Saturday, May 31, 2008

Treating (Iranian) Industry as a Luxury

There are strange signs emanating out of the Syrian-Iranian relationship. Here is my article from this month's edition of Syria Today about one example of how Iranian investments are bogged down in Syria - but surviving. It is a follow up of my January 2007 story on the launch of the Iranian-Syrian "Cham Car" project. Since publishing the story, SAIPA confirmed to Syria Today this month it began production of its popular car Saba.

Treating Industry as a Luxury
Andrew Tabler
Syria Today Magazine May 2008

Two Syrian-Iranian car companies are struggling to make a profit as complicated government red tape means they have to pay luxury tax on car components they import.

When Syria’s first domestically assembled automobile, the Cham Car, rolled off an assembly line outside Damascus in January 2007, Syrians hailed the joint venture between Iran’s Khodro and Syria’s public sector General Organisation for Engineering Industries as an example of how their country’s industrial aspirations could be achieved through their government’s deepening relations with Tehran. Outside Syria, journalists and analysts cited the project as yet another sign of an Iranian “takeover” in Damascus that threatened the region’s Arab political order.
While the Syrian-Iranian alliance appears as solid as ever – including Tehran’s announcement last March that it is increasing technical assistance to Syria from USD 1bn to USD 3.5bn – it hasn’t been sturdy enough to cut through the Syrian Government red tape. Cham Car and another new venture, the Syrian-Iranian Vehicle Company (SIVECO), are struggling to turn a profit as the Syrian customs’ authority continues to apply luxury tax on the car components at the port.
“When we started looking at this project in 2001, import tariffs on cars were between 145 and 195 percent,” said Masoud Nazari, resident manager for SAIPA, the Iranian automaker that holds an 88 percent stake in SIVECO. “SAIPA vehicles were number one in sales on the Syrian market between 2003 and 2005. So assembling cars in Syria and getting around the tariffs made great business sense. ”
Then the unexpected happened. On May 7, 2005 – as the world focused on Syria’s withdrawal from Lebanon a few days before – President Assad issued Legislative Decree No. 197 slashing tariffs on automobiles to 40 percent on Completely Built- Up (CBU) Vehicles – industry-speak for assembled vehicles – with engines smaller than 1.6cc and 60 percent with larger motors. Margins in Syria’s automobile market immediately narrowed. Previously expensive European and East Asian models were suddenly more affordable for many Syrians.
Executives from Syria’s two Iranian automotive joint ventures hurriedly calculated the tariffs assessed by Syrian customs on their cars’ various parts and decided to press on. They lobbied the government to pass a special law to support local assembly industries, specifically to cut customs procedures on inputs for Semi-Knocked Down (SKD) car units – or partially assembled automobiles – and exempt them from luxury taxes.

Luxury tax
When President Assad opened the Cham Car plant amidst great fanfare in January 2007, the government issued a decree concerning customs procedures for domestic automotive industries that only standardised customs rates on inputs. Luxury tax would still apply to domestically assembled automobiles, but – in an unexpected twist – domestic producers of automobiles would be required to pay luxury tax on the cars’ components when they entered a Syrian port. As their competitors importing CBVs are only required to pay the luxury tax when buyers purchase cars from showrooms, Cham Car and SIVECO are saddled with around USD 3,000 per unit in luxury tax overhead prior to sale.
The government has yet to amend the law, despite over a year-and-a-half of lobbying by both companies. This has particularly hit SIVECO – a completely private sector venture – hard. While SIVECO’s plant in Hassia industrial city near Homs was opened by President Assad in January 2008, its product, the SAIPA Saba, is only scheduled to hit Syria’s thoroughfares this month. Lack of progress on the issue is particularly surprising given that the Syrian Government owns a 35 percent stake in Cham Car. Both companies’ executives say solving the luxury tax issue soon is key to moving ahead.
“We prefer to be straightforward,” Nazari, whose company plans to produce up to 5,000 units per year, said. “Some of those selling imported cars in Syria under-invoice the sticker price to reduce customs and luxury taxes. Our input and prices are declared to the Syrian Government. Our sales price of SYP 550,000 is one of the cheapest on the Syrian market. Modifying the law to support local industries like ours will help us remain competitive and help the state collect more revenues."
To weather the regulatory limbo, Cham Car keeps its stock to a bare minimum, selling their plant’s 10,000-car annual production almost as soon as they roll off the assembly line. “At SYP 645,000, the cars fly out of the showroom,” Nidal Fallouh, production manager of the General Organisation’s for Engineering Industries and a board member of Cham Car, said. “Solving the issue with the government will help us expand distribution outside major cities.”
Government foot-dragging on dealing with the automobile assembly issue is delaying their Iranian partners’ plans to expand assembly capacity and introduce new product lines. “We have plans to introduce a new Cham Car in the coming months with full options, including Anti-lock Break Systems (ABS), airbags, and a different engine,” Fallouh said. “We might call it the Cham LX.”
To give Cham Car a competitive edge, the company plans to rely more on Syrian inputs. “In the near future, we will open a paint ‘baking’ line, which will allow us to do more finishing in Syria,” Fallouh said. “In the future, we could even expand our assembly lines to produce for other manufacturers.”

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