Abstract

The purpose of this research is to come across an effective and implemental strategy for Iranian car industry to become an export player in the Middle-East region. With consideration the importance of market development for international auto makers, the Middle-East market is evaluated and Iran as a case study is looked over in terms of its potential automobile market and developing opportunities in Iranian car industry to become a manufacturing partner for international players. Through out a review of Iranian economy and the position of auto sector in Iran economy, the difficulties of growth and development, the role of government- as the regulator- are discussed briefly and the effect of international auto makers -in the past and future- is analyzed. On this basis, we point out the main troubles of the current auto industry's structure and the government dilemma to set its policies. At the end we suggest a reform in the structure and strategy of both assemblers and suppliers to enter to the international markets.

Keywords: Operation strategy; Iran auto industry; Globalization, Regionalization, Industry study

Introduction

Iran's economic performance has begun to improve slowly after a decade of recession which was caused by the long and costly war with Iraq and fluctuations in oil prices. In the decade ending in 1998, GDP's growth per capitals started to rise, although the average was only 3 percent per year. (Economic reports, the World Bank Group)

The automotive industry, as one of Iran's most promising industries, was the country's fastest growing industry with the average annual growth of 27.2% between 1995 and 2000 which was 5.5 times of the country average industrial growth. (Economic Focus, Iran Daily News).

The domestic vehicle production is growing quickly but it is highly protected, and only in highly exceptional circumstances can Iranians import cars from abroad. Locally produced cars have a reputation for poor quality and have contributed to the dangerously high pollution levels. Also, Iranian firms were not able to satisfy the domestic market in terms of quantity. Demand for automobiles, particularly passenger vehicles, far exceeds the supply. In fact, more than 450,000 people pre-purchase automobiles every year and wait approximately two years to receive them.

As a result the government, which wants to raise unit production and improve domestic industry in line with industrialization program, hopes to stimulate competition as part of the effect to make the economy less dependent on oil.

In order to follow the market reform plans and provide better circumstances for the country's main industries such as petrochemical industry, textile and etc, President Khatami (since August 1997- 2005) in 1999, announced an ambitious program to privatize several major industries which included auto industry as a part of "total restructuring" of Iranian economy.

Currently 13 public and privately owned auto maker exist in Iran. The largest vehicle manufacturing company is Iran Khodro with an average share of 60.90% percent of domestic vehicle production, as the main government-controlled carmaker and Saipa is the second one with 32.70%.

Subsequent to the development program, automakers have been encouraged to review the way in which their strategies will be developed in the future and to extend a range of strategy options that might enhance their position. Consequently, most Iranian auto makers have been encouraged to join ventures or any other strategic alliances with foreign auto manufacturers to meet the increasing demand (www.ikco.com).

On the other hand, in looking at the automobile market generally, during the past few years, it might be observed that after a period of growth from 1997 to 2000 -resulting from the exceptional boom in US economy and the upturn in Europe-but the automobile market especially in North America and Europe has entered a consolidation phase because of overcapacity. The market is mature in developed countries such as those of Western European countries and US market where nearly 90% of sales of new vehicles are now accounted by replacement purchases. Also, in Far East-Japan and South Korea-, overcapacity is a highly sensitive problem (REINAUD, 2001), whereas in Middle-East region, vehicle out put is 6% of total global output in comparison with 29% in Europe and 30.2% in US (carmakers' Annual report,*DRI). Thus, some auto manufacturers might be looking for new methods to penetrate the auto market in Middle-East in order to gain more market share over their competitors.

If these companies do become partners, Iran will be an option to emerge as a major regional car manufacturer, serving the Middle East beside Other countries in the region, particularly Egypt and Turkey which have substantial car assembly arrangements.

The following companies have signed cooperative agreements and their products are either already on the market or are to be introduced in the near future:

  • France's Peugeot with Iran Khodro.
  • Korea's Kia Motors with Saipa.
  • France's Citroen with Saipa.
  • Korean Daewoo and Kerman Motors.
  • Optimus of the UK with Renus.
  • Proton of Malaysia with Zagros

According to the French automaker Peugeot, Iran has one car for every 21 people. Turkey has one for every 12, while Western European countries and Japan have nearly one car for every 2 people (www.peugeot.com). That indicates market growth potential, and the reason that foreign car manufacturer might be interested in the Iranian auto market.

In this research the current auto industry situation in Iran will be analyzed and it will be evaluated in relation to its future strategy consequent upon growth in terms of output quality and ability to serve the domestic market, but also to play a major rule in region and become a truly international car manufacturer and exporter in Middle-East.

To achieve a rich understanding of the current situation and examine the environmental position to meet the research objectives, other developing countries auto industry examples like China, India and Turkey will be investigated and analyzed as examples, while the regional circumstances, business environment and other specific characters of Iran's economy - e.g. the role of government , economic condition and Iran's regulations - will be considered to find out the most appropriate strategy for Iran car industry.

The research question for the chosen topic is 'What would be the most effective strategy for Iranian car industry to become a major player in the Middle-East market?"

From this research question, the following objectives would be appropriate to evaluate:

  1. To evaluate existing methods of development strategy in the Iranian auto industry,
  2. To identify the best possible methods of development strategy for domestic and foreign companies,
  3. To recommend how such a strategy can be implemented.

The background of the research is set with a brief discussion on the changes have happened in the world of auto industry, the consequent of globalization, the dynamic and diversity of demand in auto market and the auto makers' difficulties to respond to new market characteristics while maintain the ability to make profit. Our goal in this paper is to propose an efficient strategy to .... The paper has the following structure. Section 2 gives the brief literature review. Section 3 analyses the competitors in automobile Middle East market. Section 4 introduces the Iranian auto industry case. Section 5 presents the growth and development problems in Iranian auto industry. Finally, section 6 is devoted to conclusions and future works.

The remainder of this paper is organised as follows. Section 2 summarises the development of Iranian production and exports in the car industry compared to other major exporters in the world. It also explains why Iranian export growth has remained much below production growth. Section 3 develops the empirical export model and describes the variables and data. Then, the model is estimated in Section 4. Estimation results are analysed and a sensitivity analysis is proposed. Section 5 estimates the Iranian export potential with regard to the main foreign markets, while Section 6 concludes.

Literature review

History of globalization

Humans have coined the word "Globalization" to describe widely traded activities that take place across the continents which are aided immensely by diminishing international trading regulations negotiated through the World Trade Organisation. Globalization is a combination of many -manufacturing, trade in services, supply chain management - activities which have been affected positively by a fast technological development in few last decades. As Friedman (1999) argues, "what is new today is the degree and intensity with which the word is being tied together in to a signal globalized market place and village. What is also new is the sheer number of people and countries able to partake of today globalized economy and information network, and to be affected by them... this new era of globalization ... is turbocharged."

As it can be observed, that this noticeable international integration is not just in economics, but in politics and cultures are as well. However, it needs to be recognised that the speed of these changes and growth of integration is different across the world. In some countries and regions the trend of globalization is rapidly increasing while in other parts the pace is much slower and globalisation is not welcomed at all. Nevertheless, regardless of the effects of globalisation no country can afford to ignore its impact on their political and economical circumstances. Likewise, the rate of change is different in various industries as is the strategic response of different business sectors to take advantages of exploiting new business opportunities.

Although the merchandise trade, capital investment and labour migration started from 1850-1914, and the economy was more open than it is today in terms of the existing tariffs and trade barriers, but it was not globalized. Just the year following the Second World War and through reconstruction of war, the world has started to establish institutions to open up trades and ensure currency stability such as GATT and IMF, which caused massive increase in the economic growth level. According to Dicken (2003), world trade increased at an average annual rate of 6.7 per cent between 1948 and 1953. "Between 1958 and 1963 the rate rose to 7.4 per cent" and "between 1963 and 1968 it accelerated further to 8.6 per cent." So people experienced a boom period up to 1970s when the first oil crisis has occurred.

The United States, which suffered less during the Second World War, increased its foreign investment and after a while the US companies started to move into Western European countries and create interdependencies across world markets. Europe and Japan which mainly focused on rebuilding their economies after the war joined in this and also expanded their positions in the market place and on the economic map after the mid-1980s. (Hill, 2005) Also, because of the necessity of promoting global interdependencies, the United Nations was established to maintain world peace and security and so help the spread of industrialisation and world trade.

The main drivers of globalization

Apart from the history of globalization there were several main drive points that enhanced the process of globalisation. From the Johnson and Turner's (2003) point of view one of the main globalization drivers was "the changing economic paradigm". The new approach for managing economy was based on limitation the government role and neo-liberalism. Limiting the role of government provides the situations for businesses to progress and boom. As the Hill (2005) says, "major changes occur as new economic and political institutions develop, with movement from traditional, non competitive institutions to competition-based capitalistic economies and democratic institution." So the market was relied on to force the pace of competition. Little by little the liberal economy became an external economic policy and the General Agreement of Tariffs and Trades (GATT) set up to support this philosophy. As a result of GATT and afterwards its successor organization- WTO-, there was a great reduction in tariffs barriers and non-tariffs barriers for participating countries which help them established and spread their liberal economic policy.

The second globalization driver is "the spread of international governance and regulation". More international rules and policies developed for business environment, especially in regional level aimed at reducing the barriers in economic market among GATT contracting and WTO members. Also spreading e-commerce as a technological consequent has brought new issues in terms of traditional governance structure. Therefore, by passing the time and more international integration, the trade and market regulation were less under the national states' control.

According to Johnson and Turner's (2003) argument "finance and capital spread" is another driver of globalization. Necessity of financial and capital movement following the market deregulation and economic liberalization has supported by national rules and has facilitated by technological development and ease the financial transactions.

All might agree that the technological development, mainly in information technology and communication sector, has played an important role in globalization. However none of them is the cause of globalization, Dicken (2003) argued, without these technologies the current complex global economy system could not exist. Shrinking time and space by innovated technologies was a great opportunity to reorganization and redefinition the commercial and economical structure. Most of industrial sectors are affected by innovations and changes in technologies especially in manufacturing system with a high influence on value chain. Transportation technology has changed dramatically from 1840 to 1960 which was a development period from steam locomotives to high speed aircraft. Therefore, new transportation systems and their wide usage with cheaper prices have brought global shrinkage. Also in communication and its convergence with computer technology development has facilitated more effective networks within and between enterprises. All of these technological conveniences provide links across borders and spread globalization in economic term.

"Social and cultural convergence" might be seen as a driver for globalization. The effect of mass media and usage of internet make the consumer preference more common in global market. As Johnson and Turner (2003) mentioned, similar taste of consumer in different parts of the market creates the opportunity to promote global product. So we can claim that the cultural and social similarities make the conditions available for globalization. Also transferring new technologies has brought about more products in greater varieties at lower costs and prices. Consequently standards of living and people's expectations rise as well.

Mode of entry and expansion methods

In simple terms, globalization is an opportunity for companies to expand their market, their value chain and their business across borders. But the point is how effective can companies use these opportunities to make more profit and enjoy sustainable growth. What factors should they consider to make decision to choose an investment option to carry on their development strategy?

Global supply chain and its dimensions

Apart from different modes of entry available for firms to get advantages from globalization and to move across borders to expand their market, other advantages may be gained through developing global supply chains. "The production of any good or service can be conceived as a production chain - that is, as a transactionally linked sequence of functions in which each stage adds value to the process of production of goods and services." (Dicken, 2003)

The firms try to differentiate their value chain in order to add more competences by using the advantages of each production chain requirement in different part of the world. However, build a global value chain might make it fragmented while the control and management of a global network is more difficult. From Dicken's point of view there are three important dimensions in production networks:

First is "governance" which means how they are coordinated and regulated. In the case which varying combinations and interrelationships of different kind of companies and firms might perform in a production network, As Dicken says, 'the market' is the main organizer of external transactions, in contrast with the case which the entire network operated with a single firm and internal organizational structure governs transactions. (Dicken, 2003)

The second important dimension in production network is "spatiality" and 'how they are conFigured geographically'. By increasing the emergence of global production network, network organizing is changing from 'geographically concentrated' to 'geographically dispersed'.

The third issue is "territorial embeddedness' - the extent to which they are connected in to particular bounded political, institutional and social setting'. (Dicken, 2003) information technology and other new technologies have made 'space' and 'distances' meaningless. Most types of capitals are mobile and all of them can easily move from one place to another. However transportation and communication technology has developed as well, capital does moves within spaceless world. Place is still an important issue, as firms are highly affected by the cultural, socio-political and institutional context of the territorial they are embedded. Therefore multinational firms try to take advantages of differences within regulations and socials in various places while, bringing different state with different regimes in count within a production network makes the situation more complex to control and to take benefits from.

Since 1999 and strongly growth of globalization, the same as other important and effective phenomena, globalization has a positive view wave that strongly recommend it and a negative wave against it which moves from developing country to developed countries during these years. Arguments about globalization success or failures do not have any satisfactory result, while globalization can be observe and discussed to understand both negative and positive sides of it.

Growth of regionalism

Although the speed of globalization and integration in the world market has increased during past decades under the General Agreement on Tariff and Trade (GATT) and more recently by World Trade Organization (WTO), the regional agreement and the debate on the desirability of regionalism has grown as well. By the beginning of twentieth century most of the counties were part of a regional integration. However one might argue that the reason of regional integration is more political than economic explanation, it can not be ignored any more as almost 50 per cent of all world trade is within regional trade agreement. As a result of that, there is fear within WTO and other international institutions that regionalism takes the place of globalization and make a stumbling block toward further global trade integration. (Lung & Van Tulder, 2004) Nevertheless there are different forms of regional integration and each of them affects global market more or less while the time of their integration process is various.

The dynamics of automobile market

Although some changes had happened in the composition and geography of automobile demand, the concentration of automobile industry in three major global regions face auto companies in these regions with the overcapacity problem. The "highly market-oriented" of automobile production caused its development be based on affluent consumer markets to achieve the economy of scale. But during the years, the automobile consumer markets in three developed region has developed as well. As Dicken argued in the Global Shift (2003), "the changing demand for Automobiles has three major characteristics:

  • It is highly cyclical.
  • There are long term (secular) changes in demand.
  • There are signs of increasing market segmentation and fragmentation." ( Dicken, 2003)

The competitors

Despite the fact that NAFTA, EU and Japan are the main developed region in both production and trade in auto industry sector, other countries have started restructuring this sector in line with their economic reform. The obvious example might be China and India which both are gaining a sustainable growth in the last decade. Also Turkey has emerged as a new automobile producer in line with other industrial changes aim to become qualified to join European Union.

Turkish auto industry

Turkey auto industry has been developing due to the well strategic planning applied by the Turkey government by the way in which they opened their country to the global world. They have started their industry as a montage (CKD or SKD) in 1960 and have turned it to manufacturing part after a few years in 1966 trough licensing agreement and dealer-assembler with American and European firms. Gradually the government attempted to adapt an export-oriented strategy; consequently it started to liberalize the importation of cars gradually and reducing the tariffs. Meanwhile it provided some financial supports for upgrading themselves to international acceptable condition. But the main change which caused a revolution in Turkey car industry was the customs unionization agreement in 1995 with European Union which followed by a new restructuring in their auto industry.

To harmonization the administrative and regulatory structure of the industry, Turkish government has established an accreditation council to prepare the documents for new adaptation the issues and procedures of exporting in line with European countries. However the Turkey supposed to complete the adaptation and remove all tariffs by 2001, they have not completed it yet and it seems the Turkey's auto industry has not well prepared for full liberalization. Although adaptation a new regime from Turkey government which obligate importing vehicle companies to prepare service facility and aftermarket parts for customers within a country was a great opportunity for domestic firms to become involved with providing spare parts and services.

Even though it was not a stable macro environment after 1997-1998 Russian and Asian crisis and again December 2000 crisis, the restructuring program caused some investment in car companies in Turkey in order to support economy of scale and encourage them to developed more update types of automobiles. "Turkish manufacturers have operated in two car segment; low medium and medium models" and the produced cars have already been phased out in their country of origin, added that "these segments account for 90 per cent of the Turkish market." (Duruiz, 2004)

Governmental financial supports and investment on auto sectors attracted many foreign investors from 1995 onward, especially with aim to develop new generation cars and modernization the industry. Most of foreign car firms have gained relatively high share of the auto industry after liberalization to use the resources in Turkey and export to European countries through Turkey. Table 1 shows the main auto manufactures in Turkey and their share.

As the effect of custom utilization agreement, the automotive sector had the 5th place in Turkey exporting in 2000, but the main effect has happened in component sector and it has increased relatively higher then auto sector export. It was also easier for component producer to upgrade their standard of their firms to get a competitive position in EU base on their lower labour wages. (Duruiz, 2004)

Nevertheless Turkey has accepted liberalization in their trade but as they have not done the full integration, their case has become special. Mostly the Turkey's future economy highly depends on the European Union decision to accept it or not as a member of European Union which lead to change their economic structure with the support from the IMF and European Union.

Indian auto industry

Emerging of India in the world economy has been started by implementing liberalization and opened up most of the economic sectors to the global world in 1992. Looking historically at Indian car industry, it can be divided in four phase from the view point of Kim (2004). The starting point was in 1920s with assembly which was established by foreign companies. (General motor and Ford) It took two decades up to 1952 that Indian build up their domestic production firm. The governmental policy in auto sector is known as the main reason of no progress in productivity and technology in this sector for long period. (Kim, 2004) The third phase was started, after three decades, by making a join venture of Maruti Udyog -became nationalized in 1980- with the Suzuki motor company. According to this agreement a revolution had happened in Indian car industry. Increase the volume and standard was not just in auto makers but the change was occurred in the components industry as well. (Venkataramani, 1990) The main and last phase was started by Indian economic reform after 1992 under the guidance of the IMF and World Bank. As it was anticipated, deregulation of auto industry in 1993 and the expectation of market growth in India according to the population have attracted international auto makers to invest in India. According to the foreign existence it was a dramatically fell of domestic firms share in India.

Investment of foreign car makers, which were mainly in the form of joint venture with domestic firms, caused the're-restructuring' in the Indian's motor industry. Apart from promotion of new models with more stylish design, significant changes have happened in auto financing as well. Also numbers of component manufacturers invested in local firms to supply their assemblers. So Indian witnessed a fundamental change in the technology, infrastructure and managerial systems. (Kim, 2004)

Despite of all expectations and anticipations about the fast economical growth after regulations in India and a positive view of auto makers about Indian market because of the sizable population of middle-class, the estimates about rising in demand did not turn to reality. Apart from the problems which multinationals generally face in new emerging countries such as "undeveloped supplier base", weak infrastructure" and undeveloped regulations (Kim, 2001), Indian environment seems more complicated for them. Although the population was far enough to support ten auto makers, the companies face with overcapacity. The lack of demand in both domestic and regional market has become the major problem for multinationals auto makers in India.

In terms of export from India to the neighbour countries also, the multinational car makers have not achieved any remarkable result. However the main reason might be the economic situation and poverty of South Asian countries which limit the demand for passenger car, we should not ignore the political and economical relation of India with its neighbour. Despite the hopes after the South Asian Association for Region Cooperation (SAARC) in 1985 and the South Asian Preferential Trading Agreement (SAPTA) in 1995, there was no significant growth observed in the South Asian trade relationship.

Although the auto industry in India has not succeeded as it was anticipated, the auto component industry has occurred high progress in quality, technology and international standards. Now, in collaborate with foreign companies, they have become competitive in international markets and auto makers in India use their Indian suppliers to supply their other operation plant around the world.

Moreover, Indian government regulations disable multinational to import completely build automobiles to India. However the Indian government did not define any limitation for on foreign ownership, instead 123 per cent tariff rates on import cars were forced multinationals to set up their assembly plant fully within India. And a high tariff on finished components also was another issue that multinationals prefer to find their supplier within domestic firms. (Kim, 2004)

Despite of all mentioned problem in India, multinational car makers seems still have a positive view about the Indian market. The potential existing market is there, but the matter is that when it will become visible.

Chinese auto industry

Following the economical reform in China, the Chinese policy makers focused on auto industry as a symbolic sector which shows the industrial development within a country. The need for technology and knowledge caused them looking for foreign partner to provide the required technology by setting up assembly plant which also generate and improve numbers of domestic firms as the suppliers to support the main assembly plants. So, in the mid-1980 three main cities of China (Beijing, Guangzhou and Shanghai) established a joint-venture with foreign auto makers supported by central and local government. (Thun, 2004)

Each local government aimed to improve the local supplier network by its JV, but the assembly plants were looking for the better quality and lower price. Therefore in contrast with the local government and despite of geographical advantages of supplying from local firms, assemblers were dependence on outside supplier and most of them imported 100 per cent of the components from outside unless they were forced by Chinese government to increase their required components from domestic firms. But even after the time assemblers shifted from outside supplier to domestic firms, the local government aim to improve their local network were failed as the JV sourced their parts from other regions. Therefore, as of 2003, just Shanghai could relay on their local auto sector and even though it did not meet the international standards, it became a dominant firm in Chinese auto market. (Thun, 2004)

The Shanghai success was the result of well support and strategic plans of local government and Shanghai Automobile industry corporation (SAIC). In 1984, when the Shanghai established a joint-venture with Volkswagen (VW), non of local firms were able to supply the required component for the assembling plant and after two years their share increased by just 2.7 per cent. (Li, 1997) No significant achievement after two years caused "Shanghai municipal government began to re-evaluate the problems within the sector and the capacity of individual firms to solve these problems." (Thun, 2004) Consequent of problem solving process, they discovered two necessity preconditions to facilitate improvement in domestic firms.

The first one was "a reorganization of the municipal bureaucracy responsible for auto sector oversight". They have set up an Automobile Industry Leading Small Group in order to control the local actors. (Li, 1997)

The second precondition "was the capital accumulation and investment". To solve this problem the local government defined a 'localization tax' and set up the localization office which was responsible to "carry out a straightforward import-substitution policy" for the imports in auto sector even from other Chinese regions. Also, the localization office checked out the list of imported components and their domestic firms which are capable of produce them successfully, then it provided a suitable investment capital as well as managing the firms' relationship with the main assembler plant. (Thun, 2004)

Apart from the local government programs, SAIC had its own way to support the Shanghai auto sector, however in some areas their activities overlapped. SAIC with a hierarchical structure were able to have an accurate control over production, especially over the financial parts. Moreover, SAIC provided learning programs and training and other activities to ensure about the management knowledge and skills during the development process. These all happened while other two cities failed in building up a local supply chain.

Despite of all attempts, even Shanghai auto sector is far from international standards in terms of quality and prices. The Chinese auto sector needs more time to catch up as a competitive country in this sector. Thun (2004) has mentioned the overlap of local government with national government as the main reason for an inefficient performance of auto sector in China. It might be also because of the decentralize system in decision making which cause the system would not be able to coordinate well and efficient. The governmental support can not be continuing further as China has joined WTO and the central government should think about other strategies to aid the auto sectors; giving more freedom to local government to choose their economical strategy and to assembler to choose their supplier from any where but more efficient, might be a good start.

Iranian auto industry case

Economic overview

Iran is a country whose economy is mostly state controlled and is highly dependent on oil and related industries such as petrochemicals and petroleum. Most economic activity is controlled by the state and private sector activity is typically small-scale - workshops, farming, and services. However the high oil price in recent years built up a great amount of exchange reserves for the country ($30 billion) and the market reform has started to improve the economy since 1990, but the progress in economic and market reform plans was limited and it has not eased economic hardship such as high unemployment and inflation. Despite of the GDP annual growth rate from 5% in 2000 to 6.5% in 2004 ($7,700 GDP per capital), inflation has increased from 13% to 15.5% and there is still 11.2% unemployment rate. (World Development Indicators database, August 2005 , The World Bank Group report) Although in the Middle-East region, Iran is known as one of the highest GDP growing and it is more industrialized than most of other countries in the region.

According to the World Factbook information (Table 3), in terms of GDP growth, Iran is standing in the third place (excluding Iraq due to its unusual circumstances) after Qatar and Turkey, while Iran GDP-per Capital is even more than Turkey.

Around 40.9% of GDP in Iran comes from industrial sector and according to Ministry of Industry and Mines the auto manufacturers has been the fastest growth industry with a 27.2% annual rate of growth, nevertheless the share of automobile and component in exports has a fell by 0.9 percent share in country export from 2003 to 2004. (Ministry of Industry and Mines, 2005) (http://www.odci.gov/cia/publications/factbook/geos/ir.html . Nov, 2005) The main reasons of export decrease were manufacturers' emphasis on domestic market and attempting to improve the quality of production cars.

Auto industry market in Iran

With the current population of 72 million in Iran, almost one percent of the world's total, the share of the total global car production is a little, over 0.6%, while the market demand is greater than current production levels and there is a big potential demand in domestic market due to; firstly, the low number of automobile per capita in Iran. (Table 4) According to statistics for 2001, there was one automobile available for every 16.8 people in Iran. This clearly shows the capacity of the market for more automobiles and secondly, almost half of the automobiles in Iran are over 20 years old. So, there is a remarkable demand for replacement of the old cars as well as new demand which auto manufacturers need to meet them. Thereupon, the government has set an objective not only to produce more cars to meet the ever-growing demand, but also to produce enough new cars to replace the old ones. (Table 5) (Atieh Bahar Consulting (2003), www.atiehbahar.com )

Iranian auto industry

"Iranian manufacturers currently produce six different types of vehicle, including passenger cars, 4WD, trucks, buses, minibuses, and pickup trucks." According to the latest statistics provided by the Ministry of Industries and Mines, there are some 3.8 million vehicles in the country.

The Iranian auto industry started with a CKD assembly industry in 1969 based on the British product, Hillman Hunter, which was named Peykan and assembled by the state owned firm, Iran-Khodro. (The production of Peykan was ceased in 2005) The aim was to develop the ability to mass produce and become an export player through a process consisting of 6 defined phases. -The development objectives are summarized in the Table 7 - but they were able to complete hardly just the first one due to the licensing agreement with foreign companies.

Despite of all progress in the sector the manufacturers can not supply the market demand. As it was mentioned, the current and potential market in Iran is large. In fact, according to Iran-Khodro, more than 450,000 people pre-purchase automobiles every year and wait approximately two years to receive them in 2001. The estimate of the total annual demand for light passenger vehicles in Iran is approximately 600,000 units (Iran Khodro Industrial Group: www.ikco.com ).

The role of the government

The government has and still is protecting the automotive industry from its more experienced and financially stronger foreign competitors. It is trying to promote export by eliminating export duties and taxes and even financial and other kinds of supports such as providing cheaper raw material for export oriented firms and it has had some degrees of success.

Also, there are other attempts for remove import barriers as well to stimulate domestic firms for compete with international firms and so improve their levels to international standards. The plan has been a reduction in import tariff from 130% to 70% in five years. "Even though the latest Automotive Law does not forbid the import of automobiles, the firm position of the Finance Ministry and the Central Bank of Iran has essentially put an end to the import of automobiles since 1995" to both protect and encourage the domestic manufacturers. (Atieh Bahar Consulting, 2003), www.atiehbahar.com

Iranian auto manufacturers and supplier network

There are currently 13 public and privately owned automakers in Iran, of which two - Iran Khodro and Saipa - account for 93.6% of the total domestic production. As it showed in Figure 6.2 Iran Khodro, which produced the most prevalent car in the country -the Paykan -, is by far the larger with 60.9% of the market, while Saipa contributes 32.7% of Iran's total production. The other car manufacturers, such as the Bahman Group, Kerman Motors, Kish Khodro, Runiran, Traktorsazi, and Shahab Khodro, together produce only 6.4%. (Sapco publication, 2003)

Sazegostar and Sapco, the respective purchasing divisions of Iran Khodro and Saipa, (the two largest Iranian auto manufacturers) are responsible for providing and dealing with suppliers and managing the contribution of the auto parts to the main assembler. The Iranian automotive parts industry consists of approximately 1200 main companies, which include those joined with vehicle manufacturers as well as independent firms. The industry consists of two primary sectors: Original Equipment Manufacturing (OEM) suppliers, which produce parts for auto makers, and After-Market Parts Manufacturers (AMPM), which produce replacement parts for vehicles.

The low level of quality in most of suppliers due to the shortage of high technology and training problems caused Sapco and Sazegostar settle on several policies to improve the quality and reliability of auto parts. They have supported the parts makers to improve the quality of their products by implementing ISO 9000 and/or ISO/TS 16969. Several training programs have been planned, not just for the managers, but also for the operatives and they have tried to involve most of their subsidiaries' employees. Finally, Sapco and Sazegostar both have defined a certain conditions and criteria for accepting production firms such as the condition of the working area, the firms' size, number of the labours and their level of training, own standard certification for quality (ISO 9001) and the condition, quality and technological level of their machinery.

Despite of all of these attempts, most of the parts produced do not meet international standards, so to the automakers' benefit - and to provide the parts industry with an incentive to raise its standards, the government has eased regulations and tariffs on the import of certain auto parts but the domestic supplier are still engaged with their quality management programs to meet the international standards.

According to the problems that automakers face in supplying their required components, their goal to reach an annual production of 500,000 units by 2001, failed; because of inability to increase the capacity of production, shortage of skilled labour and more emphasis to improve the quality. (The problems of auto industry development in Iran will be discussed further in the next chapter) Therefore, the target was postponed until 2003.

Although the government of Iran has passed laws and regulations such as high import tariffs, taxation and low or no financial support for the companies which import the component, to support the domestic production of spare parts, there is a large demand for foreign parts due to their levels of quality and stability of domestic component productions. (Atieh Bahar Consulting, 2003) www.atiehbahar.com

Growth and development problems in Iranian auto industry

Domestic and export market

In terms of quality, domestic automakers and the Ministry of Industries and Mines are trying to adopt policies that will raise the standards of Iranian production to be able to compete in the international export market. However the Iranian auto makers can not continue with poor quality and over-pricing even in domestic market for long time as Iran will join the world trade organization in near future and the potential market in Iran will attract multinational auto makers with higher quality and more competitive prices. Apart from the characteristics of the market which we mentioned in previous chapter, the anticipations of more growth beside the advantages of a young population, a great amount of resources for raw materials and low wages caused multinationals thinking of entering the market not just by importing but also to establish their own platform.

Looking at the SMMT statistics for the number of cars imported in Middle-East shows Iran is standing on the first place by importing 213,652 passenger car and 16,000 commercial vehicles, despite of strict regulations of importing cars. (Table 8)

Apart from Iran, Middle-East market is known as one of the wealthiest regions. Statistics show that among different products, automobile market has got the highest rate of growth of 149% from 1995 to 2002 and it is expected to have 50% more growth to 2012. (United Nation Industrial Development Organization, 2003) http://www.unido.org According to the expected potential market in the region, if Iranian firms improve themselves in terms of quality, reliability and competitive price, they should be able to play a vital role in Middle-East region, as there is no other car producer in the region apart from Turkey.

Role of the State

In the countries, where the economy is largely controlled by the state, there are always debates on the government and its decisions' influences on the current circumstances of economy and the failure of any industries. The auto makers have been always considered as one of the main industrial part of the countries' economy and so it is in Iran. Therefore looking at the role of state and the way in which it attempts to support and enhance the auto industry can clear some indicates of why Iranian automakers have not developed as it was expected and planed.

Investment Policies

Since the Iranian automakers are controlled by the state, they have the advantages of financial support from the government budget. For ten years between 1979 and 1989 -period of war and the construction afterward-, the industry went down and posed the challenge that whether auto manufacturing should be supported or scrapped. Early in 1992 the Iranian parliament approved the Five Year National Vehicle Act, and it became the basis for a calculated and determined move towards achieving a national auto industry policy. This event helped clarify the legal roadmap of the industry. A direct result was Rls 1,100 billion investments, made between 1994 and 1998 on auto-part manufacturing other than the vehicle manufacturers themselves and the ministry of industry and mine was responsible for it in line with the government program to develop non-oil productions. (Irano-British Chamber of Commerce, Industries and Mines, 2002)

Despite all investment which automakers have had during these years, less and less was spent on the research and development part, therefore the knowledge and information bases of auto industry have a low level of improvements, while the factories spent the financial aid on machinery and other expenditures but not on developing their own technology and design. However the result of government investment has helped to build an infrastructure in terms of educated and skilled people who encouraged working in auto-part manufacturers and machineries which increased the capacity of production. It shows maybe the government can classify the area in which it devotes the budget and also define other sorts of aid and investment which is happened in recent years such as providing the opportunities to deal and set agreements with foreign manufacturers.

Market Policy

Iran's automotive market is not easily accessible to foreign companies. Imports are only allowed for limited number (10,000 per year in 2004) and in special cases for governmental organizations or by car manufacturers with specific terms (See foreign investment, 3.Licensing part); however at the moment, debates are going on the issue of tariffs and taxes on importing cars and the adjustment of import policies. But protection policies in long-term and extremely low level of imports have built up an oligopoly market in Iran which is determined mainly by two main state owned companies, Iran-Khodro and Saipa. The main result of this type of market has been exposed on the price and quality of products. The lack of foreign competition in the market has allowed domestic car companies to set extremely high prices, sometimes up to 100% higher than the total cost, and offer poor quality products compared with the international standard. Despite of several strategies to improve the quality of parts and products during the years, there is no encouragement for firms and factories as long as they have no competitors and the market has no other choice except the poor quality and high price domestic produced cars.

Protection of Industry

The government general policy to support the automakers is protecting the industry with high tariffs while the number of car imported is limited as well.

As we pointed out in the previous chapter, the experience, quality and competitive price of foreign firms were the main reason to prevent imports and so provide an opportunity for domestic firms to catch up themselves. After following a protection strategy the government has begun to recognise with the advantages of sharing the market with foreign firm if they are seriously looking for the international credits in terms of quality and reliability to become a car exporter in Middle-East. At the moment Iran's automotive industry is vulnerable to real competition; hence the government believes that the door to imports should be opened very gradually and under careful supervision, so they have started with reducing tariffs from 130% to 70%. In five years from the beginning of 2005. Also we have to consider Iran's aim of becoming a member of WTO as an issue which force government to steadily remove all taxes and tariffs.

Foreign Investment

The strategic location and low costs of both natural and human resources that Iran benefits from, make it very attractive for foreign investors. They intend to take advantage of the opportunities for inexpensive assembly projects, but also use the country as an export base for the Persian Gulf states and to take advantage of the Iranian market, but the government policy after the revolution in 1979 became strict about the foreign presence in domestic market in any way, not just in auto industry, but also in other sectors. Notwithstanding of the optimistic and helpful effect of FDI in developing countries, Iranian government is still doubtful and so is fearful of foreign investment in that multinationals may try to get control of domestic firms and so has opened its doors gradually to try to protect domestic firms.

FDI in the Wholly Owned Subsidiaries

Establishment of a wholly own subsidiary in Iran by foreigner is still not allowed, especially in the main industries which are controlled by the state. Accordingly, even in the private sort of FDI in small businesses, the government do not provide the legal security for investors. Thereupon there was never any real attempt to attract FDI into auto sector, excluding the economical and political situation of the region which is unstable.

Joint Ventures

For long period of time, the Iranian government considered Joint Ventures as a way of including foreigners in domestic market and industry which was against their independent policies. The parliament approval to investment in the auto industry in 1992 excluded this option from its industrial privatization policy and so the auto sector remained in government hands to prevent it falling into the hands of foreign multinationals. But after a long debate on the issue of cooperation with multinational manufacturers due to the Iranian firms' need of technology, especially in R&D, the first Joined venture has created in auto sector.

In May 2004, French company Renault-Nissan formed a joint-venture car manufacturing company called Renault-Pars to produce light passenger vehicles in Iran. "Fifty-one percent of the company's shares are owned by Renault-Nissan and the remaining fourty nine percent by the Automotive Industry Development Company, a concern owned by the Iran's two main government-controlled carmakers, the Saipa Group and Iran Khodro." (Middle-East finance and economy, October 2004) http://www.ameinfo.com.

Renault's investment is the first large-scale, long-term direct investment in Iran by a French company since the 1979 revolution, which can be considered as the starting point for further foreign investment flows into the country.

Licensing

Licensing has been the only way in which foreign cars come to Iranian market. Iranian car manufactures were allowed to import limited number of cars, provided that they decided to start to build up the car within the country. So after the company import cars, under a licensing agreement start to transfer the assembly line (platform) including technological requirements from their licensing partner. After a period of assembling, by importing car components via their licensing partner, domestic manufacturers started to design the parts inside the firm and set a target to produce the parts by domestic suppliers. However, mostly due to lack of information and technology expertise the result was poor quality production in most of the cases, unless they had support from the foreign partner in production line in the main supplier firms.

Ultimately, the Iranian automotive manufacturers realised they needed the technology, expertise and management skills that foreign companies could provide.

France's Peugeot have been the first foreign company that signed an agreement with the state owned manufacturers, Iran-Khodro after 1979 (revolution). Their products are the Peugeot 405, Pars (Persia) and 206. The Peugeot 206 entered the market in the fourth quarter of 2001. Iran-Khodro suppliers (Sapco) are able to produce 87% of the Peugeot 405 parts, almost 80% of Pars Peugeot and 65% of Peugeot 206 domestically. (www.ikco.com )

France's Citroen also formed a licensing agreement with Saipa in the fourth quarter of 2001 to produce Citroen Xantia.

From Korea, Kia Motor with Saipa, are producing the Kia Pride. And Korean Daewoo and Kerman Motors had an agreement for Daewoo Cielo and Matiz which is finished by 2005. (Atieh Bahar Consulting, 2003) www.atiehbahar.com

The last licensing agreement will start in 2006 and Renault-Pars will produce the Logan under Renault license, a vehicle based on Type B of the L90 series of Renault automobiles. (Middle-East finance and economy, October 2004)

Also for the foreign partners the agreement can be with the export a predetermined percentage of the Iranian production to other countries. For example, France's Citroen is currently in partnership with Iran's Saipa, which assembles the Xantia. According to the agreement, 70% of the cars manufactured in Iran are to be exported back to France, which apparently also includes spare parts. (Atieh Bahar Consulting, 2003) www.atiehbahar.com Also according to the Chairman of Iran's Industrial Development and Renovation Organization, Half the L90 production volume will be targeted for exports to 26 countries as well.

Design, Technology and Education

With no doubt, the issue of research and development is one of the Iranian automakers weaknesses. In most of licensing agreement Iranian companies try to take advantages of their foreigner partners' experience in designing the automobile body and parts to improve their knowledge for their own technology.

Design

However Iranian agreement in most cases was the assembly with the imported parts which the facility and technology of the line also provided by foreign party with the emphasis on eventually producing the parts in domestic firms to lessen dependence on foreign design and knowledge and build up expertise in Iranian firms.

In both Sazegostar and Sapco, which have the responsibility of designing auto parts for two main automakers in Iran and prepare the chosen parts for producing domestically, still the design departments remain heavily dependent on Japanese and French. Although a lot of training programs have been held for qualified domestic designer and they have educated many highly skilled people in this area, it seems more needs to be invested in this area, to achieve the objective of becoming an export player and maintain their technologies as other multinationals.

At the moment the cars, which are produced in Iran, are no longer old fashioned, but many new types and models came after them in the car market and all of them are available in Middle-East market. To catch up faster, the investment and training on design part supposed to be well planed to be able to covered new designed models in the same time with the international market.

Technology

In the current automobile market, developing a new model of car has reduced to thirty months in most cases. In such a fast growing market, differentiation and innovating new models are highly depends on the high technology and well based information technology to support the system.

The main Iranian automakers' technology sources have been their foreigner partners in almost all cases. Also in developing further technologies to produce the auto parts, the technology and knowledge, training and the way that system supposed to be managed are provided by the foreign partners.

If Iran decides to become an automobile exporter, acquiring a qualified level of technology is an important issue. In licensing agreements the multinationals do not invest on the R&D department in large amount which is a necessary part for having, improving and maintain the technology in an international level. As the Minister of Industries and Mines emphasis in a meeting with the managing director of Renault-Nissan Alliance, the joint venture is mainly for cooperation between the research departments of France's Renault and Iran Khodro as well as Saipa. Iranan car makers find out that they can not play in internetional level without connection to world automakers chain and exhchange technologies with them. (Middle-East finance and economy, October 2004) http://www.ameinfo.com

Management of the Technology

The technology that transferred to a country under a licensing agreement will supported by importer for a specific time (depends on the agreement), but the issue of managing the new used technology will be a problem for host country. In Iran, the most cases of production poor quality parts, the designed part has been developend and built up by foreign partner and when the technology demands goes down to the lower tiers in the supply chain, suppliers do not have enough knowledge and background to manage it. Development on technological issues will not occur without the skilled workforces and professional managers as a required precondition whose can deal with transferred technology and manage to maintain it. Managing the technology is not summarized in the assembly parts, but the planner should include whole value chain take account of the workforces to settle the objectives and plan to reach the international standard level of technology and the managing ability to maintain and develop it.

Supply Chain

In the current fast growth and close competition among auto manufacturers in the world, the main competitive advantages of car manufacturers lie in their supply chain. All automakers are highly dependent on their suppliers. Quality, reliability and total cost of the automobiles are base on suppliers' performance, so all automakers are so sensitive about their value chain and have their own strict regulation and indicates to select them. Iranian government also in line with the plans to support and improve national auto industry, try to help the auto part makers in several ways, investing $ 670 million in three years up to 2005 is one of governmental supports. However most of them have not reached the international standard level. (Hoshyar, Mar 6, 2005)

Size of Firms

Two main Iran automakers, Iran-Khodro and Saipa have managed their suppliers via establishing a subsidiary which is responsible for all purchasing activities. (This is a similar model to Peugeot's purchasing division, Sogedac) The subsidiary's title is 'Supplier of Automotive Parts Company' (SAPCO), and founded in 1993 and it's actively involved in design, engineering, quality and planning aspects of auto-parts. Sazegostar is playing the same role for Saipa. But apart from these two main suppliers, there are around 1200 main part manufacturers in Iranian auto industry. Some of these suppliers are well equipped and have plenty of skilled workforces, while if we investigate down the chain there are a lot of small size factories which supply the main supplier. These workshops mostly do not have high and modern technologies and are short of skilled labour.

A lot of small firms in the chain with no connection to other suppliers make the control over the value chain difficult. Quality control, technological improvement and even include them in training programs will be impossible and need a lot of investment. (www.ikco.com)

Apart from all those problems, the main issue about the small size factories is the economy of scale and increase the total cost of production. Despite of the decision to combine most of the small size firms in 2002 to increase efficiency, they are still working with no link to the main supply chain.

Level of Quality

According to the Industrial Development and Renovation Organization of Iran (IDRO), despite of investing a great amount of money on part suppliers from 2002 to 2005, in the year 2004, $ 5.2 billion auto parts were imported to Iran whereas the export value was $ 250 million; $ 50 million under the estimated value. (Hoshyar, Mar 6, 2005) http://www.idro.org Considering the low wages of labour and cheaper raw material in Iran, the final price of producing the auto parts is 15 % under the international price in Iran, yet the main weakness lies in low quality levels and they cannot improve their exports Until the quality issue is resolved. While some of the suppliers in Iran import parts from outside, the small factories produced other parts with low level of technology, and poorly qualified labour which impacts badly on quality. This major contrast makes even the cooperation among the value chain unfeasible. (Hoshyar, Mar 6, 2005)

Labour

No country can achieve sustainable development, without training specialized workforce.

Also for industrialization-oriented strategies there must be specific serious efforts to improve human resources from both quantitative and qualitative points of view. While we should beware that in reality, specialized workers are leaving the country in the hope and search of better life and research conditions in the advanced world.

Iran's population with the average of 24.23 is considered as a young populated country. Despite the fact that there are 23 million workforces exist in the country, the industrial sectors still suffered from the lack of skilled workforce. However there are several qualified universities in Iran and considering the number of people educated abroad, no sustainable program to use and support the high educated people caused Iran to be known as the highest rate of brain drain with the emigration of 150,000 to 180,000 highly educated people every year. (BBC news, 2003) http://www.bbc.co.uk/persian/

In the auto industry sector in Iran there is a widely training program implemented to improve the level of workforce and so the quality of products. However there were some training for the managers before, but with the new approaches and plan to join the global network of automobile suppliers with the joint venture agreement, the necessity to improve all aspect of companies including labours become more important. There are 156,000 employees working in auto industry sector in Iran and still a great number of them are uneducated and poorly trained which is affecting the quality and general performance at first. In the fast changing technology in auto industry, if Iran decided to join the international market, it supposed to have a sustainable program for human resource and prepare them to deal and work with new and high technological facilities, improves their knowledge and experience and maintains the quality of their job as the technology changes or upgraded. (www.ikco.com) (http://www.odci.gov/cia/publications/factbook/geos/ir.html . Nov, 2005)

Conclusion

This research aimed to cover and point out the strengths and weaknesses of Iranian car industry and intended to define an effective and implemental strategy for future car industry in Iran. First we have looked at the logical and required steps in the world auto industry and auto market from both the production point of view and consumption. And we have talked about the changes that happen in the world consumption which leads manufacturers to change their production and marketing policy. Then we have referred to remarkable decline in development of a new product and ability to offer new types of car in shorter period and other different strategy which auto makers follow to maintain their economy of scale and profitability. Following these general concepts we have looked briefly on three examples of emerging countries - Turkey, China and India- which has reformed their auto industry and maintain their growing. The more similarity in the circumstances and the place of mentioned developing countries to Iran, the easier will be comparison. According to this background we have looked at the case of Iran auto industry and its current situation. Although there are much more in this issue on auto industry and the way in which it is affected in Iranian economy some main points come up from the above information and discussion.

  • The strict production policy which has followed by Iranian government might be the main cause of poor development in this sector. However this strategy in short term helps the manufacturers to build up them, in long term, lack of connection to the world industry network keep the technology undeveloped. No encouragement to improve the quality and reliability is the result of no real competition in the market which the production strategy provides for the market. In such a situation all kind of investment and financial aid by government are ineffective. This is an important issue which had happened in all mentioned examples and they all finally have decided to remove it, whether in short period of time (India) or in a long time aim to build up a national industry.(China & Turkey).
  • The auto makers' performance on the R&D part has been so impractical and inefficient which lead them to the shortage of high skilled people in research and design area, and caused an undersized rate of improvement in the level of technology. To catch up in the world auto market is not possible without a strong infrastructure and high technology which can be best done through participating in the global economy. It seams technological development is not possible without connection to the world auto network. Iranian firms need to import technology, base information, training programs and the experience of auto engineering from the international auto makers. Iran situation has enough potential opportunity for multinationals such as its market, cheap raw material and cheap workforce, so presence of them and share the market with them aim to improve the knowledge and technology does not mean dependency on the foreign companies and it will be possible to build up a national industry as well.
  • Another issue which emerges from the Iranian auto industry case study is the supply chain performance. Lack of efficiency is comprehensible according to the large number of small size factories which makes the rational investment almost impossible. Also small size companies hardly can meet economy of scale and thus the productivity is low. In order to organize their technological upgrade, training plans and effective investment, the necessity of merge the small size firms is inevitable. Added that the auto component industry can be seen as a separate issue from auto makers which can improve and become international through joining the international part suppliers which encourage them to improve their quality as well and make them independent from the domestic auto makers.

For sure there are other specific points apart form those are mentioned above, however according to the objective of the research, we try to raise up the main issues which standing against further development in the Iranian auto industry and suggest an implemental strategy to cover the aim of this research.

According to the experience of what happened in 3 mentioned examples (Turkey, China and India) by consideration the specific circumstances and other different characteristics of Iran, the Iranian government and their perspective about national industries and Iranian auto industry place in the country also compare to the international auto makers we can claim that some serious changes need in the strategy, approach and performance of both government and auto makers in Iran if they are looking for their own developed national industry as well as become an export player in Middle-East.

The recommendations address mainly to the government as the main regulator, also consider auto manufacturers and the auto component suppliers.

  • Although government's protective strategy aim has been structuring a national auto industry, the experience shows the failure of this strategy in all cases. So the government needs to open the market for international firms which can be done in several ways in order to maintain domestic firms, still have the control over the market and use the advantages of international companies' presence.
  • The Iranian auto industry needs international partners in the way which the partner obligated to transfer not only the platform technology but the knowledge, research and development information, design and other facilities to maintain the level of technology upgraded, such as joint venture, merge, acquisition or other strategic alliances. It can be followed by specific regulation for foreign partner such as:

- Limited number of share and/or

- Limited ownership for international partner and

- Define percentage of benefits to control the role of them in the market.

  • Also the government can liberalize importing cars gradually. The tariffs and taxes can be removed steadily to encourage Internationals Company toward importing, while the number of the cars imported in a year can be limited and the tariffs on importing auto parts can remain high as a sort of support for domestic firms. Therefore a new regulation, such as necessity of preparation aftermarket parts and services within the country, obligate international car makers, whose importing cars in to the Iranian car market, to dealing with domestics' auto makers and their suppliers and invest on them to provide their requirements component instead of import them with high taxation. Meanwhile the government can consider an intensive program for investing and supporting domestic auto makers to enhance their level to the international standards level.
  • Although the component industry in Iran is not well developed, in order to have a high quality cars and following the fast growing market, the government need to invest more on the auto component makers and prepare their cooperation with international auto supplier network. Maintaining the high tariffs on auto parts imported to the country can be both an encouragement and support for domestic supplier, while the multinationals find it more rational to bring their supplier with them. As a result the component makers will receive a great amount of financial support and technological aid from multinationals, while the opportunity of joining international network will provide for them. The auto component industry can be seen as a separate issue from auto makers which can play a dominant role in the county's economy.
  • Nevertheless in order to attract international car suppliers in to the country and encourage them to invest on auto suppliers first there are some concerns which have to be resolve; the main problem is the large number of small factories producing auto parts. The importance of economy of scale and efficient performance necessitate a plan to close inefficient small firms and merge other small sizes enterprises to organize them rationally in less numbers but big size which make the investment effective and managing their performance efficient.
  • When domestic auto makers joint multinational auto makers, their suppliers interested in domestic firms to provide parts for their assemblers. The government should provide the suitable conditions for them to invest on domestic suppliers which cause a technological revolution in the auto parts industry and the quality of their products. The government's program and investment, including financial and non financial such as training programs and facilitate firms to import their technological requirements or overseas training for managers, can make auto component industry competitive in international market the same as Indian case.

In addition, the Iranian government needs to provide the preconditions of any changes in the long term strategy. The economical circumstance in Iran is fragment and with no sustainable economy, international firms do not feel security for their investment and intellectual properties to invest for long time in Iran. So apart form the attempts to have a sustainable growing economy, the government should approve the regulations and rules which support and help protect foreign intellectual properties. Moreover, apart form the new strategy to change and improve auto industry, there should be a long term strategy to build up the infrastructure of the industry. With a large number of young population, define and classify different relevant courses in the engineering schools and training supports for existing workforce in auto sector can facilitated the shortage of skilled human resource, while there are many educated people live inside or in overseas countries and they can be attracted to this sector by providing a practical supports for them.

With no doubt, Iranian auto industry has a long way to catch up the world standards, but a rational usage of their advantages such as its strategic location, low costs of both natural and human resources, a great potential and existing market in the region and the position of their auto industry in Middle-East region, with an effective long term strategy can reduce the time and the way of developed industry.

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