Iran ties could dent European automakers' U.S. business
PARIS -- PSA Group and Renault have spent hundreds of millions of euros to rebuild their businesses in Iran following the lifting of nuclear sanctions in 2015, eyeing a market with about 1.5 million annual sales and consumers hungry to modernize after years of economic hardship.
But those investments are now looking less certain following the decision this month by the United States to withdraw from a nuclear accord and re-impose sanctions on companies that do business in both Iran and the U.S.
PSA could be forced to choose between Iran, where its market share exceeds 25 percent and the U.S., where it has just embarked on a 10-year plan to re-enter the market. Renault, which is seeking to nearly double production in Iran and has an 11 percent share, might be penalized in the future if it substantially strengthens financial ties to alliance partner Nissan, with its huge U.S. presence.
Daimler and Volkswagen Group, which have taken small steps to gain a toehold in Iran, could decide to suspend their plans.
"The autos sector was one of the biggest beneficiaries when the nuclear deal was struck in 2015, opening the door for millions of dollars in investment from the likes of PSA Group and Renault,” BMI Research wrote in a note this month. However, BMI said, "The re-imposition of U.S. sanctions on Iran will see investment in the country's autos sector dry up as companies are faced with uncertainty surrounding the business environment.”
Together, PSA and Renault now hold almost 40 percent of the Iranian auto market, which saw total sales of 1.59 million passenger cars in 2017, according to the global automotive trade association OICA. Locally, 1.41 million cars were produced last year.
PSA, which has in two joint ventures in Iran valued at 700 million euros, is unlikely to sacrifice its business in Iran for an uncertain future in the hypercompetitive U.S. market, said Fawad Ahmad, an analyst with IHS Markit based in Frankfurt.
“The plan for PSA to return to the U.S. was always to slowly re-enter the market, starting with car-sharing,” Ahmad said. “We believe that instead of taking an opportunity in a market where you cannot be sure of success, they would just stick with what they've got in Iran.”
PSA would probably continue its car-sharing operations rather than move into retail if sanctions make selling cars in North America impractical, he said.
PSA has called on the EU to maintain a united front. A spokesman said it was monitoring the the issue closely, and that PSA's automotive activities are "totally compliant with international regulations."
Ahmad said that the risk for Renault was relatively low so long as a merger with Nissan is not on the table. He noted that Renault remained in Iran with a limited presence under sanctions, and was not penalized for it. “There is some flexibility for Renault because they have not fully merged with Nissan,” he said.
However, Ahmad said he expected that Daimler and Volkswagen would halt their fledgling operations in Iran. “It's the opposite of the French OEMs, which don't have any business in the U.S. but huge businesses in Iran,” he said.
Automakers say they are closely watching the situation, but none have yet announced an official withdrawal.
Sanctions to resume
The Trump administration said the first group of sanctions, including the automotive sector, would go into effect in August. However, American and European negotiators are expected to continue discussions on how to salvage parts of the nuclear deal, known formally as the Joint Comprehensive Plan of Action. Some companies could receive waivers.
European leaders, including President Emmanuel Macron of France, have said that the EU needs to protect companies that do business in Iran. But a number of large companies, including the French fuel giant Total and the shipping firm A.P. Moller Maersk, have indicated that they will leave Iran, weakening the case for European unity.
Car companies who remain in Iran could find a more difficult environment, Ahmad said. Oil exports are expected to fall by 10 percent this year and 20 percent in 2019. Just as important, Iran could largely be shut out of the global banking market, making it harder for companies to find financing.
“Our current stance is that sanctions will have an impact, but it won't be as severe as it was in 2012-2015,” he said. “How far the sanctions will reach the actual automotive market in Iran depends on negotiations with the EU.”
Here is a look at recent investments in Iran:
No other foreign automaker is as heavily invested in Iran as PSA, which recorded 444,600 sales there last year. The automaker had almost 30 percent of the market in 2011, but it pulled out reportedly under pressure from General Motors, which took a 7 percent stake in PSA in early 2012. The withdrawal from Iran was a deep wound for PSA, contributing to the company's full-year loss that year.
However, its partner, Iran Khodro, continued to produce older Peugeot models using “gray market” parts, and PSA did not book the sales.
Hoping to quickly reclaim its leading position after sanctions were lifted in 2015, PSA signed two joint venture agreements in 2016. The first, with Iran Khodro, was valued at 400 million euros over five years, with the money being invested to modernize production of Peugeot models under license.
PSA also agreed to pay $446 million to Iran Khodro for losses incurred after the 2011 pullout, which had been a sticking point to the deal. The joint venture with Khodro produced 443,000 vehicles in 2017, including the Peugeot 206, 207, 405 and 2008.
The second venture, with Saipa, is valued at 300 million euros to manufacture and market Citroen models, starting with the compact C3 this year. PSA also has an interest in a several Iranian joint ventures connected to Faurecia, the automotive supplier in which it is the controlling shareholder.
Iran is Renault Group's eighth-largest market, with sales of 162,709 vehicles in 2017 -- a 16 percent increase from 2016. Top-sellers include the Sandero (which is sold as a Dacia in Europe) and the Tondar, both locally produced. Renault has been producing cars since 2003 in Iran in a joint venture with Iran Khodro and the Saipa Group; current capacity is about 200,000 vehicles a year.
In August 2017, the company announced it was setting up another joint venture with Iran's Industrial Development and Renovation Organization and a local partner, Negin, to produce an additional 150,000 vehicles a year. Iran's official news agency valued the deal at 660 million euros.
Iran is a major part of CEO Carlos Ghosn's growth aspirations under Renault's Drive the Future midterm plan. Renault is aiming for a 15 percent market share by 2022 and sales of more than 250,000 units annually.
Spokespeople for Renault and the Renault Nissan Mitsubishi alliance said the companies would not comment.
Daimler and VW
German automakers have proceeded cautiously in Iran. Daimler signed agreements with Iran Khodro in September 2017 to import Mercedes-Benz trucks and to set up manufacturing of Actros brand trucks at a later date. In July 2017, Volkswagen said it would begin exporting Tiguan and Passat models to Iran with local partner Mammut Khodro, which is also the importer of Volkswagen Group's Scania trucks. Volkswagen withdrew from the Iranian market in 2000.
Daimler and Volkswagen say they are monitoring the situation closely. “As a matter of principle, Volkswagen complies with all applicable national and international laws and export regulations,” the company said.