October 16, 2006

Iran's car industry stuck in 1970s gear

Petrol's cheap and business is booming. But US sanctions still hurt, writes Eric Ellis in Tehran.

THE first thing that strikes one on arrival at Tehran's gleaming new Imam Khomeini International Airport is that Iranians don't have the horns or cloven hooves that George Bush and friends seem intent on depicting them with, just as Americans don't have the devilish deformities Iran's Islamist leaders attach to their "Great Satan", the USA.

Beyond the airport and beyond the propaganda, Iran seems a pretty normal, hospitable and sophisticated place.

Another is that Iran, there at OPEC's foundation in 1960 with its tenth of the world's oil reserves, has a major industry apart from petroleum. Iran has the biggest car industry in the Middle East and one of the biggest in the developing world. Its annual output of 1 million vehicles is as big as Australia's and three times Indonesia's.

But perhaps most remarkable, given Iran's tumultuous relationship with the world in the past 25 years, is that its car industry has survived at all in a sector dominated globally by the same American behemoth that's sanctioned Iran since the US embassy siege in Tehran in 1979.

Iran's car industry, employing 150,000 Iranians and comprising 4 per cent of its GDP, has survived, but it hasn't progressed. Indeed, there's a distinct retro air to Iranian traffic, where half the vehicles are jerry-built versions of the "National Car", the Paykan, a boxy knock-off of a 1960s Hillman Hunter in production for almost 40 years - with the emission standards of that era to boot.

Since Khomeini's mullahs seized power and began provoking Washington, Iran's two main car makers, Iran Khodro and Saipa, have been political footballs prodded and pulled, nationalised, corporatised, privatised, corrupted and eclipsed.

Once proud symbols of progressive Islamic commerce, they've become pariahs reduced by sanctions to scrounging parts to keep their 1970s era plants operating, with restricted access to markets, their cars a joke.

"Paykan" is Farsi for arrow but it's hardly apposite. It splutters along Iran's snarled roads, lucky to reach 80kmh. It guzzles petrol at an appalling rate, about three kilometres a litre, though that's not much of an issue in a country where juice costs one-third the price of drinking water.

Paykan exhaust has made Tehran one of the world's most polluted cities. Rare is the journey where a Paykan isn't seen hood-up with Iranian heads disappearing beneath the bonnet, or one being pushed to the side of the freeway.

Iran has 45 degree summers and snowy winters but most Paykans have neither air-conditioning or heating. But for 30 years, with little alternative, the Paykan was pretty much all Iranians could buy - if they could get one. It took two years from order to delivery and sometimes buyers had to add their own windows and seats.

The Iranian car industry is both primitive and impressive. The massive Saipa and Iran Khodro plants sprawl across the hot desert plains of West Tehran, industrial cities within a city.

Iran Khodro has its own postal code, train station, and apartment blocks. Streets are festooned with Koranic exhortations, reminding workers to strive for the revolution.

Common to many Iranian workplaces, their factory floors are open to the feared Basij militia, Iran's religious police who keep the faithful in order. Built in the 1960s and 1970s, and patched up by improvisation over the years, the plants are in desperate need of the technology transfer Washington tries to prevent.

As US warships steam for the Persian Gulf, Iranian car makers blame their backwardness on the US, which reminded other countries and companies trading with Iran their business wouldn't be welcome stateside. Says Alireza Mirzaei, Iran Khodro's deputy president and a 37-year-old veteran of the 1980s Iraq-Iran war that socialised so many of his generation, "the Paykan lasted so long because the US would not permit us to trade.

"In the 1970s, Koreans regarded us as a developing world model for their own new car industry [but] now we are following them," Mirzaei says.

"If we did not have these problems with the US, we could have a car industry at least like Korea's."

Iran might be a fully-paid member of Washington's Axis of Evil but US bellicosity hasn't prevented the odd nibble from Detroit. Saipa's strategic planning director Hossein Momeni confirms 1990s negotiations with Chrysler, the American company fronting talks through its Canadian division.

Momeni says Chrysler wanted to introduce a version of the Plymouth Acclaim to Iran and that vehicles were even tested for Iranian conditions.

"The negotiations proceeded to a semi-advanced stage based on representations by Chrysler that it was able to follow through despite the state of political relations," Momeni says.

Another Saipa executive says discreet meetings took place in Istanbul and Dubai, with the two sides agreeing on price and production details. Then suddenly, he says, the Chrysler side disappeared.

"Even their fax numbers were disconnected."

(Chrysler denies there were talks. "Neither Chrysler nor any of its subsidiaries has engaged in, or authorised anyone else to engage in, any meetings or negotiations with any state-owned or other automobile companies in Iran," says DaimlerChrysler spokeswoman Ursula Mertzig-Stein.)

But things are changing, even as US and Europe threaten deeper sanctions on Iran over its nuclear program. Record oil prices are delivering a boom and Iran's aspirational population is in serious catch-up mode.

Foreign car makers seeking volume are gambling their US businesses - and getting away with it by licensing models in Iran, the country's 70 million population too big to ignore as markets elsewhere mature. Kia of Korea is producing a version of the Pride with Saipa, Peugeot a take on its popular 405 model with both Saipa and Iran Khodro, and Renault has a $300 million investment with Saipa to produce the Logan and the Megane.

There's even plans to produce a local Mercedes under licence. Profits are again flowing and there's a new confidence. Iran Khodro even thought about making a bid for Britain's MG group last year.

Still, this new prosperity masks nervous times. As major engineers with military connections, Saipa and Iran Khodro executives presume they are in the crosshairs of Washington's war planners. Each company has prudently made war-time business plans - just in case.

Saipa's Green Plan is for normalised relations between Iran and the US. Diplomats are exchanged and Washington allows Iran unfettered access to the world economy. Yellow is the status quo, pariah diplomatic status where parts and financing are expensive and difficult to source. Saipa's Red Plan presumes war, "attack and invasion, even nuclear".

"We would operate," the company says, "but we would decrease some of the lines because of the lack of customers."

At Iran Khodro, "a war could destroy everything," says Mirzaei. "We are a people born of war and in a special situation maybe war is the only way. We hope for the best but our plans also include the worst."

It's gloomy stuff, realpolitik and, as the rhetoric ratchets up daily and nuclear deadlines pass unfulfilled, the shadows of war edge ever closer to Iran. The two companies seem fatalistic, almost sanguine, about the uncertain future.

"So maybe they attack," posits Saipa's Momeni. "This would be a challenge for a short period of time but then the company would go to a normal situation very soon."

Mirzaei at Iran Khodro agrees: "Business is business. The past is past and, after five to six years, I believe we will be producing Chevrolets."

Eric Ellis is South-East Asia Correspondent for Fortune Magazine.