Iranian car lines keep rolling despite sanctions

KARAJ, Iran (Reuters) - In the Iranian summer heat, portable fans cool workers stacking parts in the Middle East's biggest car factory.

But the heavy lifting is unaffected by the soaring temperatures as robots -- from South Korea, Germany and Japan, -- stamp sheets of steel into body panels, shaking the floors at a busy plant which shows no signs of being crippled by international sanctions.

"I think the sanctions make us stronger," said Amirshahab Yarian, one of the 25,000 workers at Iran Khodro's main plant just outside Tehran, as sparks flew into the air from robot welders on one production line producing 30 car bodies per hour.

Unusually for the Middle East, Iran has developed its domestic car industry for five decades and produced 1.6 million vehicles last year, about half of them made by Iran Khodro which aims to export around 10 percent of its production this year.

Even with sanctions, which have scared off some suppliers from exporting to Iran, and a limp economy, Iran Khodro says sales rose 18 percent in 2010 and plans a 13 percent output increase this year to 860,000 vehicles.

"Iran Khodro isn't under sanctions," said Abdollah Babaei, Khodro's international relations director. "It's the foreign companies that used to work with us that are under sanctions."

It is a familiar refrain in Iran which insists that sanctions -- aimed at pressuring Tehran to curb its nuclear work -- have not only failed to hurt the economy but have actually made it more robust by forcing manufacturers to rely more on domestic production rather than imports.

"Our strategy to overcome sanctions was to reduce dependence on foreign vehicle parts," Babaei told Reuters in his office from whose window the still snow-capped Alborz mountains provide a backdrop to the industrial production just outside. "More than 90 percent of our parts are domestically produced."

SANCTIONS AND INVESTMENTS

"Over the past 10 years we have managed to reach a stage where we produce our own parts," he said. In 2000 Khodro was making its own car bodies, by 2005 its own motors and by 2015 it will have its own car platform, no longer relying on foreign-designed basics.

"In the last five or six years, we have produced as many cars as we did in the previous 40 years," he said.

Cars and most of their components are not directly affected by the four rounds of United Nations sanctions which target items related to nuclear and military technology or are considered of possible "dual use."

Tighter sanctions imposed by the United States, the European Union and some other countries have hit foreign investment in Iran's oil and gas sectors and hampered access to international financial services but appear to have inflicted no direct harm on the car industry.

Only a few minor foreign component suppliers have stopped doing business and it is their loss, Iran Khodro says.

The bigger overseas players have not fled Iran where French and South Korean branded cars -- made in Iran -- are highly visible in a market where foreign-made vehicles are kept out by a 90 percent import tariff.

Khodro's main brand, the Samand, is a sedan based on the Peugeot 405 which retails, with ABS brakes and airbags, for just under 150 million rials (around $14,000).

Khodro also produces Peugeot branded cars and a version of a Renault model under agreements with the French manufacturers, despite Paris's support for tighter U.N. and EU sanctions.

Several other foreign companies are present in Iran, most noticeably South Korea's KIA Motors whose Pride model, built by the other big Iranian producer Saipa, is one of the most popular in Iran.

Like the EU, U.S. ally South Korea followed Washington's lead and last year blacklisted 102 companies and banned investment and construction contracts to develop Iran's oil industry.

CLOSED MARKET

The smart family cars rolling off Iran Khodro's production lines are a far cry from the rickety model it produced for years -- the famously polluting Paykan, based on Britain's Hillman Hunter, a design from the 1960s which the company was still making until eight years ago and which still makes up a significant proportion of the cars choking Tehran's streets.

"It was an easy car to repair. Everyone was his own or her own mechanic," said Yarian, with a hint of nostalgia.

Unlike the boxy Paykan, Iran Khodro says its current models meet Western pollution and safety standards and are prized by consumers in 30 markets in the Middle East, Africa and the former Soviet republics where it exports.

It also has five factories abroad, in Azerbaijan, Belarus, Senegal, Syria and Venezuela.

But while foreign analysts are impressed by Iran's ability to keep producing cars in the face of sanctions, they say its scope to increase exports or more foreign expansion is limited.

"They keep producing cars, and that is surprising," said analyst Pierluigi Bellini, Middle East and Africa manager at IHS Automotive.

Iran's Khodro and Saipa share the Iranian market of 78 million people with respective market shares of 49 and 48 percent, Babaei said. Import tariffs make most foreign automobiles the reserve of the wealthiest Iranians.

As part of a general privatisation drive, Iran Khodro is now only 20 percent owned by the state, although shareholdings by government-related institutional investors such as pension and social security funds mean the stake is actually much higher.

"The Iranian government ... is quite keen on developing the auto industry and when you have a country behind you, you can direct resources to those industries," Bellini said.

Financial sanctions and Tehran's policy to maintain a strong currency both impede exports, analysts say, but Bellini said it was the cars themselves that still had a long way to go to appeal to most foreign markets.

"The level of technology of Iranian made cars in not enough for Europe, America or Japan, or even for China which are used to cars which are the best in the world," he said. "They cannot compete in that way.

"What they can do is have some share in countries where there is a low purchasing power and compete with used cars."

Iran Khodro's sights are higher. A new sedan called Dena, to be launched by August 2012, will offer higher specifications and continue the drive for a purely Iranian car, Babaei said. "Whereas we used to have foreign help, the Dena is purely Iranian."

(editing by David Stamp)

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