As Iran’s automotive market opens up after the lifting of sanctions, Chinese manufacturers are set to pose the greatest competitive challenge to the domestic-owned carmakers.

The Islamic Republic's auto industry is the country's biggest sector after the country's dominant oil, petrochemical and gas sectors and is growing strongly. According to figures released by Tehran’s Auto Policy Council on November 5, production in the country’s automotive sector grew 26.1% year-on-year (y/y) to 691,427 units during the first seven months of the current Iranian year (which started on March 20). During this period domestic-owned carmakers produced 638,599 passenger vehicles and another 45,000 pickup utility vehicles, representing a 27% growth year-on-year.

The number of imported cars represented less than 10% of the market last year, according to Iran's Vehicle and Manufacturers Association (IVMA), because vehicles imported in a fully finished form incur a tax of at least 100% of the value of the vehicle – meaning a Maserati Grancabrio in Iran costs IRR7.35bn ($210,000).

This helps the majority state-owned domestic carmakers to continue to dominate the automotive market, with Iran Khodro Company (IKCO) controlling 44% of production, and Société Anonyme Iranienne de Production Automobile (SAIPA) following closely behind with 42%, while Chinese and other carmakers making up 9% of production (car sales are not compiled in Iran).

But both SAIPA and IKCO are notorious in the Islamic Republic for being slow in producing new vehicles. IKCO still produces the Peugeot 405, first released by Peugeot in 1987, at a price of around €7,000. SAIPA has produced the KIA Pride, first released by Kia in 1987, in various forms since the early 1990s – both groups have been pushed by the government to end production of these vehicles on several occasions.

They are now being challenged by newer, fully furnished European models sold at higher prices, often imported as complete knock-down (CKD) kits and reassembled in Iran, which avoids heavy import duties.

Vehicles and spare parts which entered the country during the first six months of the current Iranian year are estimated to be worth $837mn, a 68% increase year-on-year. According to the Islamic Republic News Agency, vehicles made up 8.1% of Iran’s import basket during the period.

Naser Beykzade, a former director of Iran IKCO’s Spare Parts subsidiary (ISACO), said the three reasons for this rise in imports is due to “the Joint Comprehensive Plan of Action [the nuclear deal], Iran’s plans to join the World Trade Organization (WTO) and the low quality of vehicles manufactured by Iranian automakers”.

Refreshing offerings

To defend their market share, local carmakers have signed several deals with France’s two major automakers PSA Peugeot-Citroen and Renault since January to try to refresh their offerings, though these will take time to begin production.

In the meantime, Chinese companies such as Geely, Chery, Lifan and FAW, which entered Iran just as sanctions were about to bite, are taking a growing share in the market with more modern models than the Iranian manufacturers and cheaper prices than European ones.

Some Iranian car pundits predicted in 2015 that once sanctions were lifted it would be the end of the road for the Chinese car companies. Instead they have become increasingly aggressive competitors. Their models, which are on average 40-50% cheaper than those now being offered by European carmakers, are increasing in quality and variety.

As one executive at the one of the few Chinese car companies said, “I think what we’re offering is likely to ruffle some feathers … but at the end of the day we’re offering cars at a better value.”

Chery has two large operations in the Iranian market, one a joint venture called Maad Iran Vehicle Manufacturing (MVM), and it also imports fully built Chery-badged vehicles from China.

Headed by an all-Chinese management team, Chery competes most aggressively on credit terms and delivery times.

For their cheapest model the 131s (based off the old Daewoo Matiz), MVM asks just for a $2,000 deposit with delivery shortly after, followed up by 36 monthly payments.

In comparison Iran’s car companies are still offering large payments up front with fixed quarterly deposits, which on average are three times more than the average monthly salary.

Another producer, Kerman Motor, which makes Lifan models, is also offering long-term payment schemes.  One visitor to the city of Kerman says it is now “a Little China”, judging by the amount of locals buying the Chinese sedans and small SUVs.