German Trade

Reopening the Silk Road to Iran

Tohid Tunnel Iran Borna MIr Fotolia
The Tohid Tunnel in Tehran. German firms hope for infrastructure project contracts.
  • Why it matters

    Why it matters

    Iran is seen as a guaranteed growth market for exporting countries after economic sanctions were lifted on Saturday. Germany in particular stands to benefit.

  • Facts

    Facts

    • Daimler Trucks said Monday it had signed letters of intent for a joint venture to produce and sell vehicles in Iran.
    • In 2014, German firms sold goods worth some €2.4 billion ($2.6 billion) to Iran, about half the level of 2005.
    • Germany’s Chambers of Commerce and Industry said the volume could reach €10 billion soon.
  • Audio

    Audio

  • Pdf

Wolfgang Bernhard wasted no time. Within hours of Saturday’s announcement that Western sanctions against Iran were finally being lifted, the head of Daimler’s truck division was sitting on a plane bound for Tehran.

Sunday is a working day in Iran, so two contracts were quickly signed. Soon Daimler, the parent company of Mercedes, will be making engines, axles and trucks in Iran again. “There’s great pent-up demand for commercial vehicles, especially trucks,” said Mr. Bernhard. Mercedes trucks had always had an “excellent reputation” in Iran.

For Daimler, the deals mark a return to well-known territory. It was making trucks in Iran until the embargo was imposed in 2010. Then the factory shut down, the machines were packed into crates and the employees sent home — but they kept on being paid by the Iranian government. Everyone was certain that the sanctions would be temporary, that the factory would quickly start up again. And that is exactly what’s about to happen.

Iran is one of the few guaranteed growth markets for 2016. While China’s boom is faltering and demand in the former growth markets Russia and Brazil has plummeted, the hopes of exporters around the world are pinned on Tehran after it was brought in from the cold. Harsh international trade sanctions were lifted on Saturday in return for the country’s hardline government honoring a deal to curb its nuclear ambitions.

“Iran is the only country in the region with a broad industrial base. It's got demand for everything.”

Ulrich Ackermann, VDMA German Engineering Federation

Germany, which was Iran’s biggest trading partner for decades before the sanctions, has particularly high hopes. In 2014, German firms sold goods worth some €2.4 billion, or $2.6 billion, to Iran, about half the level of 2005. Germany’s Chambers of Commerce and Industry said that volume could soon reach €10 billion.

That’s because after a decade cut off from Western markets, Iran needs everything: Trucks, cars, machines, power stations, medical technology and consumer goods, for a population of 80 million, half of whom are under 30.

Many German industrial firms kept in touch with partners in Iran throughout the sanctions. Daimler and Siemens, keen to avoid the ire of U.S. authorities, officially cut their relations with Tehran. But others such as steel group SMS and building materials group Knauf never shut their offices in Iran.

 

TehranTrain station AFP Getty Images
A train station in Tehran. The country is bound to offer great opportunities for foreign firms. Source: AFP Getty Images

Nikolaus von Bomhard, the head of reinsurer Munich Re, said back in August that it “shouldn’t be difficult” to resume business in Iran. Reinsurance contracts would be the focus, at least to start. Selling classic insurance, through its subsidiary Ergo, for example, would be less of a priority.

The need for machinery is particularly great. Plant construction company Voith, which has just opened a new office in Iran, is optimistic that it will win contracts to modernize old factories and build new ones. Voith, which builds factories and offers industrial services in the energy, paper and raw materials sectors, said its business in Iran used to be “attractive and profitable” — before the sanctions.

Industrial companies such as ThyssenKrupp, Gea and hundreds of small and medium-sized businesses are also attracted by Iran’s business potential. “Iran is the only country in the region with a broad industrial base,” said Ulrich Ackermann, head of foreign trade at the VDMA German Engineering Federation. “It’s got demand for everything.”

Its machinery is outdated and there’s a huge investment backlog. But it won’t be easy to reclaim old terrain because Chinese competitors are already providing almost half the plant and machinery that Iran orders — and no one’s expecting them to give up their lead without a fight.

Tourism is also likely to reawaken. In fact, it already is. Gleaming mosques, magnificent palaces, the beautiful city of Isfahan on the Silk Road — Iran has always been a very attractive destination for globetrotters, but tour operators all but gave it up after hardliner Mahmoud Ahmadinejad became president in 2005.

The regime change in 2013 which brought the more moderate President Hassan Rouhani to power has changed that. “Since then we’ve seen double-digit revenue growth,” said German tour operator Studiosus. Its rivals, such as Berge & Meer and Gebeco, are hard-pressed to keep up with demand for their tours to Iran. According to the DRV German Travel Association, the number of trips taken to Iran increased by two thirds to 50,000 between 2010 and 2014.

Tuifly, the airline owned by German travel company TUI Group, and Hanover airport have approached the Iranian government with a view to cooperation that could take the form of Tuifly providing an Iranian airline with aircraft and crews, TUI Group said.

Rivals are already well ahead. “We’re flying tourists to Iran with Turkish Airlines without any problems,” said tour operator Studiosus. Turkish Airlines offers flights to seven cities in Iran. German national carrier Lufthansa also plans to increase its flights to Tehran. At present it offers daily flights from Frankfurt. From the end of March it will add three flights per week from Munich.

Iran-01

German consumer products giant Henkel is also looking forward to returning to Iran. In August 2013, when a nuclear deal seemed hopeless, Henkel pulled the plug, saying it planned to sell its business in Iran within a year and would make a €25 million writedown. It said the decision was partly based on political factors. After all, the U.S. had just tightened its sanctions.

It was a tough move because Henkel can look back on a long history of business in Iran. It set up a subsidiary there back in 1970 and in 2002 bought a 60 percent stake in one of the biggest Iranian detergent manufacturers with a workforce of 1,200, paying the equivalent of €20.4 million.

Henkel’s chief executive, Kasper Rorsted, who on Monday announced he was moving to Adidas, will likely have been pleased that Henkel couldn’t find a buyer for its Iranian detergent business. He decided in early 2014 not to sell it after all. “The country’s readiness to enter into constructive dialogue with the West has increased significantly,” he said at the time.

At that point Henkel still employed 500 people in Iran, generating €100 million in sales. The decision to stick with Iran may pay off for Mr. Rorsted’s successor at Henkel, Hans Van Bylen.

One of the few reluctant industries to jump into the fold, however, remains banking. Michael Kemmer, head of the German banking association, said financial firms will probably wait until there is more clarity about exactly which transactions would be allowed. Banks have been burned by running afoul of U.S. sanctions, including Deutsche Bank and Commerzbank, which had to pay a $1.45 billion fine.

Markus Fasse covers the automobile industry from Munich, Kerstin Leitel covers the banking industry in Frankfurt, Martin Murphy reports on the automotive and steel industries, Christoph Schlautmann is based in Düsseldorf and covers the logistics industry. To contact the authors: fasse@handelsblatt.com, leitel@handelsblatt.com, murphy@handelsblatt.com, schlautmann@handelsblatt.com

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