Chery Takes a Chance on Iran

A0117749.jpgFirst it was a tie up with Chrysler, then it was a surprise joint venture with Fiat – now it’s investing in Iran. Chery, the Chinese car manufacturer, is quite the globetrotter these days, and its first major auto venture in the Middle Eastern country looks like a smart move. Chery announced on Monday that it would be opening a factory in Babol, northern Iran, one which it said would produce a maximum of 200,000 cars a year. The $370 million plant would be build together with Iran’s biggest automaker Iran-Khodro, and the Canadian investment firm Solitac.

While American car companies are shunning Iran because of US sanctions, Chery is able to take advantage of Iran’s large and relatively young population. Iran has just over 65 million people, with a median age of 16.5 years.

That Chery will be competing against a handful of European automakers who have ventured into Iran gives it a further foundation for entering the more mature markets.

Iran’s automotive industry is subject to US sanctions because of its links to the government. It means that most cars built in Iran rarely get exported; nearly everything is for the domestic market. But in 2006 it still managed to produce one million vehicles, making it one of the Middle East’s leading car producers.

Iran’s burgeoning population appears to have been enough to have helped the nation’s car market grow 8.5% last year, 10% in 2005, and nearly 20% in 2004. The rate has been slowing as the market has grown.

Still, “there’s lot of potential for growth,” said Jonathan Poskitt of J.D. Power Automotive Forecasting. “It’s a young population and we’re expecting to see over the next few years an explosion in the age of the population who are able to drive a car.”

Iran-Khodro is Iran’s largest auto manufacturer, holding a 60% share of the country’s car market, along with its smaller competitor, Sapia. Everything has to be done through joint ventures.

That is fine for Chery, whose recent joint ventures have included a tie-up with Italy’s Fiat, to turn around 175,000 Fiat and Alfa Romeo cars a year for the Chinese market, along with a partnership with Chrysler to build cars for export to the United States.

Iran-Khodro has also already friends overseas, including in France’s Peugeot, with whom it has made models like the Peugeot 405, 206 and RP – Peugeot built 340,000 units in Iran last year.

Other big partners have been South Korea’s Kia, who built 430,000 units in Iran in 2006, and more recently the alliance of Renault Nissan, which want to build 300,000 cars (mostly Logans) a year in Iran.

Chery President Yin Tongyao said that his company’s venture with Iran-Khodro would “strengthen Chery’s competitiveness in Iran or even in the entire Middle East market” – Iran seems a good place to start, but it’ll be a while before it makes any hefty profits.

“They’ll make money but it’ll be money in the longer term,” said Donnelly. “They won’t make money immediately; you can’t charge a high premium price in a country like Iran.”

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