12 percent official unemployment rate, a weak Iranian rial, and inflation of 14.5 percent. It should also be noted that gasoline (petrol) price inflation has resulted in a reduction in vehicle demand.

The Iranian government may also limit imports of vehicles to give domestic OEMs time to respond to renewed demand. Indeed, the government has already put in place several laws that avoid large-scale imports of vehicles. For example, a model requires authorisation before being imported; import duties total 90 percent of the initial final price of a vehicle; and imports of premium and powerful models are banned. As a consequence, vehicle sales will be dependent on future local production volumes.

On the production front, IHS has also improved its outlook for the market as sanctions should be lifted progressively after the finalisation and implementation phases of the agreement, despite the industry having already benefited from gains under the temporary sanction relief periods as negotiations took place. Under the deal agreed, there should be a complete lifting of sanctions against the Iranian automotive industry during a nine-month period, with most sanctions expected to be lifted by mid-2016, although some will remain in place until December 2016. IHS Automotive expects that production in the country will grow at a moderate pace during 2015 of between 18 percent y/y and 20 percent y/y. However, there could be a dip in 2016 as the situation remains mixed.

Source: IHS Automotive

On the sales front, IHS Automotive will revise up its expectations for the Iranian market. Having previously estimated that light-vehicle sales in the country would grow by around 12.5 percent year on year (y/y) to 1.3 million units during 2015, IHS now anticipates that there will be a surge in "unofficial" imports into the country. Among the beneficiaries of this are likely to be Chinese automakers, which already have a strong network of importers in Iran set up prior to the embargo being brought into force. Other Asian manufacturers such as Hyundai, Kia, and Toyota also look set to benefit given their strong position in neighbouring Gulf states, while premium OEMs may also see a lift because of this. However, official imports may take longer to take off as automakers wait for the "adoption and implementation phase" of the agreement, which is expected to take a minimum of 90 days, before they reinvest in their local dealer networks. Because of the relatively low ratio of imports in the market, IHS Automotive preliminary forecast shows only an additional two or three percentage points of growth for 2015, so up to 15.5 percent y/y.

A more significant impact is expected from mid-2016 or from 2017. IHS Automotive forecasts that the deal could add an additional six to eight percentage points to previous growth forecasts for these years, resulting in an average 10 percent y/y growth rate until the end of 2017. However, this is a cautious baseline as several elements could affect the situation on the market. These include the unstable political situations in Syria, Iraq and Yemen, which could frighten off some investors. IHS also takes into account the current economic situation in Iran, where there is a 12 percent official unemployment rate, a weak Iranian rial, and inflation of 14.5 percent. It should also be noted that gasoline (petrol) price inflation has resulted in a reduction in vehicle demand.

The Iranian government may also limit imports of vehicles to give domestic OEMs time to respond to renewed demand. Indeed, the government has already put in place several laws that avoid large-scale imports of vehicles. For example, a model requires authorisation before being imported; import duties total 90 percent of the initial final price of a vehicle; and imports of premium and powerful models are banned. As a consequence, vehicle sales will be dependent on future local production volumes.

On the production front, IHS has also improved its outlook for the market as sanctions should be lifted progressively after the finalisation and implementation phases of the agreement, despite the industry having already benefited from gains under the temporary sanction relief periods as negotiations took place. Under the deal agreed, there should be a complete lifting of sanctions against the Iranian automotive industry during a nine-month period, with most sanctions expected to be lifted by mid-2016, although some will remain in place until December 2016. IHS Automotive expects that production in the country will grow at a moderate pace during 2015 of between 18 percent y/y and 20 percent y/y. However, there could be a dip in 2016 as the situation remains mixed.

Source: IHS Automotive