Iranian tyre manufacturers optimistic about export future as sanctions ease

As Iranian business envoys court representatives of the various global markets at the 2014 World Economic Forum in Davos, Switzerland, details of the country’s recent tyre market development have also emerged. Of course, the Iranian enterprise bigwigs have been intent on smoozing with the self-styled “masters of the universe” in order to make business in-roads now that certain automotive and petrochemical economic sanctions have been lifted by the west. During a recent interview with the BBC one such envoy described Iran as a very developed and highly educated market poised for further development, but it also has to be said that the geo-political environment makes things complex.

According to the latest estimates published by Research and Markets, revenues in the Iranian tyre market are expected to grow at a compound annual growth rate (CAGR) of around 7 per cent during the next five years (2013-18). While on the conservative side, this tallies with other data T&A has seen (and which is laid out in the below table, but more on this later). This development is said to have come because Iran has the largest automotive industry from among the Middle East countries. In Iran, the automobile industry is also the second largest sector after oil and gas. And as Iran is surrounded by about 20 developing countries, the country also provides opportunities to supply various major domestic automotive manufacturers such as Khodro and Sapia, which in turn have access to neighbouring markets that offer a potential customer base of over 300 million. These players, apart from catering to the domestic automobile demand, also export to neighbouring countries such as Kazakhstan, Venezuela, Turkmenistan and Ukraine.

Iran, therefore, is like most major tyre markets inasmuch as it is driven by the developments of domestic and neighbouring automotive markets. In Iran’s particular case, these automotive manufacturers, along with their own car models, have secured licenses from global automotive players for the manufacturing different car models. As a result Iran was ranked 11th in terms of global automobile production in 2011. To put this into perspective, Iranian vehicle output is not dissimilar to the UK’s. However, due to sanctions imposed on the country by the US and EU, the country’s position slipped to 18th in 2012. Research and Markets reports that the sanctions affected the wider Iranian economy as the automobile production and sales volume registered a double digit negative year-on-year growth in 2012. However, by the end of 2013, the sanctions on Iran were removed and the situation is now said to be turning. Indeed Research and Markets’ analysis is even more optimistic: “[The easing of sanctions] is expected to significantly boost the automotive and tyre industry of the country over the next five years.”

The first main reason for this is clear: as sanctions ease automobile demand and demand for tyres in the domestic market is expected to increase. In 2012 about 50 per cent of the total Iranian car parc was more than 25 years old and the number of vehicles per capita was also low with about 89 vehicles per thousand people. Both factors indicate significant degrees of pent-up demand that are likely, in turn, to support growth in both the OE and replacement sides of the tyre business. According to Research and Markets, major provinces such as Azerbaijan and Khuzestan, and cities such as Tehran and Semnan are particularly expected to generate considerable demand for tyres over the next five years.

Light and heavy tyre demand in Iran

(in millions of units)

Source: Hooman Tootoonchi, Mehdi Sojoodi, Mojtaba Dyhim, Pars Tire

The long-term future of tyre manufacturing in Iran

With the first Iranian automobile factory having been established in 1957, Iran has 50 years’ experience manufacturing different kinds of automobiles. Because this foundation directly led to establishment of a BF Goodrich tyre factory shortly afterwards, the country’s tyre production history begins at around the same time. However, while the tyre market in Iran is dominated by domestic manufacturers such as Barez, Kavir, Yazd, Goldstone and Pars Tire, while global players such as Goodyear, Kumho, Bridgestone and Pirelli are also present and account for a significant market share.

Looking forward, Hooman Tootoonchi, Mehdi Sojoodi, Mojtaba Dyhim all representatives of one of group of lranian tyre manufacturers, Pars Tire, are optimistic about their country and companies’ prospects for the future. For those of us that are less than familiar with the Iranian tyre market, it is worth pointing out that Pars Tire Co began its tyre manufacturing activities in 1983 in the central Iranian city of Saveh with a production capacity of 40,000 tonnes a year. Go back a few decades and it is clear the company has some quality heritage – albeit from quite a few years ago. When it was founded in 1976, the company worked in cooperation with Pirelli. The Italian company was also a supplier and a shareholder in the company at that point. However, after the Islamic Revolution, Pirelli left. Bringing things much more up to date, Pars Tire embarked on a significant radicalisation investment project in the latter part of 2013.

All this, say the team from Pars Tire, puts the company (and by implication others like it) in a good position to move towards the development and advancement of the businesses industrial operations. Indeed Pars Tire CEO Mr Qadri echoed this and outlined, albeit generally, the company’s future plans, which include: “creating incentives for managers and employees, increasing productivity levels and [further] updating existing technology”.

Iranian tyre manufacturers

Source: Hooman Tootoonchi, Mehdi Sojoodi, Mojtaba Dyhim, Pars Tire

Such developments have by no means been exclusively made by Pars Tire and on a more general note said that the establishment of national centres such as the Petrochemical and Polymer Research Center of Iran and the Tire Industry Research Center of Iran have also been significant sources of support to the industry.

All these features set against Iran’s dependence on road-based transport for both freight and human transportation as well as the relatively low costs of establishing and expanding the production facilities compared to other areas of the world are good arguments in favour of outside businesses investing in the tyre business in this part of the world. Its geographical position between the Middle East and former Soviet states also present positive strategic opportunities for those interested in these areas.

However on the other hand, according Dubai Customs figures, 15 per cent of all exports out of Dubai are destined for Iran. Of these 16 per cent are tyres. The figure is 44 per cent if you include all car parts and accessories. So with automotive parts exports worth something like US$10.1 billion whatever the correct answer is in the final analysis, we know that a significant amount of tyres are imported into Dubai and re-exported into Iran. It therefore appears that alternative trade routes have been set up during the years of sanctions, which could make the possibility of Iran becoming a net importer of tyres just as likely as a major manufacturing renaissance.

So, when it comes to automotive or tyre companies setting up or resurrecting joint ventures in Iran – for that is the kind of thing that all the smoozing in Davos is really all about – any potential upsides (real or imagined) will have to be tempered by the concrete, continuing and still very much unanswered political questions associated with investing in Iran. The sanctions may have eased, but the complexity of doing business in the region remains.

An earlier report into the development of the Iranian tyre market can be found here. Ongoing coverage of the Iranian tyre market can be found here.