New markets: Iran

The Gulf has always thrived on trade, and the international business of IT is no exception, with companies from all around the globe doing business into and out of the region. In the first in a series of features on new and developing markets, we look at one of the Arabian peninsular’s largest neighbours and oldest trading partners, Iran, and the opportunities it presents to the channel.

  • E-Mail
By  Mark Sutton Published  October 1, 2001

Introduction|~||~||~|Iran is one of the largest countries on the Arabian Gulf, both in terms of size and population. It has a mostly young, educated population, with a modest oil-based economy. But it is also one of the most closed markets in the world, due to both a US embargo on exporting high tech goods, and internal controls that restrict almost all goods entering the country freely.

But despite the controls, the Iranian market is growing like never before, Internet use is booming, internal manufacturing of IT goods is at peak levels and import of IT goods, especially from the UAE, has never been bigger business. So what is the future for this busy Gulf state?

The economic situation in Iran poses some immediate problems, mostly unemployment and inflation. The young population—around 65% of Iran’s 65 million people—is pushing for better employment prospects.
Officially unemployment is at 15%, according to Reuters, but some estimates suggest it may be as high as 20-25%. Employment is heavily regulated in the country, as is most economic activity. There is the possibility of investing oil money, but economists fear that this could mean a rise in inflation, which the central bank has struggled to keep at 15%. High oil prices however, have given the country scope to develop, and the situation for foreign business is improving.

||**||Import and manufacturing|~||~||~|The lion’s share of IT business with Iran is through the import of PC components. Because the US restricts trade to peripherals such as printers and digital cameras, the main name-brands PC are not present in the country.

The situation is also affected by manufacturing and assembly in Iran. Many components, most notably monitors, are produced in the country. In order to protect the home market, Iran only permits the import of ‘completely-knocked down’ or ‘semi-knocked down’ PCs, making locally assembled PCs the only choice.

The absence of US brands means that the vast majority of components come from Asia. “If you go to Iran and ask what country of origin is the best for products, the first countries mentioned are Japan or Taiwan,” said Ahmed Farahani, general manager of Ashley Distribution in Dubai. “These countries are taking good market share—monitors are all Korean, motherboards are all Taiwanese or Chinese, as is RAM—even in hard disks, Maxtor is taking over. American companies are falling behind in almost all sectors.”

This situation led to a booming, but complicated market to supply Iranian assemblers. “There is no real idea how many PCs are going onto the market,” Farahani explained. “The best we have is guess-estimates. There are at least 300,000 monitors manufactured and sold in Iran each year, so this must mean at least 300,000 PCs are sold a year.”

Illegal importation of components was a problem two-three years ago, with as much as 90% of all items shipped illegally, although many in the market say the problem is coming under control. More of a problem, for importers at least, is getting permission to bring in products. It is difficult to get permission for most products, said Farahani, but those products that are available locally cause the most problems. The government imposes controls, but local supply is unable to meet demand, so the controls are relaxed, so then the importers flood the market again—the markets are rarely stable.

Demand is also seasonal, according to Masoud Jalilian, manager of Golden Systems Electronics, a Dubai-based distributor that does much of its business in Iran. “Demand is heaviest in the summer and winter. In the summer, students have a three month holiday, they have to have something to do, so some of them get PCs. After the summer, volumes come down by as much as half in the space of a week,” he said. “Then, in December, January and February, we have three months of very high levels of business, because of tenders before the end of the Iranian year in March. Lots of companies keep back some of their budgets, and then by the end of the year they have to use it up, so the best use of that money is to go out and buy computers.”

Golden is also involved in assembly and manufacturing in the region, with Gigabyte motherboards. The amount produced is “not huge”, said Jalilian, but by producing in-country, Golden is allowed to bring in more motherboards on top of what they produce, which gives them extra capacity to cope with demand.

Those companies that do manufacture in Iran, do so in partnership with local manufacturers. Both Samsung and LG follow this model. LG has been in the market for six years, working with distributor/assembler Iranian Office Machines Group (IOMG). IOMG also produces printers from Epson and Olivetti. The partnership has brought LG a 72% market share, producing 300,000 monitors per year, according to Hamad Malik, LG’s senior marketing manager for Tehran. “The factory belongs to IOMG, we only supply the kits and components, and they produce them under the LG brand name,” he explained. “They are on a par with many of the most modern companies in the world—IOMG produces six models here currently, these include conventional and flat screen, and next year we will be producing LCD monitors in Iran.”

||**||Distribution and RMA|~||~||~|The Iranian consumers are certainly keen to get their hands on the latest and best. “The customers are asking for quality,” said Jalilian. “In general, the brands that are sold are of the highest quality. Iranian customers look for quality, they don’t want cheap alternatives.”

Being able to provide support in Iran is also important. Accton has been gaining ground in the region, with many government tenders now specifying Accton by part numbers. One of the most important steps to that growth was investing in support, according to Jamshed Mehdi, managing director of Accton ME. “In Iran, when a product goes down, you can’t bring it out again to fix it, there is a real problem with RMA,” he said. “Since it is a good market for us, and we want to provide for it long term, we have established a support centre inside Iran, they give a repair or replace warranty.”

Because of the problems with RMA, building a support network is essential. Golden has service centres in all of Iran’s provincial capitals, and hubs in Tehran and Shiraz.

Almasa Distribution, who recently signed a distributor agreement for HP in the region, and is already present with other brands, including Asus and ATI, has also established a network of some 30 service centres with partners across the region. The company is already doing well with the products that it has, but it is now hoping that the HP products that it can distribute—printers, scanners and cameras—provide it with further growth opportunities. “We see it is an opportunity, there is a lot of growth in Iran,” said Gerry Saumure, managing director of Almasa. “We will try to develop new sectors, maybe a bit of the retail sector in Iran, and bring in incremental business by widening the customer base. A lot of the traditional business [in Iran] was corporate/government, but the private sector is building.”

Almasa also sees the HP partnership as a strategic position. “It is an opportunity for us to sell printers, but HP has a lot more in its portfolio, and when the day comes that we are allowed to sell, then we will be in a strong position. Every time Iran gets closer to opening up the market, it gets better,” Saumure said.

One problem that will need to be addressed is the need for more developed financing. “Transfer of money internationally is slower than the UAE—here you can transfer money in 24 hours, in Iran it can take a week,” said Jalilian. “The economic situation has settled down very slowly. Finance is something that everybody is hoping [will change], but nobody knows when that might happen.”

IRAN

Population: 65,619,636 (July 2000 est)
Economy: Iran’s economy is a mixture of central planning, state ownership of oil and other large enterprises, village agriculture, and small-scale private trading and service ventures. The zoom in oil prices in 1999 afforded Iran fiscal breathing room.
GDP: $347.6 billion (1999 est)
GDP real growth rate: 1% (1999 est)
GDP by sector:
agriculture: 21%
industry: 34%
services: 45% (1997 est)
Labor force: 15.4 million
Labor force by occupation:
agriculture 33%
industry 25%
services 42% (1997 est)
Unemployment rate: 25% (1999 est)
Exports: $12.2 billion (1998 est)
petroleum 80%, carpets, fruits, nuts, hides, iron, steel.
Imports: $13.8 billion (1998 est)
Import commodities: machinery, metal works, foodstuffs, pharmaceuticals, technical services, refined oil products
Import partners: Germany, Italy, Japan, UAE, UK, Belgium
Currency: 10 Iranian rials (IR) = 1 toman. $1 = 1750 rials
Telephones main lines: 7 million (1998 est)
Telephones mobile cellular: 265,000 (August 1998)
Telephone system: Currently being modernised and expanded with the goal of improving the efficiency and volume of the urban service and also bringing telephone service to several thousand villages, not presently connected
ISPs: 1 (1999), 100+ (2001)
||**||Iran and the Internet|~||~||~|One area that has expanded dramatically in Iran is the Internet. In 1999 there was just one ISP in the country—today there are well over 100. Unlike the West, where business users have driven Internet adoption, Iran’s ISPs have been fuelled by private users.

“There are between three and five million Iranians living overseas, and there are no restrictions on PC-to-phone communications—being able to talk over the Internet—well sales of sound cards have increased dramatically,” said Ahmed Farahani.

Abdollah Fateh is managing director of Pars Online, a Tehran-based ISP. He says that the growth of the Internet in Iran has been phenomenal. “We are turning users away. The growth is amazing—I believe there are over 100 ISPs in Tehran alone. We are growing at about 1500-2000 customers a month, and we have to add capacity step-by-step to cope,” he said.

Joseph Braude, an analyst at Pyramid Research puts the number of Internet users in Iran at 380,000, a figure that is growing by 30% every six months. Pars Online has 8000 customers, with plans to grow that to 20,000 by March.

Internet cafes are also big business, driven by VoIP. After an initial outbreak of popularity, which saw people queuing in the streets to take advantage of international call rates of around 6 cents per minute against nearly $1 per minute for landline calls, the authorities demanded that Internet cafes become licensed. There are now laws against using VoIP phone lines, but, says Fateh, it is too difficult for the authorities to control PC-to-phone communications.

The authorities seem to be accepting the Internet. “For all my discussions with [government] people, no-one has told me that Iran shouldn’t have the Internet,” Fateh said. “The parliament has realised that this is a technology they cannot do without, but there is a stance that this is an Islamic country and it has to be done following Islamic law.”

The government is also investing in the infrastructure. At present Iran is only linked to the Internet via satellite, which causes a six hundred millisecond lag in connection, and only allows a total of 300mbits of bandwidth for the whole country—Pars Online is the only ISP that can offer 56kbps dial up, and like all companies, it has to rent all of its backbone from the government.

Iran is well positioned however to tap fibre communications, with the TAE link running through the north of the country and the FLAG link from the UAE just offshore in the Gulf. A 172km fibre cable from the port of Jask to Fujairah in the UAE provides some connectivity, although it is not yet linked to the rest of Iran. Tehran is just finishing testing of a 155mbits local loop; and the government is becoming more responsive.

“It is getting a lot better—they are starting to see that this is a service industry,” said Fateh. “Before, on a Thursday afternoon, if the satellite link went down, it would be hard to find someone there to tell to go and fix it, now they have learnt we need 24 hour customer service.”

Businesses are also starting to wake up to the Internet. “Some companies are purchasing leased lines, but they are mostly the foreign companies, like Mitsubishi or the national Norwegian Oil Company that have intranets. I don’t think there are many companies that realise what e-commerce really is, but the hype is there. Everyone thinks they should have a web presence, they should have an email@ourcompanyname.com. Last year we would have had a tough time selling one hosting package a month—now we are signing up three or four a week,” says Fateh.

The big problem that e-commerce faces in Iran is the lack of credit facilities, with no way to pay for goods online. Fateh expects that all of the problems will be overcome in time. Braude agrees: “The Internet is becoming an issue with political returns within the government,” he said. “The entrepreneurs in the Internet space in Iran like to avoid talking about things like censorship and they are really looking at it as a patriotic project. They feel, in their own way, that it will ultimately provide a way in which Iranians will be able to bring revenue into the country.”||**||

Add a Comment

Your display name This field is mandatory

Your e-mail address This field is mandatory (Your e-mail address won't be published)

Security code