The race for Iran

With the largest population of any country in the Middle East region, a rapidly growing economy and rising household incomes, Iran represents a potential commercial gold mine for consumer electronics vendors. Michael Thorne investigates.

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By  Michael Thorne Published  April 5, 2006

The race is on|~|iran200.gif|~|Iran's CE retail sector has remained largely unaffected by the regional trend towards hypermarket retailing.|~|With the largest population of any country in the Middle East region, a rapidly growing economy and rising household incomes, Iran represents a potential commercial gold mine for consumer electronics vendors. Michael Thorne investigates. The Iranian market for consumer electronics continues to grow at a phenomenal pace, assimilating products through a range of channels including the so called ‘grey market’. ECN can reveal that despite the ongoing threat of UN economic sanctions, a host of consumer electronics vendors including Sony, Sharp, BenQ, Nikai, LG and JVC are in the process of negotiating new or reviewing existing distribution deals in an effort to expand their commercial presence in Iran. Sharp Middle East and Africa general manager Yoko Yama tells ECN: “We are hoping to appoint distribution partners as soon as possible in Iran. We are looking to launch our LCD TV range there this year before releasing a range of other products including DVD players, audiovisual systems and household appliances. We are aiming for 10% market share of the Iranian LCD TV market within 12 months of launch.” Sony is also planning to launch its Bravia range of LCD TVs in Iran this year, after recently negotiating a distribution agreement with a new, unnamed channel partner. BenQ, LG and JVC also confirmed that they are looking to develop their distribution channels in Iran over the next 12 months. Iran boasts a GDP of $US551.6 billion, more than double that of Saudi Arabia, the largest consumer market in the GCC. GfK estimates that sales of televisions in Iran generated $US960 million in revenue in 2005, compared to KSA, which managed $US540 million and the UAE with $US290 million. Iranian sales accounted for 22% of all revenues generated by television sales in the Middle East and North Africa in 2005, an impressive achievement given the trade barriers that impact the country’s consumer market. “If you look at Iran, around 60% of the population is aged 15 to 59. With such a huge population it’s easy to see the country’s commercial potential at a consumer level,” says Harsh Gupta, regional manager of Iran and GCC for Dubai-based consumer electronics and appliance vendor Nikai. “Nikai established a market presence in Iran in 2001. We’re currently revamping our distribution channels. We recently appointed a national distributor based in Tehran that supplies retailers based in the regional centres of Tabriz, Esfahan and Shiraz. We also do business with the larger retailers in Iran, such as Refah, Etka and Shahrvand.” Nikai is looking to increase its market share in Iran to at least 5% of the total consumer electronics sector before the end of 2006. The company is also targeting 10% to 15% market share of the household appliance sector and 5% to 7% of the market for white goods. In contrast, companies with ties to the US are restricted from trade with Iran. Mobile handset vendors BenQ Mobile, Motorola and Sony-Ericsson all feature US patented technology in their products and are therefore restricted from operating in Iran due to America’s bilateral trade sanctions against the country. Despite this, many US patented products find their way into Iran through the ‘grey market’. Most of these products are acquired from retailers in Dubai, meaning vendors have little control over the movement of such products. “Iran is a black hole,” says BenQ Mobile marketing manager for the Middle East and Africa Moussa Obeid. “Distributors are aware of this and use it to their benefit by re-exporting our products through the grey market to meet demand. We have no control over this process as we maintain no direct trade links with Iran as a result of the American boycott.” BenQ Mobile is prohibited from exporting its products to Iran because the T9 predictive text technology featured in its mobile handset range comes under the American boycott. “Iran is very tricky given the issues relating to the US embargo,” reiterates Najib Ashraf Kazi, BenQ Mobile vice president of Sales and Marketing for the Middle East and Africa. “While we are well aware of the issues relating to grey market imports, we are powerless to stop it. Regardless, we do everything we can to ensure that our own operations in no way breach any international laws.” Raed Nasser, managing director of GfK Marketing Services Middle East, says that the grey market accounts for a significant share of the consumer electronics sector in Iran, with a raft of distributors and re-sellers shipping consumer electronics products via three main routes into the country. He claims the majority of shipments move from Dubai to the Iranian free trade zones on the islands of Kish, Kashan and Shabhar, from where they enter Iran through the south of the country. “Distributors travel to Dubai to take advantage of the Emirate’s cash and carry facilities,” he says. “They have their sources and routes already established, the consumer electronics and household appliance products are taken to the free trade zones and from there they enter Iran through organised channels.” Nasser claims the two other major points of entry for these products are to the east of the country, via the Pakistani and Afghani borders and from the north via Turkey by way of Iraq. He believes the grey market is decreasing somewhat in significance due to the growing number of foreign vendors entering the market and increasing government efforts to curtail the market for illegal goods. Regardless, legal routes-to-market for foreign vendors in Iran remain less streamlined than in the GCC countries. The Iranian consumer electronics market consists of a large number of distributors supplying an often-extended channel of resellers, wholesalers and localised distributors who in turn supply a fragmented retail market. Sizeable hypermarkets or retail chains do not currently exist in the country on the same level as Saudi Arabia or the UAE. However three larger government-owned retailers, Refah, Etka and Shahrvand, have of late expanded their respective consumer electronics product ranges and industry speculation suggests that Carrefour will open an outlet in the country in the near future. ||**||Convoluted channel|~|Nasser200.gif|~|GfK Middle East managing director Raed Nasser.|~|The burden of this convoluted channel model combined with high import duties has led to higher prices for Iranian consumers, and in many cases, lower profit margins for retailers and distributors. It also means that vendors require a strong distribution network and solid knowledge of the market in order to succeed. Many vendors also still rely almost entirely on their channel distribution partners to develop marketing and promotional strategies for Iran. “It is crucial that our distributors are equipped with localised knowledge of the various consumer markets in Iran in order to be able to take on additional marketing responsibilities,” says Swapna Nair, marketing manager for BenQ Middle East and Africa. “Iran represents BenQ’s third largest market in the Middle East, generating 15% to 20% of our annual revenue. However, the market offers even greater potential. At the moment we are committing the bare minimum resources from our base in Dubai but we’re pleased with how things are going for us in the country regardless.” Nair adds that BenQ plans to launch its LCD TV range in Iran later this year. Tehran is Iran’s largest consumer electronics market, with retail souks scattered across the city specialising in various products such as audio-visual systems (Jomhouri), white goods (Amin Hozoor) and small domestic appliances (Shariati). Outside Tehran the country’s major consumer electronics hubs are located in Tabriz and Mashhad in the north of the country, Esfahan in central Iran, and Shiraz in southern Iran. People from smaller towns and rural areas tend to commute to the cities to buy consumer electronics goods and appliances, especially those produced by foreign vendors. Sales trends suggest that consumers are willing to pay higher prices for premium consumer electronics brands as opposed to entry level products from lesser known vendors. “Iran is a very brand and quality conscious market,” comments Gupta. “Despite the fact that household incomes are relatively low compared to the rest of the region, Iranian consumers still spend more on well-known branded items. Saudi consumers for example, who generally have much higher levels of disposable income, are comparatively more inclined to purchase goods from less well-known manufacturers. “Another factor in this equation is the high tax rate on imported goods, which can range up to 45% compared to a much lower tax rate applied to goods produced domestically. Also, when vendors ship goods to Iran using foreign shipping companies Iranian authorities add a 10% surcharge.” However, Gupta stresses that the combination of these factors still doesn’t make it essential for companies such as Nikai to establish manufacturing bases in the country. “Samsung and LG have a strong regional presence with assembly plants in Iran but we are gaining ground on them by providing quality products via a broad distribution network,” he says. “Establishing your own manufacturing facilities in Iran provides a slight competitive advantage in the domestic market but we are confident that we can increase our market share without following suit. That’s not to say that it isn’t something we may look into in the future.” Despite this, GfK’s Nasser says that the South Korean vendors’ decision to establish assembly facilities in the country has enabled the companies to build a significant brand presence in the domestic market. “Samsung and LG take Iran very seriously and have done for some time,” says GfK’s Nasser. “Their decision to establish a local manufacturing presence has provided them with a significant competitive advantage, in terms of creating a more efficient channel that brings vendors and retailers closer together so that products can be sold at more competitive prices with a greater awareness of local market trends.” LG director of Corporate Communications Hamad Malik confirmed that the South Korean company’s manufacturing partnerships in Iran were fundamental to its overall strategy to build brand equity with the country’s consumers. “Our partners have their own modern production facilities,” he says. “We provide them with knock down units as well as technical support. We also maintain a distribution arrangement for finished goods with our master distributors. “Having a manufacturing base in the country definitely provides us with a competitive advantage in the domestic market. Apart from the tax benefits, we feel that with a multinational brand such as LG it is vital to maintain a local presence in our key markets. This strategy is about working to improve ties with our customers more than anything else.” The Iranian market generates around $US309 million in annual revenues for LG accounting for 13.6% of its sales in the Middle East and Africa. It is the company’s second largest market in the region behind South Africa. Malik says the company’s annual sales revenues in Iran are almost equivalent to those it achieves in the entire lower GCC region. “We hold the number one position for LCD monitors in Iran with a 70-75% market share,” he says. “We are also among the top three vendors in the country for televisions and washing machines.” Malik claims the company’s decision to establish a presence in the country in the1980s and foster closer ties with the Iranian community has enabled it to consolidate its market leading position. “Our strategy for Iran is unique,” he says. “We have staged the LG Football Cup three times in Iran, and it still stands today as the largest sporting event organised by a foreign company in Iran. We also have a very distinct programme involving our microwave oven range and local women. “We established a cooking school in 2004 that provides a social platform where local women can interact with each other in a friendly and educational environment. It’s a way of establishing a connection between our brand and the people of Iran. “In the 1990s, Japanese brands dominated the Iranian market but in the ensuing period their position has waned, mainly because they failed to establish lasting relationships with Iranian consumers, which is how we established our presence. Still, competition is fierce. Despite this, we have a very strong channel distribution network in the country and our partners ensure that we stay ahead of the game.” ||**||Trade sanction threat|~|creek200.gif|~|Dubai Creek docks - ground zero for Iran’s flourishing grey market of imported consumer electronics goods. Iranian authorities are working hard to stop the flow of unregistered products into the country.|~|The trade tariffs that have impacted foreign vendors have enabled Iran’s local consumer electronics manufacturing sector to flourish, with a host of domestic brands developing products that utilise a combination of proprietary and licensed technology from multinational vendors. These companies include Tehran-based Sanam, which produces a range of CRT TVs; household appliance manufacturer, Sam Electronics; Shahab, which manufactures LG products under license; and Bootan and Astra two of the country’s largest branded products manufacturers. Locally branded products tend to target the lower-end of the market with a range of goods including air conditioners, cookers, water heaters, microwaves and audio systems. Nikai’s Gupta remains dismissive of the competitive claims of domestic manufacturers. “We don’t consider the local manufacturers to pose any serious competition to our business,” he says. “These manufacturers might produce a lot of products, but the country’s consumers are very quality conscious and we score highly in this respect.” The majority of vendors surveyed by ECN also believe that the introduction of UN sanctions would have a devastating effect on the domestic economy. Continuing speculation over what these sanctions may involve if introduced has led some to reconsider their investment strategies for the country. “We have been looking at investing in assembly plants in Iran for some time but because of the political situation our plans have been postponed,” concedes Daewoo Electronics Middle East marketing director K.D. Kim. Iran represents one of Daewoo Electronics’ largest markets in the Middle East. The company boasts an exclusive channel relationship with Tehran-based distributor Parcon Electronics. “The decision to postpone our investment in SKD facilities in Iran was made by Daewoo Middle East in conjunction with our distributors as we decided the safest option was to wait and see what happens in regards to the threat of UN sanctions. If the situation is resolved we will consider fast-tracking these investments again,” Kim says. Another barrier to trade is the high cost of import duties. Gupta remains sceptical about suggestions that Iranian authorities may review their policy in this respect. “The government has not reviewed these policies for some time, there has been little privatisation and the economy relies heavily on state-run enterprises,” he says. “This is something that is hindering trade – if there was a greater amount of privatisation it could really boost the economy.” The future development of the Iranian consumer electronics market therefore depends largely on the willingness of foreign vendors to take the risk of investing in the domestic economy. While companies continue to export goods to Iran through the current channels, prices will remain inflated and undermine the true potential of the Middle East’s biggest consumer market. UN sanctions will only serve to magnify this situation, ensuring even steeper consumer electronics prices and a flourishing grey market. ||**||

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