State dominance of the sector offers Iran’s automakers many protections, but it is believed it is not enough to insulate the industry from the global drop in auto demand. Iran has ambitious goals for becoming an autos exporter, but we forecast a decline in both production and sales amid the downturn in the Iranian and world economy. In August, the country’s Minster of Economic Affairs and Finance said that the government is determined to protect the economy from the effects of the global economic crisis.

But Iran’s state-owned enterprises are hurting. Iran Khodro is dealing with a liquidity crisis and had to be bailed out with a US$1bn rescue package in July. Even though the firm plans to restructure its business, we are sceptical of the scope of these changes and privatization efforts overall.

Iran Khodro and the country’s other leading carmaker Saipa are affiliated to the Industrial Development and Renovation Organization (IDRO) and have manufactured some 278,000 cars in the three-month period ended June 21 2009. That reportedly represented growth of 11% in comparison with the output for year-ago period. Saipa produced 148,334 vehicles while Iran Khodro manufactured 130,300 cars, indicating a 7% and 16% rise, respectively, in the period.

While the figures showed an increase in output, it is believed the country’s state-owned manufacturers face several challenges ahead. Iran Khodro’s dire situation is seen by some commentators as a reflection of mismanagement by the state sector, which has resulted in operational efficiencies. While there are early signs that the worst of the world economic downturn may be over, any recovery is likely to be fragile, which will keep a lid on demand for Iran’s exports. We foresee Iran’s auto exports nearly halving in 2009 to 23,692 units. We don’t expect exports to recover fully until near the end of our five-year forecast period.

Increasing political tension has also soured the business environment. World leaders are facing pressure to find new policies for dealing with Iran following the disputed re-election of President Mahmoud Ahmadinejad in June and ensuing crackdown on protesters. In August, the US announced that it may seek tough new sanctions on Iran if the country misses a September deadline for agreeing to hold talks on its nuclear programme.

For now, domestic sales are holding up. We expect auto sales to rise a modest 4% to 1.16mn units in 2009. But consumption levels are expected to remain under pressure as low oil prices and sanctions continue to weigh on economic growth. Our five-year forecast for sales is more upbeat, with sales reaching 1.33mn units, but we are cautious as additional sanctions and political strife could have longterm implications for Iran’s economy. Already, there are signs that the turbulence is triggering large outflows of private wealth. If that continues, we believe it could crimp the growth of auto ownership rates, and ultimately, sales, in the long run.