By Sharad P Matade
There is a cautious optimism on the economic horizon of Iran which is gearing up to emerge as a powerful economy in the Middle East following the progressive lifting of sanctions since January 2017. The Iranian tyre industry is also now looking forward to fresh investments, technology collaborations and joint ventures in a bid to reviving, modernising and expanding the industry. Yes, these are challenging times for the tyre industry in Iran, especially as uncertainty prevails in the country’s relations with the US.
As long years of economic isolation ended early this year, Iran is engaged in a cautious but ambitious bid to regain its status as a lucrative market in the Middle East region for many businesses, including the tyre business. Many international tyre manufacturers and allied companies are exploring the possibilities to enter the Iranian market while the domestic tyre industry is on the look out of financial, technological and other collaborations with foreign tyre majors in its bid to revive the industry.
But the road ahead is not that smooth either for the foreign tyre majors or the domestic industry. Managing the possible tough competition in the industry in the years ahead is certainly going to be a tough task.
Impact of sanctions
International sanctions imposed by the Western world have had its toll on Iran’s economy and also the country’s tyre industry. “The tyre market of Iran has been majorly hampered by the restrictions on the import and export of automobiles as well as tyres on account of sanctions imposed by P5+1 nations (France, the United Kingdom, Russia, China, the United States, plus Germany) due to Iran’s Nuclear Enrichment Programme,” says Karan Chechi, Research Director at TechSci, which has recently published a comprehensive report on the Iranian tyre industry, titled Iran Tire Market Forecast & Opportunities, 2021.
The Iranian tyre industry at present consists of nine to ten manufacturing companies with production capacity of 230,000 tonnes a year. Among local tyre companies, Barez Tire is the largest tyre manufacturer in Iran, followed by Dena Tire and Yazd Tire in 2014, according to Hassan Shaebani, CEO, Rubber Industries Engineering and Research Company (RIERCO). The country’s requirement for tyres is currently 330,000 tonnes annually, of which 230,000 tonnes are produced domestically and 100,000 tonnes met through imports.
Business restrictions due to the sanctions is clearly seen in the domestic tyre companies’ production, exports and imports, and product developments over the years. According to the data compiled by RIERCO, production of different types of tyres and tubes in Iran was recorded at 229,206 tonnes in 2004 and it grew 8.26% to 248,144 tonnes in 2014.
However, consumption of tyres and tubes surged over 53% to 370,111 tonnes in 2014 from 240,502 tonnes in 2004 on demand from automobile sector. The glaring difference between domestic production and consumption is being met by imports, mainly from China.
However, according to industry sources, production in 2015 declined further on liquidity crunch, growing cheap imports and inflation. “In 2015 , the actual production decreased from 243,440 tonnes to less than 194,000 tonnes because of lack of liquidity, import of low-quality and very cheap tyres from China as well as huge economic recession. It is expected that the total production may not exceed 200,000 tonnes in 2016 and the year ahead.
Revival of economy
Iran is the second-largest economy in the Middle East and North Africa (MENA) region after Saudi Arabia, and the 18th biggest in the world, according to the World Bank. Experts anticipate some relief for tyre manufacturers in Iran on revival of economy and the automobile sector.
“ During 2014, due to the partial relief from sanctions, the automobile market reflected a bullish trend, exhibiting a whopping growth of around 29% in automobile production, which had a direct positive impact on the growth of OEM tyre market of the country,” says Karan Chechi.
The economy of Iran is witnessing revival as can be witnessed from a boost in the sale of passenger cars, which rose to 1,055,400 units in 2015 from 691,709 units in 2013.
Post sanctions, the country’s tyre industry is expected to post a double-digit growth in the next five years. According to TechSci Research report,the tyre market in Iran is anticipated to grow at a CAGR of over 12% during 2016-2021 on account of the anticipated growth in automobile production and sales. Moreover, lifting of sanctions and anticipated economic revival are further anticipated to augment demand for tyres in the country through 2021.
Raising production capacity
The removal of sanctions has bolstered the sentiments of tyre manufacturers in the country. Now the Iranian tyre industry intends almost to double its production capacity from the current level of 230,000 tonnes to 500,000 tonnes in the next five years.
“After lifting the sanctions, we have started increasing our production capacity. In the initial phase, we are planning to add 100,000 tonnes and then reach 500,000 tonnes in five years from today. We have four to five automotive companies that produce 2 million cars per year and they are in negotiations for Joint Ventures and we hope that in the coming two years, we will see new brands in Iran, which will lead to an increase in domestic consumption of tyres,” says Mohammad Reza Ganji, Chairman of Iran Tire Association.
Tyre companies in Iran are already gearing up to enhance their production capacity. According to reports, the largest Iranian tyre company Barez Tire is set to boost its production by setting up a new plant in Kerman. Barez Group targets to produce 150,000 tonnes of tyres per year by 2021 from the current production of 85,000 tonnes per year. Another company, Iran Tire, is also planning to increase production to expand its local market.
“Our current production capacity is 70,000 tonnes per day out of which 7,000 tonnes are passenger radial tyres. We will increase PCR production to 25,000 units in the next three years,” says Asghar Asgharpour, Deputy of Sales & Marketing at Iran Tire. With the increased production, Iran Tire’s market share will increase to 10% from the current 7 per cent.
“The Iranian Government is keen to increase the production capacity and in October 2015 the Government announced that it is looking for private sector partners to establish the proposed four greenfield facilities. The four new facilities will have a capacity of 50,000 tonnes each and will be located in four cities — Khorramabad, Kermanshah, Sanandaj and Zabol — where there is no tyre manufacturing unit at present,” says an industry source.
The domestic market for tyre building machinery is picking up, though 50% requirement of the machines is met through imports, mainly from China.
Being one of the largest tyre markets in the Middle East,Iran is being targeted by major international tyre companies. According to reports, Michelin is exploring opportunities to resume its business in Iran which was Michelin’s biggest market until it stopped exports to Iran in 2011.
Chinese tyre company Shandong Linglong Tyre has also entered into a strategic partnership with the Iranian company Tosse Tabdil Sina (TTS). Under the deal, TTS will act as an exclusive agent for the Linglong brand in Iran and handle its sales, marketing and after-sales service.
Indian tyre major Apollo Tyres too has increased its sales in Iran. Apollo sells its products through a local channel partner and claims it has a dominant position in Iran’s cross-ply truck and bus tyre market. According to Apollo Tyres, Iran contributes more than 25% to the country’s Middle East & North African (MENA) revenue and since the lifting of sanctions on Iran in early 2016, the business has gone up nearly 50% for the Indian company.
Chinese tyre companies already have a significant presence in Iran and looks upon the country as a major export market. Kaisheng Hou, Senior Consultant, China Chemical Guilin Engineering Co.,Ltd. (CGEC), predicts that the Iranian tyre consumption will increase 20% in the coming years and radial tyre production will increase 15% to 30%. Hou expects that the Iranian tyre companies will be able to match the European regulations. However, according to Hou, the Iranian tyre companies will face stiff challenges on technology upgradations and cost. The Chinese tyre industry can support Iranian tyre companies in improving service and quality, she says.
Shift from bias to radial tyres
A gradual shift from bias tyres to radial tyres is also taking place in the country, though bias tyre segment is dominating commercial tyre segment largely. In 2014, 11,972,349 units were produced in the passenger car tyre segment, while bias tyres production stood at 289,151 units.
By the third quarter of 2015, radial truck and bus tyre production stood at 215,467 units, while production of bias tyres is estimated at 843,187 units. However, according to tyre professionals, global trends and norms for regulations will lead to higher demand for radial tyres.
Bias tyres account for around 60% of Iran’s tyre production capacity. The demand for radial tyre is growing in the market. For instance, Iran Tire, which produces bias tyres based on General Tire technology, has already started radial tyre production. “We started producing radial passenger car tyres three years ago. The company purchased radial tyre technology under license from Matador Continental. The company also plans to convert its bias tyre capacity to radial tyres,” says Asgharpour.
Growing radialisation will change the demand pattern for the main raw materials, natural rubber and synthetic rubber, in the country. The contribution of natural rubber, synthetic rubber and carbon black in the cost of tyre production varies between 58% to 68% mainly because of the technology for bias and radial production. In bias tyre production, the use of natural rubber is more than synthetic rubber. Since Iran is going to focus mainly on radial tyre production in the future, the demand for synthetic rubber will exceed the demand for natural rubber, experts say.
On the raw material front, around 100% of natural rubber is imported from South East Asian countries like Malaysia, Indonesia, Thailand and some other Asian countries. “However, over 65% of the requirement of synthetic rubber is supplied through local manufacturers such as Shazand Petrochemical Company, Takhte Jamshid Petrochemical Company and Bandar Imam Petrochemical Company. The rest, mainly Butyl Rubber and Pro Butyl Rubber, are imported from Korea, China, India etc. Majority of Carbon Black is supplied in-house by companies like San-ati Doodeh Faam Company (SADAF), Iran Carbon Company, Pars Carbon Black Company, Carbon Simorgh Company, etc. Even as the Iranian tyre industry is aiming to increase production capacity to meet future demand, there increasing awareness about the need to have eco-friendly products, explains the source.
Focus on green tyres
According to Mehrtash Sepahan Company, which produces industrial chemical materials and lubrication for various industries, usage of aromatic oils will decline on tightening regulations to encourage green tyres in Iran as well as globally. “The Iran tyre industry mainly consumes aromatic oil. However, we are expecting reduction in the usage of aromatic oil in the near future owing to export market requirements and emphasis on eco-friendly products in the country,” says B Iranpour, Director Manager at Mehrtash Sepahan Company.
Though aromatic oil usage is higher than paraffinic oil in Iran, the profit margins in paraffinic oil is higher than aromatic oils. The usage of aromatic oils for making tyres has already been banned in the developed markets citing its hazardous impact on environment and humans.
Mehrtash Sepahan Company dominates the paraffinic oil segment in Iran with a share of 90%, while in aromatic oil segment, it holds 20% share in the country and Behran Oil Co holds 50% share. The Swedish oil company Nynas, which has been supplying industrial oil to Iran, is now also exploring opportunities to supply its tyre oil, which is considered as green oil, anticipating future growth.
A few Iranian companies are looking for expanding their business in other countries along with their neighbouring countries through exports. “Majority of nations in the Middle East region are import-dependent countries. Neighbouring nations such as Saudi Arabia, Qatar, Oman, the United Arab Emirates (UAE), Kuwait, etc and various countries of the African region are expected to be the potential export markets for the Iranian tyre companies,” says
Iran tyre companies do very little exports. “Our current capacity is only 230,000 tonnes which is not much and does not meet the domestic demand. We export only around 5% of total production and that too to neighbouring countries,” says Ganji.
The Iranian tyre companies are not keen on setting up plants in other countries. However, a few Iranian companies are trying to enter into the Asian markets along with their traditional export market. Mehrtash Sepahan, which has a capacity of 50,000 MT of industrial oil annually, is planning to set up business in India. “The company is interested in entering India in a big way. It already has an office in India. We are evaluating the Indian market right now. We
have visited some potential customers,” says B Iranpour.
Though the Iranian tyre industry’s future looks bright, there are serious challenges ahead. Many tyre companies are on the verge of bankruptcy. Technology and machines are outdated. Import of Chinese tyres is on the increase. Production cost is higher due to low production volume and even in such conditions, innovations and R&D are not a priority for the Iranian tyre companies.
The Iranian tyre industry has already set an ambitious target to double its production capacity in the next five years, and for that tyre companies are in a desperate search of investments. Most tyre and other tyre-related companies are seeking foreign investment as financing from local banks are not being preferred due higher interest rates. “Local banks’ interest rates are as high as 28%, so we are reluctant to approach local banks for loans,” says Asgharpour
The high domestic interest rates, electricity charge and other charges are a disincentive to attract foreign investments. However, Ganji says that the Government packages for loans are competitive and tyre companies can opt for it. “We need finance to expand tyre production capacity in the country. Banks’ interest rates are quite high, but the Government allocates some funds to the industry with special interest rates comparable to international interest rates. Anybody who wants to come to Iran for tyre business can avail of these special facilities,” says Ganji.
Funding for Research & Developments is a major issue for the Iranian tyre industry. “Along with research and technical support, we also need financial support to conduct research in various segments in the industry,” says Shaebani.
Upgradation of technology is another challenge confronting the Iranian tyre industry. Most tyre companies use outdated technology of international tyre companies. “Sometime we also do reverse engineering on machinery and technology bought from China and Europe,” says Mehdi Ghavami, Project Manager, Novin Fanavaran Ned Group, which makes tyre and rubber building machines.
Many international companies are looking for Joint Ventures to expand production and upgrade technology. “We see a lot of potential in solid tyre business and we want to enter into solid tyre production and will be ready to form a JV with a foreign company for the same,” says Raza Moghaddam of Kian Tire, the largest OTR tyre producer in Iran.
Kiran Tire produces different sizes for the local and foreign markets. However, producing different sizes is another challenge. “Since the size of tyres are changing almost every day, we find it very difficult to produce sizes on demand. For changed sizes, we have to buy new moulds and augment our production capacity which is not a feasible option,” says the company spokesman.
Import of Chinese tyres
Import of tyres from China is a major threat to domestic tyre companies. Around 40% of Iran’s tyre demand is being met through imports. Imports from 2004 to 2014 surged around 150% to 133,136 tonnes. Imported Chinese tyres are 40% cheaper than the locally produced tyres.
Many Chinese companies grossly undervalue the tyres exported to Iran to escape higher import duties. Iran tyre industry professionals have called for higher import duty to check inflow of cheap tyres.
However, imports and export duty policies of the Government are in favour of local tyre companies. Import duty on raw materials is around 4%, while export duty on finished products and raw materials is nil. However, for imports of radial tyres, traders should pay 32% import duty and on heavy tyres they have to pay 20%.
The road ahead
Though doors are open for foreign companies to enter into the Iranian market, the going will not be easy for both local and foreign companies. Prior to the imposition of nuclear sanctions on the country, the tyre market of Iran was highly diversified with various international brands such as Bridgestone, Continental, Michelin etc. and domestic tyre brands such as Barez, Kavir, Goldstone etc.
However, the situation became critical after the imposition of sanctions on Iran. International tyre majors halted operations in the country, which eventually helped domestic tyre brands in Iran to gain share in the market and establish a strong foothold.
Therefore, the international tyre majors who are now planning to resume operations in Iran will have to face stiff competition from domestic players and it would be a challenging task for them to regain their share in the Iran market.
According to the Chair-man of Iran Tire Association, the foreign brands can now have an effective entry into Iran market only through joint ventures with Iranian companies.
Meanwhile, the uncertainty clouding Iran’s future relationship with the United States, particularly after Donald Trump became the new US President, has put a question mark over Iran’s ambitious development plans. The possibility of Trump imposing new sanctions on Iran is viewed with anxiety by the international business community.