WHAT WILL YOUR STRATEGY BE? IRAN’S REVIVAL: solidiance Solidiance has produced this white paper for information purposes only. While every effort has been made to ensure the accuracy of the information and data contained herein, Solidiance bears no responsibility for any possible errors and omissions. All information, views, and advice are given in good faith but without any legal responsibility; the information contained should not be regarded as a substitute for legal and/or commercial advice. Copyright restrictions (including those of third parties) are to be observed. JANUARY 2016
Transcript
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What Will Your StrategY Be?
Iran’s revIval:
solidiance
Solidiance has produced this white paper for information purposes only. While every effort has been made to ensure the accuracy of the information and data contained herein, Solidiance bears no responsibility for any possible errors and omissions. All information, views, and advice are given in good faith but without any legal responsibility; the information contained should not be regarded as a
substitute for legal and/or commercial advice. Copyright restrictions (including those of third parties) are to be observed.
JANUARY 2016
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a HIstorIc Day
The announcement came hours after the International Atomic Energy Agency (IAEA) released a report citing that Iran had complied with all parameters set in the Iran Nuclear Accord signed nearly 6 months ago to dismantle the country’s nuclear programme (July 2015). In principle, this would put an end to 37 years of various degrees of sanctions imposed on Iran.
On January 16th, senior diplomats from around the world formally announced
the lifting of sanctions against Iran.
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There were many skeptics that did not feel this deal would ever come through. The sanctions against Iran were mounted over some 37 years and the additional sanctions that came into effect over the past 5 years were remarked on more than one occasion to be “unprecedented” by U.S. officials; the additional sanctions instituted against Iran by the U.S., the European Union (EU), and the United Nations (UN) in 2010-2012 were amongst the toughest restrictions placed on any single economy.
One of the greatest impediments posed was the removal of 15 Iranian banks from the global banking system in 2012, commonly referred to as the SWIFT system. Being barred from the SWIFT system meant that Iranian banks, and thus both Iranian businesses and MNCs with a presence in Iran were surgically excluded from the international financial sector. This had a significant effect on the Iranian economy; according to Mark Dubowitz and Jonathan Schanzer of the Foundation for Defense of Democracies, “Iranian financial institutions used SWIFT more than 2 million times in 2010”, which resulted in transactions worth USD ~35 billion with Europe alone. In 2012, this ability to play in the world financial markets was taken away. Many believe it was this financial pinch which finally pushed the government to come to the negotiating table.
tHe PIncH of tHe sanctIons
“Iranian financial institutions used SWIFT more than 2 million times in 2010, resulting in transactions worth USD ~35 billion with Europe alone.”
- Mark Dubowitz & Jonathan Schanzer, Foundation for Defense of Democracies
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tIMelIne of sanctIons on Iran
1979 1995 1996 2006
The US imposes the first sanctions against Iran and freezes USD 12 billion in
assets.
US bans any trade and investment with Iran.
US imposes sanctions on foreign firms doing business
with Iran over USD 20 million.
The UN imposes sanctions on Iran’s trade in nuclear-
related materials and technologies.
tIMelIne of sanctIons on Iran
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2007 - 2010 2011 - 2012 2015
The UN and the US both toughen sanctions against
Iran with successive sanctions.
The US leads the blacklisting of Iranian banks from the global financial system;
UK-US-Canada announce bilateral sanctions.
The Nuclear Accord is signed, brokered between
Iran and world powers under the UN and the EU.
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tHe oPPortunItIes tHat coMe at tHe enD of an era
While global politicians and the vast majority of the Iranian population breathe out a heavy sigh of relief, hopeful for the sanction removal to ease Iran out of an economic recession, an equal number of business leaders around the world are brimming with excitement.
Businesses around the world are eager to find the right strategies to capture the 200-300% profit margins that local companies playing in the grey-market have enjoyed with their foreign products during the sanctions. These are margins rarely found in markets as large and industrialized as Iran, and the pull to this market is understandable.
The thought of (re-)entering and (re-)capturing market-share in the Iranian market, after 5+ years of Iran being locked away in a black box, is exciting in and of itself. The opportunities that this market presents to the global economy are abundant and are for many companies, game-changing. And for the select few that have had a glimpse of the complexities of the Iran business and political environment, the challenges on the road ahead bring about a nervous excitement. In Iran, there will be no room for missteps, slow action or delayed entry. Iran is a “first come, first serve” market – and the pie, though larger and more plentiful than many other emerging economies, is not enough to feed everyone.
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rebuIlDIng tHe IranIan econoMy
Middle East and North Africa (MENA) – Economic Overview
The Iranian people have been suffering under the sanctions in recent years, as the past 3-years in particular have left the country ‘strapped for cash’. With the sanctions lifted, the Iranian government now has access to USD 150 billion in its frozen assets. But most exciting is the country’s ability to attract and access Foreign Direct Investment (FDI).
5,398
29,767
3,928
5,797
7,13141,652
15,0134,129
16,527
97,052
26,032
4,564
45,341
12,383
0
50
100
150
200
250
0 100 200 300 400 500 600 700 800 900 1000
GDP (US$ Bn) (2014)
FDI S
tock
(US$
Bn)
201
4
Bubble size = GDP per Capita (2020F)
Oman Iran
Egypt
Saudi Arabia
UAE
Turkey
Morocco Lebanon
Tunisia
Kuwait
Qatar
Developed Developing*
Source: IMF, World Bank UNCTAD, Solidiance Research and Analysis
Note: *Developing MENA as characterized by World Bank include Algeria, Djibouti, Egypt, Iran, Iraq, Jordan, Lebanon, Libya, Morocco, Syria, Tunisia, West Bank and Gaza and Yemen
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Iran‘s current stock of foreign investment is estimated to be USD 43 billion, which is a remarkably large sum considering the sanctions the country has been under in recent years. Though Iran ranks 58th in the world in terms of FDI, this is a relatively low sum compared to nearby economies such as Turkey that received approximately USD 209 billion in foreign investment (nearly 5 times Iran’s FDI stock).
There is no question that Iran is poised to be one of the largest and most attractive markets for foreign players to invest and play in, in both the Middle East and North Africa region as well as across Asia. With a GDP of approximately USD 1.4 trillion (converted to international dollars using purchasing power parity rates), Iran is home to 1.5% of the global GDP. Iran currently has the 18th largest economy in the world, placing the country between Turkey and Australia. Iran’s GDP per capita is approximately USD 17,000, placing it ahead of both China and Brazil; these figures are quite remarkable in light of the economic struggles brought on by the sanctions.
Stock of FDi at home in uSD billion – 2013 estimates
#1 United States of America USD 2.815 trillion
#13 Asia Royal USD 663 billion
#27 Indonesia USD 207 billion
#33 Malaysia USD 143 billion
#57 Iran USD 37 billion (2012e)
Source: CIA World Fact Book
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$ 1.4trIllIon
1.5%
18tH
12%
13tH
$ 43bIllIon
73%
44%
13.3%
Iran’s GDP 2015e
Iran is home to 1.5% of the Global GDP
Largest economy in the world (2015)
Iran’s debt-to-equity ratio (2014)
Largest automotive manufacturer (2011)
FDI Stock in Iran (2015e)
Iran’s urbanization rate; Similar to other industrialized nations
University population studying STEM fields
Working population graduated from university
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tHe next “golDen boy” of tHe eMergIng Markets?
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Many are making comparisons between Iran and the most recent “Golden Boy” of the emerging markets: none other than Turkey. Both share similar populations and diversified economies with a thriving automotive sector.
Iran’s GDP today is equivalent to that of Turkey’s GDP 10 years ago; in the past decade, Turkey had more than doubled its GDP. After Turkey’s new government in 2002 instituted a new banking system, disciplined fiscal reforms, and privatization, the country saw an era of unprecedented growth. In 2011, Turkey was the world’s second fastest growing economy, preceded only by China. Now, many have similar hopes for Iran’s next decade.
For those that hope for a similar success and trajectory as that experienced in Turkey over the past decade for Iran, their bets are not baseless. Iran is the only country in the world which has massive reserves in both oil and gas; Iran boasts the 2nd largest proven natural gas reserves and the 4th largest proven oil reserves in the world. Unlike its neighbors in the Gulf, Iran is also blessed with a diversified economy, where roughly half of the country’s GDP comes from the Oil & Gas sector, while the rest of the country’s economy is well distributed in the Automotive, Agricultural, Manufacturing, Mining and Services sectors.
Before the heaviest of sanctions hit Iran in 2009, well before the hit of the financial sanctions, Iran was the world’s 5th largest automotive manufacturer, producing nearly 2 million cars annually – placing the country’s automotive production above and beyond that of the United Kingdom. The country manufacturers Renault, Peugot, Citroen, Hyundai, Kia and a number of Chinese and Iranian automotive brands. The country had over 21 million vehicles on the road in 2015.
0
200
400
600
800
1000
1200
1980
19
81
1982
19
83
1984
19
85
1986
19
87
1988
19
89
1990
19
91
1992
19
93
1994
19
95
1996
19
97
1998
19
99
2000
20
01
2002
20
03
2004
20
05
2006
20
07
2008
20
09
2010
20
11
2012
20
13
2014
20
15
2016
f 20
17f
2018
f 20
19f
2020
f
Iran’s GDP Turkey’s GDP
US$ Bn
Historical GDP Comparison: Iran and Turkey
Iran’s GDP by sector, 2014
Source: IMF, Turkey Investment Support and Promotion Agency, Solidiance Research and Analysis
Source: Statistical Centre of Iran, Solidiance Research and Analysis
10%
25%
10% 10%
45%
Agriculture
Oil & Gas
Automotive
Manufacturing & Mining
Services & Other
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The country also has the 4th largest zinc deposits in the world, the 9th largest copper deposits in the world, the 2nd largest copper mine in the world (mining 5% of the world’s total), and is the 2nd largest producer of cement in the region. The country has benefited USD 35 billion annually from automotive production, chemicals, mining and minerals, utilities, and telecommunications.
Despite the country’s strengths in manufacturing, petrochemicals and chemicals, the country still imports a significant amount of these materials, as Iran has a high propensity to pay for high quality materials and machinery. Manufacturing Material, Machinery, Food and Chemicals were the largest import products for Iran between 2009-2013.
There is no question that Iran is poised for economic growth after the removal of sanctions; some estimates posit a boost in GDP growth up to ~7% a year by 2018. Iran has the second largest population in the Middle East and North Africa (preceded by Egypt), and is currently viewed as the most attractive (and exciting) market in the region, given its untapped potential.
Even when comparing it to many of the emerging markets in Asia, Iran holds its weight. Prior to the 1979 Islamic Revolution in Iran when the US first imposed sanctions on the country, Iran had a GDP/capita that was 5 times greater than that of Thailand, and 2 times greater than that of Malaysia. Despite struggles with sanctions over the past 37 years, Iran maintains a GDP per capita (USD 2,962), not far from that of Thailand (USD 3,426).
74%
8%
3% 3% 13%
Minerals
Chemicals Manufacturing Material Food
Others
17%
16%
13% 18%
6%
32%
Manufacturing Material Non-electric Machinery Chemicals
Food
Transport Equipment
Others
Exports Imports
Trade Value by Type (Avg. % share by value in 2009-2013)
GDP / Capita Comparison (Constant US$ - 2005)
Source: Iran Trade Promotion Organization, Iran’s Customs Administration, International Trade Centre, Solidiance Research and Analysis
Source: World Bank, Solidiance Research and Analysis
-
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
1970
19
71
1972
19
73
1974
19
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1976
19
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1978
19
79
1980
19
81
1982
19
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1984
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85
1986
19
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1988
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19
91
1992
19
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1994
19
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19
97
1998
19
99
2000
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01
2002
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03
2004
20
05
2006
20
07
2008
20
09
2010
20
11
2012
20
13
2014
2012: US sanctions on oil and banks June 2013: US Sanctions on auto
2,088
1,383
583
2,962
7,374
3,426
Iran’s GDP / Capita was ~5x of TH and ~2x of MY at its peak
prior to 1979, year of the Islamic Revolution, when US first
imposed sanctions
Jan 2014: Temporary
sanctions relief for select sectors
1995: Sanctions expanded to target US and non-US
firms doing business with Iran
2006: UN imposed sanctions 2007: EU imposed sanctions
Iran’s GDP / Capita Malaysia’s GDP / Capita Thailand’s GDP / Capita
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Most importantly, Iran’s population which is equivalent in size to that of Turkey or Germany, is one of the most educated in the region. The population is highly urbanized at 73%, which is an urbanization rate on par with industrialized countries. 64% of the population are under the age of 35, with the highest literacy rates in the region (98% for those between 15-24). Of the 4.4 million students enrolled in universities in Iran in 2013, 60% were women, and 44% had majored in the STEM fields (science, technology, engineering and mathematics). Iran is estimated to be the world’s 5th largest producer of engineering graduates, and 13.3% of the country’s working-age population have completed a university education. For comparison, Brazil and Indonesia’s university graduates make up 11.7% and 6.9% of the population, respectively.
Urbanization Rate by Province (2012)
Iran’s Age Composition
Source: World Bank, Iran National Population and Housing Census, Solidiance Research and Analysis
<50%
50% - 59.99%
60% - 69.99%
70% - 79.99%
80% - 89.99%
>90%
Tehran
Qom
Esfahan
Yazd
Semnan Khorasan_e_Razavi
Khuzestan
Fars Kerman
South Khorasan
Sistan & Baluchestan Hormozgan
Bushehr
Golestan
Mazandaran
Gilan
Alborz
North Khorasan
Source: Iran National Population and Housing Census, Solidiance Research and Analysis
46% 44% 45% 40% 25% 23%
50% 52% 52% 56% 70% 71%
4% 4% 3% 4% 5% 6%
1996 1976 1986 1996 2006 2014
<15 15-64 >65
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tHe cHallenges tHat awaIt In Iran
The industries posing the greatest opportunities in Iran are vast and varied; from the automotive, automotive aftermarket, construction and construction materials, machinery, high-end luxury consumer goods, manufacturing, healthcare, to petrochemicals and chemical sectors.
But Iran’s opportunities come with its challenges in equal measure. Only the fastest, brightest, and most aware of on-the-ground realities will succeed. Some challenges being faced by foreign investors across industries include:
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• Lack of transparency:
Challenges in identifying private companies from state-owned enterprises. In 2004, the Iranian government permitted the privatization of state-owned enterprises by up to 80% of their shares. Via various programs, many shares were given to the underprivileged segments of the population, which made the companies even less efficient. Underperforming and debt-ridden companies – private or public – were often transferred to the revolutionary and religious foundations, military and paramilitary organizations, and state-run pension funds, before being sold back to private sector businessmen. The transparency of transfer of businesses and shareholdings can be extremely vague in this market, making due diligence of paramount importance – especially as some sanctions are still in place against state-run businesses.
• shift towards LocaLization:
Restrictive import tariffs or increasing policy shifts towards local manufacturing, which require foreign players to “go all in” or get nothing.
• tackLing the grey Market:
Challenges in tackling the current ‘majority’ and in some cases ‘exclusively’ grey-market. Compared to pre-2010, when many foreign players successfully penetrated the market and held the “grey market” to a minority of 20-30%, today the vast majority of goods across all industries are majority entering the market through grey-channels.
• counterfeit products:
Counterfeit products that have damaged many foreign products’ brand equity over the years. Iran is a poor protector of intellectual property rights and ranked 111th out of 131 countries in the 2013 worldwide ranking of property rights regimes (Property Rights Alliance). In comparison, China, India and Brazil were all in the top 60 countries.
• traditionaL Market dynaMics:
Many organizations are now facing uncertainty on whether the current traditional market structures in Iran across several industries are ready to embrace modern/foreign business models. This requires careful reviews and stakeholder engagement to understand positions. There are some industries which are operated as a monopoly or duopoly of sorts, strongly managed by a group of families, making penetration by other local players, let alone foreign players, very challenging.
• corruption and unethicaL business
practices:
Iran ranked 136th out of 174 countries on Transparency International’s 2014 Corruption Perception Index. One does not have to stay in Iran long to observe corruption at work. Whether it is a local police officer picking up ‘fees’ from local businesses to be left alone, companies smuggling in goods to avoid import tariffs, duties and taxes, or companies having several sets of financial accounts and books to aid in tax-evasion – corruption exists on every level.
• expansive geography caLLs for strategic
distribution pLans:
For goods that must be distributed across the country, there is significant investment and strategic prowess required to set up adequate distribution channels across the 1.65 million square kilometer expanse of Iran. Though the country is 73% urbanized, the 5 key cities and provinces are hundreds of kilometers apart. The main port which 80% of the goods entering Iran travel through, Bandar Abbas, is 1,500km away from Tehran.
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Tehran
Bandar Abbas
Tabriz
Easy accessibility (average road speed: 75 km/h)
Medium accessibility (average road speed: 50 km/h)
Legend: Main Points of Entry Main markets for luxury cars
Tabriz is the main point of entry from Europe and a key market for luxury cars
Bushehr is a more economic port of entry
Bandar Abbas is Iran’s busiest port, where 80% of goods into Iran enter from.
Iran’s Expansive Supply Chain Channels (2015)
Source: Solidiance Research and Analysis
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survIval of tHe fIttest, fastest anD Most InforMeD
It is easy to understand why Iran ranked 130th out of 189 countries on the 2015 Ease of Doing Business Index. For all of the aforementioned reasons, business in Iran is challenging, and is not for the faint of heart. Businesses must find strong and trustworthy partners, conduct due diligence with boots on the ground, and local staff. Most importantly, speed is paramount. There are only a handful of experienced and trustworthy distribution or joint venture (JV) partners in the country across each industry. After these small few businesses are signed on to a foreign player, others will have little room to maneuver.
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Over the past year, we have been watching as the who’s who of European and Asian Fortune 1000 companies shuttled in and out of the Tehran Imam Khomeini International Airport determined to try and piece together the puzzle that is Iran. Exploratory discussions have taken shape, in other cases extensive due diligence processes have been carried out, and relationships have been invested in over the past months. In some cases, valuations of companies to be purchased have also taken place, and in the coming weeks, Iran will be back on the Global Banking System, making major transactions possible.
Many European firms have had a head start in formulating their strategies and partnerships in Iran, but it is only a matter of time when the American companies and others behind the starting line will follow suit, and aggressively. Iran will become a place of fierce competition from local and global players alike; but much will depend on the local partners secured. The wrong partner can sideline a global player for several years, and the next entrant will take the lion’s share of the pie. Careful strategy development and execution with strong Iranian partners and local staff will define your success in this exciting and newly (re-)opened market.
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Erika Masako WelchDirector of Business Development Middle East
Erika is Solidiance’s Regional Director of Business Development in the Middle East. She brings 7 years of regional experience focused on strategy consulting and business development, working with Fortune 500 companies and the region’s most influential corporations, government bodies, and foundations. She has executed strategic consulting projects in Iran, as well as the UAE, Qatar, Oman, Saudi Arabia, Jordan, and Lebanon. Outside of the Middle East, Erika has consulted for Fortune 500 companies in Japan, Indonesia, Singapore, Canada, West Africa, and the UK. Erika received her B.Sc from McGill University, Canada and holds a Postgraduate Certificate in Sustainability Leadership and Business from the University of Cambridge, UK. Erika speaks fluent English, Japanese, conversational French and “survival” Arabic.
autHor
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aboutus
what we do
Soldiance is a corporate strategy consulting firm with focus on Asia Pacific. We advise CEOs on make-or-break deals, define new business models and accelerate Asia growth. Through our 10 offices across Asia, we provide our clients with a better understanding of intrinsic regional issues. To learn more about how Solidiance has helped many Fortune 500 & Asian Conglomerates to succeed in Asia, please visit:
http://www.solidiance.com/clients.
what we are focusing on
Our industry experience is centered on industrial development, construction materials, green buildings, and urbanization. Our Asian market entry and growth strategy services provide the required insights and the necessary roadmap to capture a profitable market share in the region.
additional details
Solidiance has offices in China, India, Indonesia, Iran, Lebanon, Malaysia, Myanmar, Philippines, Singapore, Thailand, United Arab Emirates, and Vietnam. We are fast expanding and always on the lookout for exceptional people.
Solidiance has been operating in Iran since 2015, reach us out at [email protected].
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references:Solidiance has conducted its research through its own secondary research, primary interviews in Iran, and analysis. Secondary sources include:
• BBC• Business Monitor• CIA World Factbook• CNN• Country Watch• Foreign Affairs, The Post American Middle East • IMF’s World Economic Outlook • International Trade Centre• Iran Customs Administration• Iran Labour Force Survey• Iran National Population and Housing Census• Iran Trade Promotion Organization• OICA• OIETA• Property Rights Alliance• Statistical Centre of Iran• Transparency International’s Corruption Perception
Index• Turkey Investment Support and Promotion Agency• UNCTAD• World Bank• World Economic Forum’s Global Competitiveness Index
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