Iran's largest auto maker seeks central bank loan

A worker on the assembly line at the Iran Khodro factory in Tehran.

TEHRAN // Sanctions and the world economic crisis have forced Iran's largest car maker to seek a loan from the government, but analysts say the money will only provide temporary respite for the company. Iran Khodro is one of several companies facing a cash shortage hoping to benefit from a decision by Iran's Central Bank to provide industries with US$5 billion (Dh18.3bn) of loans. Saeed Laylaz, an economic and political analyst, said the government's promise to provide loans would only solve the problem temporarily. "The money has to be extracted from the Oil Reserve Fund. Injecting this huge sum into the economy will contribute to even higher inflation. Higher inflation [would] then lead to higher end prices of produced cars," he said. However, the government is preventing car makers from increasing the price of their products so that in the long run the injection of the money will hurt the industry rather than solve their cash flow problem, Mr Laylaz said. Iran Khodro is one of the companies hardest hit by sanctions from the United States and United Nations. "Sanctions have raised costs of banking operations for our company," said Hamid Reza Taghavinejad, Iran Khodro's deputy president for strategy and planning. "There is now more need for cash resources to conduct business with foreign counterparts. We have requested the government for more support from domestic banks to resolve the cash deficiency issue and there have been promises to help solve our problems," he said. The shortage of cash is also being caused by international banks refusing to issue letters of credit for Iranian companies. Iran Khodro imports parts and materials but international banks now demand a large deposit from Iranian companies to issue letters of credit. Many transactions therefore have to be conducted in cash. However, Iran Khodro is determined to overcome the problem and has revealed plans for expansion, including making a car designed especially for women. Its will feature parking and navigation aids, a jack for changing tyres without getting grease on your clothes and will come in a range of feminine colours. Iran Khodro is one of the largest companies in the country with a turnover of $7bn and produced nearly half of the 1,146,000 vehicles made in Iran in 2007. One of its top-selling cars, the Samand, which costs Rls150,000,000 (Dh55,500), was the first nationally designed car. The company exports its products to more than 35 countries, including the UAE. The biggest markets for its products are Russia, Syria and Iraq. International sanctions have been causing other problems for the car maker. Some motor parts that have to be imported from Europe can have multiple functions including being used in military products. This means some of the company's consignments are held up by customs of European countries en route to Iran. "We have to provide documents to prove these parts are intended for use in car motors. This type of problem is always solved by providing the proper documents but it can be a lengthy process," Mr Taghavinejad said. Most recently, when Iran's shipping company came under unilateral US sanctions, the company faced problems in transporting car parts ordered from European countries. "Our company is one of the largest customers of the Islamic Republic of Iran Shipping Lines. We had to implement extensive plans to overcome the problems affecting transportation of goods when the shipping lines came under US sanctions," Mr Taghavinejad said. To help resolve the cash deficiency problem the company has recently begun importing Peugeot 407s from France. The car has sold well in the Iranian market despite import tax and tariffs that raise the cost of imported cars by 100 per cent. Iran Khodro has a 20-year history with Peugeot, but the relationship is showing signs of turning sour. Manouchehr Manteghi, the chairman of Iran Khodro, recently criticised the French government for jeopardising joint ventures with the company. Mr Manteghi blamed a slip in production numbers on the "methodology chosen by Renault in relations with Iranian part makers as well as a miscalculated cash flow". "The first problem we have with Peugeot? is basically France's policies," Mr Manteghi said. Since Nicolas Sarkozy was elected president, France has toughened its position towards Iran and has supported UN Security Council sanctions against Iran for its failure to suspend uranium enrichment. "Given they seem to be moving in line with US politics, they are harming our trade level, which has been built up with much mutual energy and efforts." Despite acknowledging the impact of sanctions, Mr Manteghi rejected any notion the measures might damage the company. "Sanctions may increase costs but they cannot stop us in terms of technology," he said. [e-mail]