Bloomberg News

BMWs Languishing at Iran Dealers as Sanctions Boost Costs

March 27, 2012

Demand for European and Asian cars has plunged as sanctions imposed by the U.S. and the Europe Union on Iran restrict access to foreign currency, making the vehicles hard to come by and raising prices beyond the means of most Iranians. Photographer: Simon Dawson/Bloomberg

Demand for European and Asian cars has plunged as sanctions imposed by the U.S. and the Europe Union on Iran restrict access to foreign currency, making the vehicles hard to come by and raising prices beyond the means of most Iranians. Photographer: Simon Dawson/Bloomberg

Mostafa Farahmand, who oversees sales at a car dealer in Tehran, hasn’t replenished his stock of Porsche (PAH3), BMW (BMW) and Mercedes-Benz (DAI) models for months because neither he nor his customers can pay for them.

Demand for European and Asian cars has plunged as sanctions imposed by the U.S. and the European Union on Iran restrict access to foreign currency, making the vehicles hard to come by and raising prices beyond the means of most Iranians.

“We haven’t imported for about four months,” said Farahmand, the sales chief at Negaheshahin Co. in the Iranian capital, which has 35 cars on display, including Korean and Japanese models. “With the current status of foreign currency, it ends up being too expensive.”

Mahmoud Ahmadinejad’s government has restricted currency exchanges to prevent a flight of capital after sanctions were imposed in an effort to curb the Islamic republic’s nuclear program. This forces dealers to buy a dollar for about 18,900 rials on the open market, a 65 percent premium over the official rate, Farahmand said. Inflation and waits of as much as three months to clear customs heighten the risk of importing autos, he said.

Iran has long had a culture featuring modern conveniences, including cars. Fueled by oil revenues, the streets in Iran’s major cities are filled with vehicles and, in Tehran, it’s not unusual to see cars from Europe and Asia. One way to judge the impact of current sanctions is to look at the state of the car industry in Iran -- and it’s suffering.

Car sales in Iran are expected to fall 10 percent this year, after a flat 2011, as the economy slows, said Pierluigi Bellini, an analyst with IHS Automotive in Milan, Italy, who covers the Middle East. About 1.46 million cars were sold in Iran last year, with about 200,000 imported, according to IHS.

$151,400 Lexus

Sellers with larger operations in Iran buy cars from Gulf dealers and smaller businesses purchase them from individuals to import them. While there are ways around the sanctions, buying cars from the Gulf is becoming tougher, dealers said.

Prices of imported cars have risen about 20 percent in two months and sales dropped by a similar rate over the past year, said Farahmand. A Lexus (7203) RX350 sport-utility vehicle is priced at 1.85 billion rials ($151,400), compared with 1.6 billion rials last year, he said at his store on a bustling street corner in Tehran. The same model starts at $39,075 in the U.S. The price of a BMW X6 SUV climbed to 3.5 billion rials from 3.2 billion rials earlier this month.

Two Sales a Month

The price surge comes after Iranians sold rials and bought gold and hard currencies to protect savings. In a bid to stabilize the rial, Iran’s central bank in January devalued its peg against the dollar by 8.5 percent. After failing to halt the decline, the central bank allowed trading at rates set by the market on March 18.

“The macroeconomic situation has always been quite bad -- the inflation rate is very high and so is unemployment,” said Bellini. “Now sanctions are becoming tighter and everything’s slowed down.”

Masoud, a car dealer at a store in downtown Tehran that showcases Mercedes (DAI), BMW and Lexus models, sells at most two cars a month. Sales are down 25 percent from last year. Korean and Japanese cars have also been hit by tighter foreign exchange controls, with prices rising 30 percent to 40 percent. Tariffs and taxes also more than double the price of imported cars, he said, declining to give his full name on concerns of being penalized for speaking to foreign media.

“People’s purchasing power is decreasing, and there is stagflation,” said Masoud, referring to Iran’s slow growth and an inflation rate that has been about 20 percent since May. Iranians are investing in foreign currencies or assets linked to them and not buying cars, he said.

Domestic Boost

The drop in demand for imported vehicles might boost Iran’s own auto industry, which would go in the direction of directives by Iranian Supreme Leader Ayatollah Ali Khamenei, who urged Iranians last week to favor domestic products whenever possible and shun imports as a way to counter the effects of sanctions.

“If we manage to boost our domestic production, a large part of enemies’ efforts will no doubt be unsuccessful,” Khamenei said on March 20, the start of the Iranian calendar year. “If we lift domestic production we will solve the issues of inflation and unemployment and our economy will be reinforced.”

Iran produced 1.65 million cars and trucks last year, more than twice as many as Italy, home of Fiat SpA (F), according to data from the International Organization of Motor Vehicle Manufacturers.

Domestic Production

Iran Khodro Co., the biggest Iranian automaker, assembles vehicles for other brands, including the Suzuki Grand Vitara compact SUV and Peugeot 206 hatchback, and builds its own models. European manufacturers PSA Peugeot Citroen (UG) and Renault SA (RNO) supply spare parts to Iran Khodro and SAIPA, the country’s second-largest producer.

Iranian carmakers are affected by the sanctions as well, as restrictions on foreign exchange hurt their ability to finance component purchases, IHS’s Bellini said. That’s pushing Iran Khodro and SAIPA to develop more vehicles on their own rather than rely on foreign technology.

Back to the War?

“They are developing more and more local cars, and they are getting better at making cars,” said Bellini. “They might not be comparable to Western countries and Japanese and Korean, but they are getting better.”

A stronger domestic auto industry could further hurt the market for imported cars in Iran, which was embroiled in an eight-year war when Iraq invaded in 1980. The country faces the possibility of another conflict as Israel and the U.S. haven’t ruled out military action against Iran over its nuclear program.

“We expect less and less imports,” Masoud said. “We may go back to a time similar to that of the war when we only sold Iranian cars. We are worried, of course. Who isn’t worried about their business or jobs?”

To contact the reporters on this story: Ladane Nasseri in Dubai at lnasseri@bloomberg.net; Tamara Walid in Abu Dhabi at twalid@bloomberg.net

To contact the editor responsible for this story: Andrew J. Barden at barden@bloomberg.net; Chad Thomas at cthomas16@bloomberg.net


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