Iran, bottomless money pit or financial Eldorado for PSA?

PSA has noted a great increase in its sales but remains dependent on the European market. That is why the company bet on Iran to maintain its growth. But why is the Iranian market attractive?

All companies that want to get into a new country look for some important criteria, especially a large population that can afford to buy products at the right price and in great quantity. And with a significant population (estimated at about 80 million people), the development of a large middle-class and the presence of an established upper class, Iran is an attractive country for a lot of foreign companies, because there is a need for diversification companies do not want to put all their eggs in one basket. Consequently, for many years the country has been very important for some transnational companies, such as the French firm PSA (Peugeot-Citroën-DS-Opel-Vauxhall), who sold 458.000 vehicles in 2011 within the country. At the time, Iran was the second market for PSA in the world.

The impact of the political situation

With the election of 2005, Mahmoud Ahmadinejad came to power, and the situation began to change quickly. The will of the government to develop its nuclear technology created some harmful effects on the economy. Gradually, sanctions became more damaging. It all started with a ban on the export of military and nuclear products, a boycott on oil products,  and a huge embargo on large sectors of the economy.

Consequently, PSA was constrained to stop its exports to Iran at the beginning of the year 2012, because of the sanctions and pressures ordered by the US Administration.

Following this departure, the company was, at the end of the year 2012, close to bankruptcy, with a drop of 13% in sales worldwide. 

Why did the company leave the market?

Basically, because there was at the time a need of joint-venture between General Motors, the American car manufacturer, and PSA. It would have been considered inappropriate for PSA to maintain its activities in the country when its future partner was asked to leave the country.

This withdrawal of companies that were well established in the country paved the way for Chinese manufacturers, who saw the potential in the country, and do not mix up business and politics.

The end of the crisis?

The Iran nuclear deal framework, reached in 2015 between Word Powers and Iran, announced the end of the economic sanctions and the possibility to export and sell products in the country. The market is open. Also, all companies see the high economic potential of the country, given that the population is very critical of local car manufacturers, arguing that the quality and security of the products are very poor, and massive boycott was decided. 

The company is back in Iran 

PSA will try to use its reputation and good image in the eyes of the population to increase its market share. It will count on its partnership with the local manufacturer Iran Khodro, an Iranian company owned by the government that manufactures car under licence.

The partnership between PSA and Iran Khodro is old, and even during the sanctions, the company kept manufacturing Peugeot’s vehicles but without any authorization, via illegal kits from China. But the return in Iran won’t be free, and PSA will have to pay an important fine to a state-owned firm Iran Khodro ($430.000 million) because of the losses caused by the sanctions. But why do foreign companies decide to forge links with local manufacturers? In fact, the legislation obliges foreign companies to create partnerships with local firms in order to share technology and create jobs. 

Indeed, the law sets export quotas, that is to say that 20% of the production should be exported to other countries, in order to manufacture high quality products that can respect international standards. In this situation, PSA just made a deal with another Iranian manufacturer, Saipa (July 2016), in order to extend its number of partners within the country.

A shift in the situation?

However, Donald Trump came to power in 2017, and it has made a huge difference, simply because the new president of the United States considers the deal as harmful and useless. 

Also, the US president has threatened to tear up the agreement. All those declarations create tensions between both governments, and world powers, just like the business sphere, are afraid of a invalidation of the deal reached in 2015. 

With a re-assessment of the Iran nuclear deal, PSA would be in a bad situation, and the comeback in Iran would be just a sweet dream.

J.Laforge-Ravet

                                                                                                                                                                                    

-        https://financialtribune.com/articles/auto/63465/iran-865-of-psa-group-mena-sales

-        http://www.bbc.com/news/world-middle-east-32166814

-        http://www.lepoint.fr/economie/l-iran-peut-il-sauver-psa-16-07-2012-1486125_28.php

-        https://www.theguardian.com/us-news/2017/oct/13/trump-iran-nuclear-deal-congress

-        http://media.groupe-psa.com/en/psa-peugeot-citro%c3%abn/press-releases/group/2015-worldwide-sales-psa-peugeot-citro%c3%abn