Emerging Market

Germans Late to the Party in Iran

iran_ozan demicran for handelsblatt
Tehran auto assembly plant.
  • Why it matters

    Why it matters

    With sanctions set to be lifted, Iran offers huge potential for international firms.

  • Facts

    Facts

    • The historic agreement reached in July between Iran and six world powers offers the prospect of ending crippling economic sanctions against Iran.
    • Iran has the world’s fourth-largest oil reserves and huge pent-up demand for Western products and investment to modernize its outdated infrastructure and industry.
    • Iranian business leaders want to cooperate with German firms because they value German knowhow and technology — but so far, German firms are taking a wait-and-see approach in Iran, letting rivals take the lead.
  • Audio

    Audio

  • Pdf

It’s pleasantly cool in the assembly hall compared with the searing heat in the car park of the Tehran auto assembly plant. Rays of sunlight pierce the corrugated roof and hit the network of metal tracks that make this 60-meter-long factory floor resemble an old gold mine. The smell of car paint hangs in the air. A workman is fitting an engine hood on a silver car chassis. In the background, sparks fly behind a wall of sea-through plastic strips.

Hamidreza Davoodzadeh, the manager of the plant, looks pleased as he walks among the workers and their machines. The plant belongs to the Bahman group and produces 22,000 cars and delivery trucks per year. “But it could easily be 70,000,” Mr. Davoodzadeh said. The company assembles cars under license on behalf of various manufacturers including Japan’s Mazda and Isuzu.

His message is clear: There’s no shortage of capacity — all that’s missing is an export market.

Iran’s economy is on the brink of a major transition following its nuclear agreement with six world powers in July which is set to end decades of sanctions. The country’s economy is crying out for new investment in its aging factories and infrastructure, and for deals with the West. The end of the sanctions will open up a market of 80 million people, many of them highly educated and hungry for quality products. Iran’s ranks 18th in the world in terms of purchasing power, just behind Spain and Turkey, and has the world’s fourth-largest oil reserves.

“Iran sees an opportunity to completely reorganise its industry.”

Afshin Ghassemi, Consultant at German Middle East Lawyers' Association

In another hall, workers are fitting engines into car chassis. Drilling machines are waiting to be operated by engineers — a task that in German auto plants has long since been taken over by robots. Iran’s technical development came to a standstill in many industries as a result of the sanctions.

“Iran sees an opportunity to completely reorganise its industry,” said Afshin Ghassemi, a corporate consultant at at the German Middle East Lawyers’ Association in Hamburg which helps German firms do business in Iran.

The opportunities are not lost on German Economics Minister Sigmar Gabriel who rushed to Tehran for economic talks in July just days after the deal was struck to lift sanctions in return for long-term curbs on Iran’s nuclear program.

Mr. Gabriel was the first top-level Western politician to visit Iran after the deal and his speed drew criticism from opposition politicians in Germany who said it smacked of opportunism and was inappropriate given that Iran continued to deny Israel’s right to exist.

 

Iran shopping-Lonely Planet-Getty Images
The Iranian market offers huge export potential. Source: Lonely Planet/Getty Images

 

Whatever the rights and wrongs of that argument, German businesses aren’t in a tearing hurry to pile into Iran, even though the country is especially keen on German technology and industrial know-how to help it upgrade its creaking factories.

While German managers are keenly aware of Iran’s potential as an export market, they’re holding back because they’re worried that if they act too fast, they’ll break the sanctions that are still in place. And many are still too perplexed by Iran’s legal framework. “For many German firms, Iran’s legal system is still a black box,” said Frederic Mirza Khanian, a lawyer at Freshfields Bruckhaus Deringer, a multinational law firm headquartered in London.

So the top German players are refraining from making big announcements. Automaker BMW said it’s early days yet. VW said it was starting to hold talks at the political level. Daimler Chief Executive Dieter Zetsche has merely said that the automaker’s commercial vehicles are popular in Iran.

Augsburg-based industrial robot maker Kuka said it did business in Iran before the sanctions were imposed. “So it could develop into an interesting market for us once the sanctions have been lifted,” a spokeswoman told Handelsblattt.

The head of industrial group Siemens, Joe Kaeser, also sees potential. But he first wants to see how the nuclear agreement is implemented and when the sanctions will actually be lifted. “One mustn’t be overhasty now,” he said.

German firms know that international rivals are pushing ahead. Immediately after the deal was reached, French automaker Peugeot said talks with Iran’s largest auto company, Pars Khodro, were well advanced. The aim was to achieve “the complete production of vehicles with Peugeot engines,” a senior Peugeot executive said. French competitor Renault also wants to take a stake in the venture. The head of Pars Khodro told the Wall Street Journal that it was in talks on the sale of entire factories.

“No one should underestimate the potential; we think the export volume could increase by €2 billion in the coming three years alone.”

Ludovic Subran,, chief economist of Euler Hermes

It’s a similar story in the power sector. Italian oil and gas giant Eni has said it’s prepared to invest in Iran. As is Anglo-Dutch oil group Shell. The company, a Shell spokesman said, wants to quickly ascertain what role it can play in using Iran’s energy potential. Company executives traveled to Tehran in June.

Swedish insulin maker Novo Nordisk said it will build a production plant in Iran in the next five years, investing some €70 million, or  $77 million, and hiring 160 people. Medical products are exempt from the sanctions but the lifting of the finance restrictions will make funding the project much easier, said Ole Moelskov Bech, the head of Novo’s Middle East business. “The growth in the Iranian economy will also increase demand,” he said. “That makes the market all the more interesting for us.”

 

Irans Economic Recovery-01

 

Economists said Iran offers huge growth potential. Ludovic Subran, the chief economist of international credit insurance group Euler Hermes, said the Iranian economy had started growing in early 2015. Iran may still look like an emerging economy, he said but added: “No one should underestimate the potential; we think the export volume could increase by €2 billion in the coming three years alone.”

Iran Gabriel-.Michael Kappeler-dpajpg
Mr. Gabriel who rushed to Tehran for economic talks in July just days after the deal was struck to lift sanctions in return for long-term curbs on Iran’s nuclear program. Source: Michael Kappeler/DPA

 

Iran is hard at work wooing German firms. “We want to work together with EU countries,” Iranian Trade Minister Reza Nematzadeh told German business leaders at a recent meeting. “Especially with your country.” He said 40 percent of all Iranian technology and machinery was already connected with Germany “directly or indirectly.”

The deputy governor of the Iranian central bank, Gholam Adi Kamyab, said Germany had for a long time been “the leading partner in Europe” and that he hoped those links could be resumed.

 

Ozan Demircan writes about companies and markets for Handelsblatt. To contact the author: demircan@handelsblatt.com

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