On January 16th 2016, the 37 years of successive sanctions against Iran was lifted. Iran is currently home to 1.5% of the global GDP and is the 18th largest economy in the world, presenting itself as a strong business-case for significant Foreign Direct Investment (FDI). For the Iranian government, this means an immediate access to USD 150 billion in frozen assets, and an opportunity to rebuild the country’s industrialized economy. For businesses, the most immediate and significant sanctions to be lifted against Iran are the financial sanctions that have barred the country from playing in the global financial markets. This white paper provides a review of the Iranian economy, comparing it to lucrative emerging markets in the Middle East and Asia such as Turkey, Thailand, Indonesia, and Malaysia, while also highlighting investment opportunities and risks in Iran today.
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Iran's Revival : What Will Your Strategy Be?
1. www.solidiance.com | 1
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
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JANUARY 2016
2. 2 | www.solidiance.com
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.
3. www.solidiance.com | 3
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
4. 4 | www.solidiance.com
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
5. www.solidiance.com | 5
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.
6. 6 | www.solidiance.com
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.
7. www.solidiance.com | 7
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
7,131
41,652
15,013
4,129
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)
FDIStock(US$Bn)2014
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
8. 8 | www.solidiance.com
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
9. www.solidiance.com | 9
$ 1.4
trillion
1.5%
18TH
12%
13TH
$ 43
BILLION
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
11. www.solidiance.com | 11
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
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016f
2017f
2018f
2019f
2020f
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
12. 12 | www.solidiance.com
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
1971
1972
1973
1974
1975
1976
1977
1978
1979
1980
1981
1982
1983
1984
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
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
13. www.solidiance.com | 13
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_R
azavi
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
14. 14 | www.solidiance.com
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:
15. www.solidiance.com | 15
• 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,
beforebeingsoldbacktoprivatesectorbusinessmen.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%, todaythevast majorityofgoods 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.
16. 16 | www.solidiance.com
Tehran
Bandar
Abbas
Tabriz
Easy accessibility (average road speed: 75 km/h)
Medium accessibility (average road speed: 50 km/h)
Bushehr
Mashhad
Esfahan
Shiraz
Difficult accessibility (average road speed: 35 km/h)
360 km
7 h
340 km
7 h
300 km
6 h
450 km
13 h 900 km
14 h
1500 km
19 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
17. www.solidiance.com | 17
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.
18. 18 | www.solidiance.com
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.
19. www.solidiance.com | 19
Erika Masako Welch
Director 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
20. 20 | www.solidiance.com
ABOUT
US
WhatWe 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.
WhatWeAre 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
SolidiancehasofficesinChina,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 info@solidiance.com.
21. www.solidiance.com | 21
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
22. 22 | www.solidiance.com
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