End of sanctions against Iran Iran: Justified optimism

The hopes are high. The sanctions against Iran will be lifted or suspended. For the German industry, this is an opportunity - more or less all representatives of the most different of sectors agree. On the one hand, there is a massive demand backlog, on the other the country must invest in the ramshackle infrastructure. And due to the different oil happenings, the country can also provide the financial resources required for this. But experts warn against too much euphoria – there are still formidable obstacles.

The German industry is expecting a powerful boom in business with Iran after the lifting of the nuclear power-related economic sanctions against the Islamic Republic in the Middle East. “We consider a doubling of exports in the coming five years from the current approx. 2.4 billion Euro to be realistic”, said Ulrich Grillo, President of the Federation of German Industry (BDI) for instance.

To ensure that this objective becomes reality, he appealed to the German Federal Government and the governments of the Federal States of the Gulf Region to create the preconditions for a permanent peace. In Iran, the demand for modernization of the industrial infrastructure is supposed to be extraordinarily huge. The modernization of the oil industry in particular, opens up large marketing opportunities for German machines and plant manufacturing. Further opportunities are on offer – according to the BDI –in automobile production, in the chemical industry, in the health care industry, in the extension of renewable energies, in waste management and in the building materials industry.

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Iran offers small to medium-sized enterprises solid opportunities in international competition

It is not just the large enterprises that expect good business, even small and medium-sized companies are sitting on the Iran boom, as Mario Ohoven, President of the German Association of Small and Medium-sized Businesses (BVMW) documents: “Iran offers big opportunities to the German small and medium-sized enterprises in particular in international competition, because as before, ‘Made in Germany’ products enjoy an excellent reputation in Iran.” Small and medium-sized German companies would exploit their opportunities as suppliers – for example in the Airbus deal. They would also enter the Iranian market themselves and the BVMW would support them now through its own representation in Teheran.

Development in exports in the areas of machine building, traffic infrastructure and renewable energies are expected to be particularly dynamic. After all, quite a few world market leaders in machine building and renewable energies do come from the German small and medium-sized enterprises sector. Ohoven is clearly even more optimistic than Industry President Grillo: As a result, he estimates the Germany-Iran trade volumes to increase four-fold by 2020 from the current mere 2.5 billion Euro.

The Central Association of Electrical and Electronics Industry (ZVEI) responds to the Iran subject with objective data. Chief National Economist Andreas Gontermann explains: “With approx. 80 million inhabitants, the population of Iran is approximately the same as that of Germany. The social product of the country – amounting to 314 billion Euro in 2014 – is comparable to that of Austria, the number of inhabitants of which is nearly ten times less.” The demand backlog is correspondingly high in Iran, which owns more than 10% of the global oil reserves.

The demand concerns among other things, the infrastructure of the country, industrial production facilities and production processes as well as the health care sector. Before the economic sanctions, Germany was the most crucial trade partner of Iran, though China assumed that position today.

“Total exports of the German electronics industry to Iran were 260 million Euro in 2014, which corresponded to a mere 0.2 % of the total exports in the sector”, emphasizes Gontermann in view of the fact that in 1992 German electronics exports to the country was in the range of 890 million Euro. The share in the total exports was 2% then, which gave Germany the 11th position in international buyer ranking. A return to a two percent share, according to today‘s yardsticks, would correspond to an export volume of approx. 3.5 billion Euro. That would be approximately 13 times today’s value and therefore, an enormous potential.

Considerable order pool therefore for chemical products and chemical plants

A considerable order pool also exists for chemical products and chemical plants. Even today, Germany is an important supplier of chemicals and pharmaceuticals to Iran, because the country buys approx. 10 % of its chemical imports from Germany. “The German companies are ready to further expand their good market position in the coming years”, asserts Manfred Ritz of the Association of Chemical Industry.

Earlier, Iran was a small but dynamic, growing export market from the German perspective, in which export of chemicals amounted to 450 million Euro in 2015. This was 0.3 % of the total chemicals exports, wherein the export volumes since 1999 increased by a total of about 150 %. The lifting of the sanctions and normalization of economic life in Iran could further accelerate the growth rates. In any case, the chemicals sector was impacted by the embargo only peripherally: Only chemicals of crude oil and natural gas production were on the prohibited list.

Traditionally good economic relations can get a new boost

The German machine tools industry greets the lifting of the economic sanctions against Iran with conspicuously greater expectancy. Heinz-Jürgen Prokop, Chairman of the German Machine Tool Builders’ Association (VDW) clarifies: “We are currently poised at the starting blocks of re-establishing our traditionally good relations with Iranian customers.”

The VDW is already preparing to hold a symposium, supplemented by a specialized fair jointly with Stuttgart Fair in early summer this year. On the whole, high modernization demands exist in all areas of metal processing and there are special business opportunities in this sector for equipment providers of the oil and gas industry as well as the vehicle industry.

Nevertheless, German machine tools export will not experience exponential leaps automatically, because more than anything else, the banks would have to participate actively in the payment transactions with Iran and enable the financing of potential business deals. Moreover, machine tools are also affected by export control for being dual-use goods, so that some high-value production machines could be delivered exclusively on the basis of export approvals.

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That trade with Iran will not reach the old peak values again within a very short period is also conceded by Federal Economy Minister Sigmar Gabriel: “I am aware that the revival of German-Iranian economic relations and especially financial relations is a long-term process.” But this does not dilute the optimism that business associations in particular exude. The chorus is also joined by Tobias Weiler, Managing Director of Spectaris, the Industry Association for Optical, Medical and Mechatronic Technologies: “The lifting of the economic and financial sanctions offers a good opportunity to give a new boost to the traditionally good German-Iranian economic relations.”

Even at the level of the federal states, the economic associations exude confidence. Alfred Gaffal, President of the Bavarian Industry Association (VBW) has solid actions to offer: “To improve the conditions of our companies in Iran, VBW has, jointly with the Training Institute of the Bavarian Industry, already opened a representation of the VBW industry in Tehran in November 2015.”

The discussions held thus far have shown that both sides are interested in long-term cooperation. The Bavarian Industry is positioned at the starting blocks and at the invitation of BVW, a 100-member business delegation of the Teheran Chamber of Commerce will be coming to Munich in February.

Large backlog of demands also in the utility vehicle area

For obvious reasons, there are numerous companies that are making preparations to participate in the future market of Iran. An example of this would be Daimler. The globally leading passenger car manufacturer has set the course for a return to the Iranian market, and has already signed appropriate agreements with two local cooperation partners for this.

Wolfgang Bernhard, Responsible Top Manager at Daimler Trucks justifies this fast initiative: “Our utility vehicles have been enjoying an excellent reputation in Iran for a long time now. At the same time, there is a large demand backlog for utility vehicles, most of all trucks.” With the end of the sanctions, one would therefore resume business activities with Iran expeditiously. The declarations of intent with local partners IKD and Mammut Industries are an important precondition for this.

Even consulting companies, lawyers’ chambers and other service providers in the export business see golden times for the German economy. Thus, Ludovic Subran, Chief National Economist at the Euler Hermes Credit Insurer: “The sectors in which German exporters are particularly strong will experience a huge demand in the coming years. German industry has an excellent reputation and stands for quality.”

Iran is a widely developed economy with a predominantly well-educated population. Many people there would love to buy high-value branded products, especially because a section of the population is used to the essentially higher standard of living from the times before the sanctions.

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Machine building: Very good opportunities, but no euphoria

And how do German machine and plant manufacturers who are already being celebrated as the big winners of the lifting of the sanctions, assess the development? Delighted but not excited – with a bit of skepticism – judges Iran specialist Klaus Friedrich of the VDMA: “Very good opportunities but no occasion for euphoria – this is the core statement of VDMA on Iran. The German machine exports in 2015 of less than 600 million Euro could improve to approx. 800 million Euro in 2016, and thanks to the good opportunities, to more than one billion Euro in the subsequent years.”

In view of the conspicuously increased competition from China and Korea, VDMA sees export values of 2 billion Euro only if Iran at least doubles its machine imports; at present they are worth 5 billion Euro. Whether the Iranian economic policy will spur such a growth remains to be seen. The main obstacle to Germany’s fast intervention in business with Iran is the unchanged restrictive business policy of the banks. And exporters would have to do their homework on export control, because the sanctions may have been slackened, but they have not been lifted fully yet.

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