Renault Deal A Welcome Relief For Iranian Government Struggling To Attract International Investment
On August 7, Renault signed a joint venture agreement with the Industrial Development & Renovation Organization of Iran (IDRO) and Parto Negin Naseh, a local vehicle importer. The new joint venture, in which Renault will be the majority shareholder, will produce up to 150,000 vehicles and engines a year in Iran, including the latest models of the Symbol and Duster.
The €660m ($780m) deal is one of the largest non-oil deals in Iran since sanctions on the country were lifted in January 2016. As such it will come as a welcome boost for the government of Hassan Rouhani, who has just begun his second term as president. Despite all the optimism surrounding the nuclear deal at the time, the country has struggled to attract the volume of foreign capital many inside the country had hoped it would.
Renault is, like its main rival PSA (owner of the Citroën and Peugeot marques), already active in Iran and has a production capacity of 200,000 cars a year there via joint ventures with the country’s two largest car companies, Saipa and Iran Khodro. Renault says it had a total market share of around 10% in the first half of this year, with sales over the six months of 68,365 – double the sales it achieved in the same period last year.
With the extra capacity from the new deal, Renault will be in a strong position in a fast-growing market in which sales of new vehicles are forecast to reach 2 million by 2020, up from around 1.3 million last year.
The rapid expansion in the market explains the interest of international car firms in the country, although their actions have not been beyond criticism. A recent article in the Tehran business paper the Financial Tribune criticised French car firms for offering their Iranian customers “the usual staple of outdated models at exorbitant prices”.
The main problem for Iran is that companies like Renault and PSA are fairly rare and, overall, too few international companies have been willing to pour money into the economy.
Progress in the oil industry has been fitful, for example, although that has been as much because of the Iranian government’s slow progress in finalising the terms of the contracts it was willing to offer international oil companies, known as the Iranian Petroleum Contract (IPC). That has now been nailed down, with France’s Total the first oil major to sign a big new deal, with a recent $4.8bn agreement on a development in the giant South Pars gas field. Other oil majors are thought to be close to following in its footsteps.
In other sectors major deals are generally still being talked about rather than signed. The National Petrochemical Company (NPC) for example says it is in talks for investments worth more than $5bn with international partners.
Overall foreign direct investment (FDI) was around $3bn last year, according to Tehran-based investment firm Turquoise Partners. That is still below the average of $3.6bn between 20008 and 2012, at which point sanctions were tightened significantly and investment levels fell. In a review of recent FDI trends, published in late July, the firm said “despite the removal of sanctions, it will take more time for FDI to recover to its historic average.”
There are myriad problems involved with investment into Iran, including concerns about falling foul of the remaining international sanctions and the risk of a company finding itself inadvertently doing business with the Islamic Revolutionary Guards Corp, which is involved in many areas of the economy. Turquoise says other issues include local private companies being reluctant to cede control to international partners and a lack of “soft infrastructure” including everything from insurance to the availability of information in English.
However, Iran may be starting to turn the corner. The Organization for Investment Economic & Technical Assistance of Iran – the government body which deals with FDI proposals – says $13bn worth of FDI projects have been approved since sanctions were lifted. The Renault deal will boost that number further and could also encourage other international companies to look more closely at the opportunities on offer.
Dominic Dudley is a freelance journalist with almost two decades’ experience in reporting on business, economic and political stories in the Middle East, Africa, Asia and Europe.