Just as Iranian vehicle makers are stepping up production and unveiling new models, the government is introducing steps to modernize the state-controlled industry and reduce restrictions on imports.

Iran Khodro last year began production of a new national car, the Samand, formerly known as the X7

Iran’s vehicle production has jumped from 68,107 units eight years ago to 379,367 vehicles in the Iranian year 1380 – March 21, 2001, to March 20, 2002, according to the Western calendar.

This is an increase of 27.6%, compared with the previous year. Passenger car production (without SUVs) rose by 28.9% to 321,181 units.

Iran’s ambitions, however, are much bigger. According to Es’haq Jahangiri, minister for industry and mines, the country’s vehicle production is expected to grow to 1 million units by 2011.

Iran Khodro Co., for example, is planning to consolidate its position as the country’s leading car maker. The company built 205,053 cars last year, including Peugeot 405 and 206 models. However, its main model remains the Paykan, based on the old British Hillman Hunter, with 128,467 units.

Production of a new national car, the Samand, formerly known as the X7, started last year but only 1,345 units were built in its first production year.

Manoucher Gharavi, general manager of Iran Khodro, says the auto maker plans to increase production by 50% this year, with new models in the pipeline.

Seyed Javad Dehnadi, Iran Khodro’s assistant executive director, says a successor to the “classic” Paykan, internally called the New Paykan (NP), will start to be marketed in the Iranian year 1384 (March 2005 to March 2006).

A smaller car, dubbed Picka, is to be introduced a year later. “The Picka would be relatively cheap considering the salaries of government employees,” Dehnadi says in published reports, adding the auto maker also is working on a fuel cell-powered car.

Saipa Group, Iran’s second-largest vehicle maker, also is modernizings its product range. The Saipa 141, a hatchback version of the Nasim/Saba small car family unveiled last year, will go into production.

Saipa has assembled the Xantia since 2001, and Pars Khodro, a car maker controlled by Saipa, has started assembly of the Nissan Maxima. Saipa plans to increase its vehicle production, including commercial vehicles, in the current Iranian year by 57% to 195,000 units, compared with 124,000 vehicles in the prior year.

Unclear is the future of Daewoo assembler Kerman Khodro. Young-Guhk Roh, director of the Korea Trade Center in Iran, who also functions as the commercial attaché at the Korean embassy in Tehran, says the Korean share in the subsidiary is worth $12.5 million.

“Kerman Khodro has announced its readiness to expand its assembly lines to include other models, but the Korean side has not answered yet,” says Roh to local media. Kerman Khodro assembled 4,931 Daewoo Matiz and 11,516 Daewoo Cielo subcompacts in the last Iranian year.

The country’s car makers will soon be confronted with new competition, as well. Zagross Khodro Car Industries Co. Ltd., Iran’s youngest auto maker, will start completely knocked-down assembly of Malaysia’s Perusahaan Otomobil Nasional Bhd. (Proton) cars in its new plant in Boroujerd, 240 miles (400 km) south of Tehran, in August.

The first model to be assembled will be the Proton Wira. Both Zagross Khodro and Proton expect to make 3,000 cars in the first year and gradually build up to more than 25,000 car per year in the medium term. (see related story: Proton Plant in Iran to Further Strengthen Position)

Talks are under way for other brands entering the country. Iran Khodro, for example, is negotiating with India’s Tata Engineering & Locomotive Co. Ltd. about technical and marketing cooperation.

A result could be the exchange of cars and parts between the two companies, including import or assembly of the Tata Indica small car by Iran Khodro and shipments of the Samand to Tata.

Tata also is negotiating with the Egyptian government about building a national car for that country.(see related story: Egypt Wants Tata to Join Arab Car Project)

The U.K.’s MG Rover Group Ltd. also is negotiating with Iranian auto makers about the assembly of some of its models.

Despite the flurry of activity, Iran Khodro and other Iranian car makers recently have come under criticism for the poor quality and performance and high prices of their cars. Additionally, car buyers regularly complain about high fuel consumption and after-sales service.

Many in the country complain Iran’s car prices are too high, recently moving the government to lift a 10% sales tax on the auto sector to decrease prices. Iran’s media also appears to have a growing interest in the domestic auto industry. Gharavi, managing director of Iran Khodro, is a frequent target of press criticism.

Reacting to the issues surrounding its budding auto industry, the Ministry for Industry and Mines, which controls the country’s main vehicle makers, has introduced a new automotive policy to promote quality and create a customer-friendly atmosphere.

Additionally, Majlis, the Iranian parliament, has approved a proposal to investigate the performance of local auto makers. Issues include price, quality, fuel consumption, emissions, distribution and service.

The law makers also are probing standards for parts, domestic and foreign contracts and Iran’s auto industry strategy.

All of this is having an effect on the industry. Already, there have been some changes in the management of Saipa to bring about more efficiency and quality at Iran’s No.2 vehicle maker. Observers now expect pressure on Iran Khodro to change some of its attitudes.

Mohammad Shariatmadari, minister of commerce, says in published reports that Iranian auto producers should make more effort to upgrade quality and compete with foreign manufacturers. He recommends local auto makers merge with global car makers in order to access advanced technology and protect their market share.

Speaking at an auto symposium on the sidelines of the recent fourth Tehran International Auto Fair, Shariatmadari says the government gives special preference to the auto sector due to its role in the national economy.

He welcomes close cooperation between local car makers and major foreign manufacturers, noting such cooperation will help upgrade the quality of Iran-made vehicles.

Iran’s top auto executives are less optimistic. The government does not support private auto manufacturers, says Mohammad Saffari, managing director of Kish Khodro – which makes cars with plastic bodies powered by Renault engines.

“The private sector needs full government backing because it lacks the necessary funds to invest in production,” he says in published reports. “In our country, producers are seen as criminals and are normally deprived of the opportunity to perform in a tension-free atmosphere.”

Another reason for the awakening of the domestic auto industry comes with the reduction of restrictions on car imports. With the opening of its car market, the government is trying to create a positive atmosphere for its ambitions to join the World Trade Organization.

However, no one should expect imported cars to dominate Iranian streets in the near future. Rather, the government’s concept is that the value of imported cars should not exceed the value of exported vehicles and auto parts.

Other obstacles for the majority of potential import buyers are extremely high taxes and duties.

At the same time, government reform should increase exports. Iran Khodro now is exporting its products, including parts, to 32 countries, says Abdolrahman Qalambar, the company’s export director.

He says the auto maker has drawn up a 10-year plan to gain a strong foothold in the international market, including setting up vehicle assembly in Egypt. It also is negotiating with partners in Pakistan, Saudi Arabia and Syria about the assembly of commercial vehicles, mainly buses.

Syria has become a significant export market for Iran. Shipments to Syria include not only cars, such as the Saipa or Iranian-made Daewoo models, but also Volvo AB heavy trucks, assembled by Saipa Diesel.

The Vehicle Industry Group plans the assembly of its Fath Sahand Cruiser SUV, which is based on a Toyota Land Cruiser, in the Sudan. Additionally, the Middle East; the former Soviet republics; Central Asia; and North African countries are typical export markets for Iranian vehicles.

Iranian component makers are increasing exports as well. Iran-made parts are already shipped to Europe, and European experts see an even bigger opportunity looming.

Baldur Heckel, a former manager of Magna Steyr Group of Austria who now is Magna Steyr’s consultant for special projects, visited several Iranian suppliers some weeks ago.

He says there are some suppliers that already are at the European level of quality. Says Heckel: “There are fantastic machining companies. What I saw was better than I expected.”

Magna Steyr and Arya Khodro signed a memorandum of understanding in April to cooperate on the production of a 4-wheel-drive vehicle. (see related story: Magna Steyr to Cooperate with Iranian Auto Maker)