Examining the Flaws of the Current Pricing Mechanism and Proposing Reform Solutions
Abstract
After three decades since the resumption of the automotive industry’s operations in Iran, this sector continues to suffer from problems at various levels. One of the key issues is the flawed pricing strategy implemented by the Competition Council and the Market Regulation Headquarters over the past decade. This misguided policy has not only caused significant losses for automobile manufacturers but also widened the gap between factory prices and market prices, creating rent-seeking opportunities for individuals who were able to purchase vehicles from these two companies. Estimates suggest that in 2022 (1401 in the Iranian calendar), buyers of vehicles received windfall profits amounting to 800 trillion Rials (approximately 80,000 billion Tomans). Therefore, it is imperative that the vehicle pricing system be urgently reformed.
Flaws in the Current Vehicle Pricing Method
The current vehicle pricing formula used by Iran’s Competition Council has key issues:
- It relies on past costs rather than current expenses, which causes pricing errors, especially during high inflation periods.
- Price updates are delayed by about four months due to dependence on quarterly inflation data, leading to losses for manufacturers.
- The fixed profit margin of 7% is too low compared to the typical 17%, discouraging investment in the automotive industry.
Reforming the pricing system with timely updates and realistic profit margins is essential to address these problems.
Effects of the Current Vehicle Sales and Pricing System
Impact on Consumers:
Due to limited factory supply and high demand, the chance of purchasing a car directly from Iran Khodro is under 1%, and from SAIPA under 10%. Most consumers are effectively unable to access factory-priced vehicles.
Impact on Automakers:
Automakers face major challenges due to currency fluctuations, stricter standards, and flawed pricing policies. Both Iran Khodro and SAIPA have moved from profitability to heavy losses over the past decade. In 2021, their combined operational losses were about 28.5 trillion tomans, and total accumulated losses reached 111.14 trillion tomans—nearly 10 times higher than in 2017. Continued losses threaten over 600,000 jobs across the automotive sector.
Recommendations for Reforming the Vehicle Pricing System
The current pricing system has failed due to political and social pressures, and automakers lack the liquidity needed for sustainable production increases.
Short-Term Recommendations:
- Calculate production costs annually with auditor approval, including R&D and financial costs.
- Include industry-standard profit margins in pricing.
- Update vehicle prices quarterly based on the Producer Price Index (PPI).
- Replace the Competition Council’s quality metrics with a Ministry of Industry regulation to improve safety and quality, with reward/penalty mechanisms.
Long-Term Recommendation:
Transfer pricing authority to automakers, and have the Competition Council focus on regulating supply, quality, safety, and product development—rather than setting prices based on cost-plus methods.
This study was conducted at Amirkabir Think Tank in collaboration with Hossein Kar-Azma Jahromi, Mohammadreza Bakhshi, MohammadAmin Salavatian and Rasoul Soleymani in 2022.
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