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Corporate Strategy for Iranian Car Industry

Info: 5513 words (22 pages) Dissertation
Published: 11th Dec 2019

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Tags: Business Strategy

Abstract

The purpose of this research is to come across an effective and implemental strategy for Iranian car industry to become an export player in the Middle-East region. With consideration the importance of market development for international auto makers, the Middle-East market is evaluated and Iran as a case study is looked over in terms of its potential automobile market and developing opportunities in Iranian car industry to become a manufacturing partner for international players. Through out a review of Iranian economy and the position of auto sector in Iran economy, the difficulties of growth and development, the role of government- as the regulator- are discussed briefly and the effect of international auto makers -in the past and future- is analyzed. On this basis, we point out the main troubles of the current auto industry’s structure and the government dilemma to set its policies. At the end we suggest a reform in the structure and strategy of both assemblers and suppliers to enter to the international markets.

Keywords: Operation strategy; Iran auto industry; Globalization, Regionalization, Industry study

Introduction

Iran’s economic performance has begun to improve slowly after a decade of recession which was caused by the long and costly war with Iraq and fluctuations in oil prices. In the decade ending in 1998, GDP’s growth per capitals started to rise, although the average was only 3 percent per year. (Economic reports, the World Bank Group)

The automotive industry, as one of Iran’s most promising industries, was the country’s fastest growing industry with the average annual growth of 27.2% between 1995 and 2000 which was 5.5 times of the country average industrial growth. (Economic Focus, Iran Daily News).

The domestic vehicle production is growing quickly but it is highly protected, and only in highly exceptional circumstances can Iranians import cars from abroad. Locally produced cars have a reputation for poor quality and have contributed to the dangerously high pollution levels. Also, Iranian firms were not able to satisfy the domestic market in terms of quantity. Demand for automobiles, particularly passenger vehicles, far exceeds the supply. In fact, more than 450,000 people pre-purchase automobiles every year and wait approximately two years to receive them.

As a result the government, which wants to raise unit production and improve domestic industry in line with industrialization program, hopes to stimulate competition as part of the effect to make the economy less dependent on oil.

In order to follow the market reform plans and provide better circumstances for the country’s main industries such as petrochemical industry, textile and etc, President Khatami (since August 1997- 2005) in 1999, announced an ambitious program to privatize several major industries which included auto industry as a part of “total restructuring” of Iranian economy.

Currently 13 public and privately owned auto maker exist in Iran. The largest vehicle manufacturing company is Iran Khodro with an average share of 60.90% percent of domestic vehicle production, as the main government-controlled carmaker and Saipa is the second one with 32.70%.

Subsequent to the development program, automakers have been encouraged to review the way in which their strategies will be developed in the future and to extend a range of strategy options that might enhance their position. Consequently, most Iranian auto makers have been encouraged to join ventures or any other strategic alliances with foreign auto manufacturers to meet the increasing demand (www.ikco.com).

On the other hand, in looking at the automobile market generally, during the past few years, it might be observed that after a period of growth from 1997 to 2000 -resulting from the exceptional boom in US economy and the upturn in Europe-but the automobile market especially in North America and Europe has entered a consolidation phase because of overcapacity. The market is mature in developed countries such as those of Western European countries and US market where nearly 90% of sales of new vehicles are now accounted by replacement purchases. Also, in Far East-Japan and South Korea-, overcapacity is a highly sensitive problem (REINAUD, 2001), whereas in Middle-East region, vehicle out put is 6% of total global output in comparison with 29% in Europe and 30.2% in US (carmakers’ Annual report,*DRI). Thus, some auto manufacturers might be looking for new methods to penetrate the auto market in Middle-East in order to gain more market share over their competitors.

If these companies do become partners, Iran will be an option to emerge as a major regional car manufacturer, serving the Middle East beside Other countries in the region, particularly Egypt and Turkey which have substantial car assembly arrangements.

The following companies have signed cooperative agreements and their products are either already on the market or are to be introduced in the near future:

  • France’s Peugeot with Iran Khodro.
  • Korea’s Kia Motors with Saipa.
  • France’s Citroen with Saipa.
  • Korean Daewoo and Kerman Motors.
  • Optimus of the UK with Renus.
  • Proton of Malaysia with Zagros

According to the French automaker Peugeot, Iran has one car for every 21 people. Turkey has one for every 12, while Western European countries and Japan have nearly one car for every 2 people (www.peugeot.com). That indicates market growth potential, and the reason that foreign car manufacturer might be interested in the Iranian auto market.

In this research the current auto industry situation in Iran will be analyzed and it will be evaluated in relation to its future strategy consequent upon growth in terms of output quality and ability to serve the domestic market, but also to play a major rule in region and become a truly international car manufacturer and exporter in Middle-East.

To achieve a rich understanding of the current situation and examine the environmental position to meet the research objectives, other developing countries auto industry examples like China, India and Turkey will be investigated and analyzed as examples, while the regional circumstances, business environment and other specific characters of Iran’s economy – e.g. the role of government , economic condition and Iran’s regulations – will be considered to find out the most appropriate strategy for Iran car industry.

The research question for the chosen topic is ‘What would be the most effective strategy for Iranian car industry to become a major player in the Middle-East market?”

From this research question, the following objectives would be appropriate to evaluate:

  1. To evaluate existing methods of development strategy in the Iranian auto industry,
  2. To identify the best possible methods of development strategy for domestic and foreign companies,
  3. To recommend how such a strategy can be implemented.

The background of the research is set with a brief discussion on the changes have happened in the world of auto industry, the consequent of globalization, the dynamic and diversity of demand in auto market and the auto makers’ difficulties to respond to new market characteristics while maintain the ability to make profit. Our goal in this paper is to propose an efficient strategy to …. The paper has the following structure. Section 2 gives the brief literature review. Section 3 analyses the competitors in automobile Middle East market. Section 4 introduces the Iranian auto industry case. Section 5 presents the growth and development problems in Iranian auto industry. Finally, section 6 is devoted to conclusions and future works.

The remainder of this paper is organised as follows. Section 2 summarises the development of Iranian production and exports in the car industry compared to other major exporters in the world. It also explains why Iranian export growth has remained much below production growth. Section 3 develops the empirical export model and describes the variables and data. Then, the model is estimated in Section 4. Estimation results are analysed and a sensitivity analysis is proposed. Section 5 estimates the Iranian export potential with regard to the main foreign markets, while Section 6 concludes.

Literature review

History of globalization

Humans have coined the word “Globalization” to describe widely traded activities that take place across the continents which are aided immensely by diminishing international trading regulations negotiated through the World Trade Organisation. Globalization is a combination of many -manufacturing, trade in services, supply chain management – activities which have been affected positively by a fast technological development in few last decades. As Friedman (1999) argues, “what is new today is the degree and intensity with which the word is being tied together in to a signal globalized market place and village. What is also new is the sheer number of people and countries able to partake of today globalized economy and information network, and to be affected by them… this new era of globalization … is turbocharged.”

As it can be observed, that this noticeable international integration is not just in economics, but in politics and cultures are as well. However, it needs to be recognised that the speed of these changes and growth of integration is different across the world. In some countries and regions the trend of globalization is rapidly increasing while in other parts the pace is much slower and globalisation is not welcomed at all. Nevertheless, regardless of the effects of globalisation no country can afford to ignore its impact on their political and economical circumstances. Likewise, the rate of change is different in various industries as is the strategic response of different business sectors to take advantages of exploiting new business opportunities.

Although the merchandise trade, capital investment and labour migration started from 1850-1914, and the economy was more open than it is today in terms of the existing tariffs and trade barriers, but it was not globalized. Just the year following the Second World War and through reconstruction of war, the world has started to establish institutions to open up trades and ensure currency stability such as GATT and IMF, which caused massive increase in the economic growth level. According to Dicken (2003), world trade increased at an average annual rate of 6.7 per cent between 1948 and 1953. “Between 1958 and 1963 the rate rose to 7.4 per cent” and “between 1963 and 1968 it accelerated further to 8.6 per cent.” So people experienced a boom period up to 1970s when the first oil crisis has occurred.

The United States, which suffered less during the Second World War, increased its foreign investment and after a while the US companies started to move into Western European countries and create interdependencies across world markets. Europe and Japan which mainly focused on rebuilding their economies after the war joined in this and also expanded their positions in the market place and on the economic map after the mid-1980s. (Hill, 2005) Also, because of the necessity of promoting global interdependencies, the United Nations was established to maintain world peace and security and so help the spread of industrialisation and world trade.

The main drivers of globalization

Apart from the history of globalization there were several main drive points that enhanced the process of globalisation. From the Johnson and Turner’s (2003) point of view one of the main globalization drivers was “the changing economic paradigm”. The new approach for managing economy was based on limitation the government role and neo-liberalism. Limiting the role of government provides the situations for businesses to progress and boom. As the Hill (2005) says, “major changes occur as new economic and political institutions develop, with movement from traditional, non competitive institutions to competition-based capitalistic economies and democratic institution.” So the market was relied on to force the pace of competition. Little by little the liberal economy became an external economic policy and the General Agreement of Tariffs and Trades (GATT) set up to support this philosophy. As a result of GATT and afterwards its successor organization- WTO-, there was a great reduction in tariffs barriers and non-tariffs barriers for participating countries which help them established and spread their liberal economic policy.

The second globalization driver is “the spread of international governance and regulation”. More international rules and policies developed for business environment, especially in regional level aimed at reducing the barriers in economic market among GATT contracting and WTO members. Also spreading e-commerce as a technological consequent has brought new issues in terms of traditional governance structure. Therefore, by passing the time and more international integration, the trade and market regulation were less under the national states’ control.

According to Johnson and Turner’s (2003) argument “finance and capital spread” is another driver of globalization. Necessity of financial and capital movement following the market deregulation and economic liberalization has supported by national rules and has facilitated by technological development and ease the financial transactions.

All might agree that the technological development, mainly in information technology and communication sector, has played an important role in globalization. However none of them is the cause of globalization, Dicken (2003) argued, without these technologies the current complex global economy system could not exist. Shrinking time and space by innovated technologies was a great opportunity to reorganization and redefinition the commercial and economical structure. Most of industrial sectors are affected by innovations and changes in technologies especially in manufacturing system with a high influence on value chain. Transportation technology has changed dramatically from 1840 to 1960 which was a development period from steam locomotives to high speed aircraft. Therefore, new transportation systems and their wide usage with cheaper prices have brought global shrinkage. Also in communication and its convergence with computer technology development has facilitated more effective networks within and between enterprises. All of these technological conveniences provide links across borders and spread globalization in economic term.

“Social and cultural convergence” might be seen as a driver for globalization. The effect of mass media and usage of internet make the consumer preference more common in global market. As Johnson and Turner (2003) mentioned, similar taste of consumer in different parts of the market creates the opportunity to promote global product. So we can claim that the cultural and social similarities make the conditions available for globalization. Also transferring new technologies has brought about more products in greater varieties at lower costs and prices. Consequently standards of living and people’s expectations rise as well.

Mode of entry and expansion methods

In simple terms, globalization is an opportunity for companies to expand their market, their value chain and their business across borders. But the point is how effective can companies use these opportunities to make more profit and enjoy sustainable growth. What factors should they consider to make decision to choose an investment option to carry on their development strategy?

Global supply chain and its dimensions

Apart from different modes of entry available for firms to get advantages from globalization and to move across borders to expand their market, other advantages may be gained through developing global supply chains. “The production of any good or service can be conceived as a production chain – that is, as a transactionally linked sequence of functions in which each stage adds value to the process of production of goods and services.” (Dicken, 2003)

The firms try to differentiate their value chain in order to add more competences by using the advantages of each production chain requirement in different part of the world. However, build a global value chain might make it fragmented while the control and management of a global network is more difficult. From Dicken’s point of view there are three important dimensions in production networks:

First is “governance” which means how they are coordinated and regulated. In the case which varying combinations and interrelationships of different kind of companies and firms might perform in a production network, As Dicken says, ‘the market’ is the main organizer of external transactions, in contrast with the case which the entire network operated with a single firm and internal organizational structure governs transactions. (Dicken, 2003)

The second important dimension in production network is “spatiality” and ‘how they are conFigured geographically’. By increasing the emergence of global production network, network organizing is changing from ‘geographically concentrated’ to ‘geographically dispersed’.

The third issue is “territorial embeddedness’ – the extent to which they are connected in to particular bounded political, institutional and social setting’. (Dicken, 2003) information technology and other new technologies have made ‘space’ and ‘distances’ meaningless. Most types of capitals are mobile and all of them can easily move from one place to another. However transportation and communication technology has developed as well, capital does moves within spaceless world. Place is still an important issue, as firms are highly affected by the cultural, socio-political and institutional context of the territorial they are embedded. Therefore multinational firms try to take advantages of differences within regulations and socials in various places while, bringing different state with different regimes in count within a production network makes the situation more complex to control and to take benefits from.

Since 1999 and strongly growth of globalization, the same as other important and effective phenomena, globalization has a positive view wave that strongly recommend it and a negative wave against it which moves from developing country to developed countries during these years. Arguments about globalization success or failures do not have any satisfactory result, while globalization can be observe and discussed to understand both negative and positive sides of it.

Growth of regionalism

Although the speed of globalization and integration in the world market has increased during past decades under the General Agreement on Tariff and Trade (GATT) and more recently by World Trade Organization (WTO), the regional agreement and the debate on the desirability of regionalism has grown as well. By the beginning of twentieth century most of the counties were part of a regional integration. However one might argue that the reason of regional integration is more political than economic explanation, it can not be ignored any more as almost 50 per cent of all world trade is within regional trade agreement. As a result of that, there is fear within WTO and other international institutions that regionalism takes the place of globalization and make a stumbling block toward further global trade integration. (Lung & Van Tulder, 2004) Nevertheless there are different forms of regional integration and each of them affects global market more or less while the time of their integration process is various.

The dynamics of automobile market

Although some changes had happened in the composition and geography of automobile demand, the concentration of automobile industry in three major global regions face auto companies in these regions with the overcapacity problem. The “highly market-oriented” of automobile production caused its development be based on affluent consumer markets to achieve the economy of scale. But during the years, the automobile consumer markets in three developed region has developed as well. As Dicken argued in the Global Shift (2003), “the changing demand for Automobiles has three major characteristics:

  • It is highly cyclical.
  • There are long term (secular) changes in demand.
  • There are signs of increasing market segmentation and fragmentation.” ( Dicken, 2003)

The competitors

Despite the fact that NAFTA, EU and Japan are the main developed region in both production and trade in auto industry sector, other countries have started restructuring this sector in line with their economic reform. The obvious example might be China and India which both are gaining a sustainable growth in the last decade. Also Turkey has emerged as a new automobile producer in line with other industrial changes aim to become qualified to join European Union.

Turkish auto industry

Turkey auto industry has been developing due to the well strategic planning applied by the Turkey government by the way in which they opened their country to the global world. They have started their industry as a montage (CKD or SKD) in 1960 and have turned it to manufacturing part after a few years in 1966 trough licensing agreement and dealer-assembler with American and European firms. Gradually the government attempted to adapt an export-oriented strategy; consequently it started to liberalize the importation of cars gradually and reducing the tariffs. Meanwhile it provided some financial supports for upgrading themselves to international acceptable condition. But the main change which caused a revolution in Turkey car industry was the customs unionization agreement in 1995 with European Union which followed by a new restructuring in their auto industry.

To harmonization the administrative and regulatory structure of the industry, Turkish government has established an accreditation council to prepare the documents for new adaptation the issues and procedures of exporting in line with European countries. However the Turkey supposed to complete the adaptation and remove all tariffs by 2001, they have not completed it yet and it seems the Turkey’s auto industry has not well prepared for full liberalization. Although adaptation a new regime from Turkey government which obligate importing vehicle companies to prepare service facility and aftermarket parts for customers within a country was a great opportunity for domestic firms to become involved with providing spare parts and services.

Even though it was not a stable macro environment after 1997-1998 Russian and Asian crisis and again December 2000 crisis, the restructuring program caused some investment in car companies in Turkey in order to support economy of scale and encourage them to developed more update types of automobiles. “Turkish manufacturers have operated in two car segment; low medium and medium models” and the produced cars have already been phased out in their country of origin, added that “these segments account for 90 per cent of the Turkish market.” (Duruiz, 2004)

Governmental financial supports and investment on auto sectors attracted many foreign investors from 1995 onward, especially with aim to develop new generation cars and modernization the industry. Most of foreign car firms have gained relatively high share of the auto industry after liberalization to use the resources in Turkey and export to European countries through Turkey. Table 1 shows the main auto manufactures in Turkey and their share.

As the effect of custom utilization agreement, the automotive sector had the 5th place in Turkey exporting in 2000, but the main effect has happened in component sector and it has increased relatively higher then auto sector export. It was also easier for component producer to upgrade their standard of their firms to get a competitive position in EU base on their lower labour wages. (Duruiz, 2004)

Nevertheless Turkey has accepted liberalization in their trade but as they have not done the full integration, their case has become special. Mostly the Turkey’s future economy highly depends on the European Union decision to accept it or not as a member of European Union which lead to change their economic structure with the support from the IMF and European Union.

Indian auto industry

Emerging of India in the world economy has been started by implementing liberalization and opened up most of the economic sectors to the global world in 1992. Looking historically at Indian car industry, it can be divided in four phase from the view point of Kim (2004). The starting point was in 1920s with assembly which was established by foreign companies. (General motor and Ford) It took two decades up to 1952 that Indian build up their domestic production firm. The governmental policy in auto sector is known as the main reason of no progress in productivity and technology in this sector for long period. (Kim, 2004) The third phase was started, after three decades, by making a join venture of Maruti Udyog -became nationalized in 1980- with the Suzuki motor company. According to this agreement a revolution had happened in Indian car industry. Increase the volume and standard was not just in auto makers but the change was occurred in the components industry as well. (Venkataramani, 1990) The main and last phase was started by Indian economic reform after 1992 under the guidance of the IMF and World Bank. As it was anticipated, deregulation of auto industry in 1993 and the expectation of market growth in India according to the population have attracted international auto makers to invest in India. According to the foreign existence it was a dramatically fell of domestic firms share in India.

Investment of foreign car makers, which were mainly in the form of joint venture with domestic firms, caused the’re-restructuring’ in the Indian’s motor industry. Apart from promotion of new models with more stylish design, significant changes have happened in auto financing as well. Also numbers of component manufacturers invested in local firms to supply their assemblers. So Indian witnessed a fundamental change in the technology, infrastructure and managerial systems. (Kim, 2004)

Despite of all expectations and anticipations about the fast economical growth after regulations in India and a positive view of auto makers about Indian market because of the sizable population of middle-class, the estimates about rising in demand did not turn to reality. Apart from the problems which multinationals generally face in new emerging countries such as “undeveloped supplier base”, weak infrastructure” and undeveloped regulations (Kim, 2001), Indian environment seems more complicated for them. Although the population was far enough to support ten auto makers, the companies face with overcapacity. The lack of demand in both domestic and regional market has become the major problem for multinationals auto makers in India.

In terms of export from India to the neighbour countries also, the multinational car makers have not achieved any remarkable result. However the main reason might be the economic situation and poverty of South Asian countries which limit the demand for passenger car, we should not ignore the political and economical relation of India with its neighbour. Despite the hopes after the South Asian Association for Region Cooperation (SAARC) in 1985 and the South Asian Preferential Trading Agreement (SAPTA) in 1995, there was no significant growth observed in the South Asian trade relationship.

Although the auto industry in India has not succeeded as it was anticipated, the auto component industry has occurred high progress in quality, technology and international standards. Now, in collaborate with foreign companies, they have become competitive in international markets and auto makers in India use their Indian suppliers to supply their other operation plant around the world.

Moreover, Indian government regulations disable multinational to import completely build automobiles to India. However the Indian government did not define any limitation for on foreign ownership, instead 123 per cent tariff rates on import cars were forced multinationals to set up their assembly plant fully within India. And a high tariff on finished components also was another issue that multinationals prefer to find their supplier within domestic firms. (Kim, 2004)

Despite of all mentioned problem in India, multinational car makers seems still have a positive view about the Indian market. The potential existing market is there, but the matter is that when it will become visible.

Chinese auto industry

Following the economical reform in China, the Chinese policy makers focused on auto industry as a symbolic sector which shows the industrial development within a country. The need for technology and knowledge caused them looking for foreign partner to provide the required technology by setting up assembly plant which also generate and improve numbers of domestic firms as the suppliers to support the main assembly plants. So, in the mid-1980 three main cities of China (Beijing, Guangzhou and Shanghai) established a joint-venture with foreign auto makers supported by central and local government. (Thun, 2004)

Each local government aimed to improve the local supplier network by its JV, but the assembly plants were looking for the better quality and lower price. Therefore in contrast with the local government and despite of geographical advantages of supplying from local firms, assemblers were dependence on outside supplier and most of them imported 100 per cent of the components from outside unless they were forced by Chinese government to increase their required components from domestic firms. But even after the time assemblers shifted from outside supplier to domestic firms, the local government aim to improve their local network were failed as the JV sourced their parts from other regions. Therefore, as of 2003, just Shanghai could relay on their local auto sector and even though it did not meet the international standards, it became a dominant firm in Chinese auto market. (Thun, 2004)

The Shanghai success was the result of well support and strategic plans of local government and Shanghai Automobile industry corporation (SAIC). In 1984, when the Shanghai established a joint-venture with Volkswagen (VW), non of local firms were able to supply the required component for the assembling plant and after two years their share increased by just 2.7 per cent. (Li, 1997) No significant achievement after two years caused “Shanghai municipal government began to re-evaluate the problems within the sector and the capacity of individual firms to solve these problems.” (Thun, 2004) Consequent of problem solving process, they discovered two necessity preconditions to facilitate improvement in domestic firms.

The first one was “a reorganization of the municipal bureaucracy responsible for auto sector oversight”. They have set up an Automobile Industry Leading Small Group in order to control the local actors. (Li, 1997)

The second precondition “was the capital accumulation and investment”. To solve this problem the local government defined a ‘localization tax’ and set up the localization office which was responsible to “carry out a straightforward import-substitution policy” for the imports in auto sector even from other Chinese regions. Also, the localization office checked out the list of imported components and their domestic firms which are capable of produce them successfully, then it provided a suitable investment capital as well as managing the firms’ relationship with the main assembler plant. (Thun, 2004)

Apart from the local government programs, SAIC had its own way to support the Shanghai auto sector, however in some areas their activities overlappe

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