Producing All Things Persian: Manufacturing in Iran
I recently went vacuum cleaner shopping in a provincial town in Lorestan, Western Iran. There was a great selection available in the shops on the bazaar-high street: some imported (over-priced for all but the most conscientious), a variety of Iranian-made foreign-branded units, as well as Iranian-made, Iranian-branded products. The most competitive and popular were foreign brands assembled - ‘montage’ in Persian – in Iran for the domestic market.
One common and recommended brand was Pars Khazar, formerly Pars Toshiba, a manufacturer that produces all types of household appliances and small white goods from the vacuum cleaner we sought to toasters, ovens, rice cookers, and juicers. Pars Khazar is one of hundreds of Iranian manufacturing companies that compete to make the staple products Iranians need and that the country exports. With 92% of Iranian manufacturing being composed of SMEs, it is a competitive and vibrant sector. The numerous dedicated economic dailies in Iran including Donya-ye Eqtesad, Economic Deeds (Abrar-e Eqtesadi), The World of Industry (Jahan-e San’at) and the newer English-language Financial Tribune attest to the liveliness and relevance of industry in Iran’s economy.
Iranian Manufacturing: Diverse, Dynamic, Sufficient
Iran’s manufacturing sector is dynamic and diverse, but challenged. It meets the vast majority of basic consumption and commercial needs in the country of 80 million, but remains relatively low-tech and inefficient. Iranian industry produces all the essential goods: foodstuffs, packaging for storage, sales, and transport, clothing and other textiles, appliances, furniture, infrastructure inputs, pharmaceuticals, office and building equipment, residential construction materials, and basic electrics and electronics. It is one of the world’s most self-sufficient and diversified large economies with a significant and varied industrial base. Furthermore, manufacturing is just one sector in a healthily diversified economy.
While Iran produces most staples domestically, it relies on global procurement for advanced manufactures like anywhere else. Iranian industry has significant capability to produce domestically, but it imports sophisticated products like personal electronics, telecoms, and large equipment such as escalators as finished products and components. Maadiran is arguably the most prominent company, reputed for its own production and international partnerships.
Iran’s manufacturing is dominated by small and big businesses with few in the middle. While small manufacturers contribute over 17% to GDP, these struggle to grow into bigger outfits for numerous reasons – a symptom of Iran’s underdevelopment. International partnering as well as competition could alleviate some of the major issues that include shortage of managerial skills, cumbersome processes, and lagging technological and R&D advancement.
Autos, Tractors, Combines
The most prominent focus on Iran’s manufacturing in Western media coverage with the lifting of sanctions has been the auto sector. Iran is the Middle East’s vehicle powerhouse. Given its size and importance economically and historically, the auto sector’s future will be a bellwether of political and economic confidence in Iranian manufacturing. It will indicate the broader sweep and direction of Iranian industrial policy. The Rouhani government has announced plans to retract car industry support, a plan of uncertain likelihood that nonetheless directs much domestic attention to the industry’s fortunes. With new international deals Iran’s auto sector is likely to prosper if it can balance international investment and partnerships with modernisation to boost sales at home and abroad.
Alongside its sizeable consumer and industrial auto market, Iran is a prominent and award-winning manufacturer of tractors and combine harvesters. Tradition stretching back decades makes Iranian tractors a point of pride, especially for the Turkish North-East, whose soccer-football club ‘Tractor’ emerged from the Tabriz factory. Over 30,000 tractor units are exported to 29 countries annually, expected to increase to 50,000 in the coming 3-5 years. Combine harvesters and trucks also have a significant production line in Iran and are exported around the Middle East and East Asia – though Iran’s own agriculture requires development in aspects other than technology.
‘Resistance Economy’ and Old-Fashioned Industry Development
Sanctions limited the reach of Iranian products but also reinforced the self-sufficiency of Iranian producers, supported by the Iranian government. This has led to a situation where Iran, though well below best practice, has been able to produce and manufacture most products needed on the domestic market and expand its industrial base with a proliferation of manufacturing outfits.
This situation is unlikely to change soon. The Resistance Economy has become the fundament of the government’s approach to Iranian development. The concept has been prominent for years and became the official slogan for the new Iranian year of 1395 (2016-17), despite tensions between the internationalist and competition-oriented Rouhani administration and other parts of the state. Iran’s isolation over the last three decades and particularly under sanctions, necessitated an old-school ‘modernisation’ model of protected import-substitution to incudbate a strong industrial base. This path was followed by modern industrial giants such as South Korea and Brazil and is likely to remain the dominant model for Iran politically and economically into the medium-term future, particularly with regards to manufacturing.
Dealing with Iranian Manufacturers and Government Relations with Manufacturing
While the Iranian auto industry receives major direct government assistance, most Iranian manufacturing operates in a lively private sector. Non-auto Iranian manufacturing benefits from preferential rates on loans, tax concessions, energy discounts and tariff protection but doesn’t generally receive direct assistance like the auto industry. Government policy on industry is flexible and pragmatic: it promotes various regions (Lorestan is 'Capital Investment Heaven' on country-wide billboards) and industries with tax and capital concessions while industrial parks are generously supported to encourage industry. Most Iranian industry is private, but some bigger players are government-backed and operate in the economy’s ‘cooperative’ sector.
International firms looking to enter the market and partner with Iranian manufacturers should prioritise two areas for investment and involvement (as with other parts of the economy):
- implementation of management practice and systems to raise productivity
- supply of sophisticated technology to improve outdated technical advancement
Iranian producers and government have a long history of making foreign-branded products locally as a base for the Middle Eastern and Central Asian regions. Contracts with international partners often include a technology transfer clause to come into force at the conclusion of a contract. As with Infrastructure and other sectors, Build, Operate, Transfer (BOT) will remain a popular partnership structure. Iranian business and government prefer ultimate control of commerce and business, but are open to full foreign ownership unlike other Middle Eastern countries. They look for partnerships to strengthen their existing capabilities in ways not available at home.
The big question is how Iranian manufacturing will fare when and if it is opened to global competition. But due to continuing protective barriers and the cautious conservatism of Iranian business, this is at best a medium-term prospect in most manufacturing. The auto industry will prove an early test case of the industrial currents given its relative strength, level of development and concurrent need of foreign involvement and partnerships. By introducing external competition and partnerships Iran may be able to build the unassailable regional auto industry.
The rest of Iran’s manufacturing has similar needs to the auto industry, across a more disparate and competitive sector. International firms looking to engage will find a great deal of opportunity in the breadth of the industry. Iran is already the manufacturing dynamo for much of the Middle Eastern region and it exports its best products globally. The development of its industrial base, including through strategic partnerships with foreign firms, promises that it could well become a major global industrial player.
To find out more about Iran’s diverse manufacturing and industry, join our webinar, Spotlight on Iran: Highlighting emerging business opportunities on Tuesday 19 April, 2016 at 5.00pm AEST. Click here to register.