What’s At Stake For The Auto Industry Now That The Iran Deal Is Over

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If you need any further evidence of the intellectual rot that has gripped the West, look no further than an obscure auto writer viewing geopolitical events through the banal lens of Chomsky-esque American Imperialism underpinning every single event in the world. Look no further if you want proof of a once radical and subversive ideology becoming utterly commoditized.

But to answer the apparently rhetorical question above, this is very bad for America’s auto industry, and GM in particular.

The automotive industry is without a doubt a mature one, and that means that growth can come from one of two avenues

  1. Fight your competitors for share in developed markets
  2. Find new, untouched markets and establish a beachhead there

The second option is always preferred. That’s why investors are always looking for the “next big thing” and why we have seen such a huge interest in autonomous vehicles, when the technology and financial communities previously treated the automotive space like a Certified Pre-Owned hypodermic needle. There is lots of money to be made by being first, and conversely, trying to steal share is utter drudgery, and can be very costly in terms of time and money, yet often yields little reward. If you understand this, then Ford’s decision to withdraw from the passenger car market should also make sense.

This logic is why auto makers were so focused on China for the past two decades, and why they are now turning their attention to markets like Indonesia, Morocco, Turkey and Iran.

As Slide 5 of this Boston Consulting Group presentation shows, Iran has the potential to be a yuge market for new vehicles. At 1.5 million units annually by 2020, Iran would be a bigger market than Australia, Mexico, Thailand and Turkey. Don’t forget that these are all countries that have serious auto manufacturing industries of their own, as well as relatively advanced economies and a decent to high standard of living.

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It’s worth noting that despite being ruled by a cadre of drooling kleptomaniac imbeciles, Iran’s population is rather young, highly educated and dying to enjoy the freedoms and tchotchkes that we in the West are privy to. Tehran’s youth regularly defy the religious police, to the point where the underground rock music scene has achieved international renown.

For years, Iran’s auto industry has consisted of a state-run enterprise called IKCO building dubious copies of old Peugeots, with the tacit assistance of parent company PSA. Renault also had a 100,000 unit operation in the country, which was shuttered due to the sanctions regime instituted during Obama’s second term.

For as long as I’ve been in the business, there have been whispers that the Iran deal – which was objectively awful for the United States – was a back-door attempt by Western powers to ensure access to the Iranian market. Any country that has an appetite for 50% more vehicles than Australia is going to need refrigerators, laundry detergent, greeting cars, commercial aircraft and all other manner of goods. It certainly explains why the Western powers went to such absurd lengths to secure a deal – not even the most hardened believer in birther/Manchurian Candidate conspiracy theories regarding Obama could pin such a strong desire to close the deal on supposed religious or cultural affinities, because the deal was so one-sided it defied logic. There had to be an economic element to it.

In 2013, the French press broke an extraordinary story, that among other things, accused GM of questionably legal importation of products like the Camaro convertible, running guerilla social media campaigns to market the idea of American cars to Iranian consumers and even attempted to undermine IKCO’s relationship with PSA. Although the story gained little traction in English-language media, it gradually became known that the EU regarded American movements related to Iran with a degree of skepticism, with some even suspecting that America was secretly attempting to muscle the European players out of the Iranian market – recall that Renault even blamed the American sanctions regime for its exit. In the aftermath of the deal, automakers wasted little time in setting up shop in the country.

The end of the Iran Deal will leave the auto industry in limbo yet again. OEMs are at a unique disadvantage, in that they must make long-term decisions that are effectively “locked in” (and are very costly to unwind). Given the conservative nature of the industry, it’s safe to assume that OEMs will be stuck in a holding pattern until the situation becomes more stable, and that means significant investment and opportunity costs are at stake. Overall, this is not a good situation for the American auto industry, or any business that had grand plans for Iran.

On the other hand, Iran has endured two near-revolutions in the past 10 years, with the end result being the near-toppling of the clerics. The regime is unlikely to survive a third. I’d say that’s bullish not just for the auto industry, but global stability.

 

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