Could a new nuclear deal spark an automotive boom in Iran?

Despite crippling sanctions, COVID-19 and a weak global oil outlook, the automotive industry in Iran saw a strong revival in 2020 and 2021

Ben Trevis, Research Analyst

27 April 2022

Iran’s recent sales history has been remarkably mixed. 2019 saw a dramatic collapse in activity after President Trump’s reinstatement of US sanctions forced foreign OEMs to cut ties with local manufacturers and distance themselves from dealings with Iran.

However, more recently, an impressive resurgence has taken place. Despite the triple threat posed by crippling sanctions, COVID-19, and a weak global oil outlook, the automotive industry saw a strong revival in 2020 and 2021. Coordinated efforts from Iranian manufacturers – SAIPA and Iran Khodro (IKCO) – paired with support from the government and military, have helped successfully localise automotive supply chains and, in turn, partially insulate the domestic market from the impact of sanctions and external risk.

While recent gains are significant, Iran’s vehicle market annual performance is still over a third below the highs seen in 2017. The true potential of the market, therefore, remains far from unlocked. And US sanctions remain the key. 

Talks between the Biden administration and Iran are ongoing, and while recent reports signal that a deal is close, the US warns the window of opportunity is closing. A renewal of the Joint Comprehensive Plan of Action (JCPOA) would ease economic sanctions and allow foreign OEMs to regain access to Iran’s market. Moreover, the lifting of sanctions would not only boost direct sales activity through more variety and competition of new models, but it would also support a much-improved economic outlook. With more openness, Iran could export oil again and take advantage of high global demand, even potentially offering an alternative source to European countries as they look for alternatives to Russia. 

Our baseline forecast assumes that a new deal will be reached this year, leading to the lifting of most US sanctions, and allowing foreign OEM activity to resume in Iran. 

However, the risks to the forecast can be argued on both the upside and downside. If the stalemate continues over the next few months, and negotiations cease, industry volume growth would then rely solely on the newly localised supply chain, leading to steady single-digit year-on-year (YoY) growth in the medium run. There is, however, a possibility that a deal that eases sanctions and allows Iran to expand its energy supply during H1 2022 could result in a faster recovery than the baseline scenario. The potential then is for the automotive market to overtake 2017’s record high by mid-decade. With that in mind, we continue to follow the talks closely.