Understanding Iran’s Manufacturing Sector
Iran’s manufacturing sector grown considerably over the last three decades. But since 2012, the impact of international sanctions on Iran have posed a new challenge for Iranian industries. In that year, Iran entered its first recession since 1994, with the economy contracting 7.4%.
As demand waned and supplier relationships were interrupted by the imposition of sanctions, manufacturing output fell. According to industrial production index data compiled by the Central Bank of Iran, which measures economic output for manufacturing firms with more than 100 employees, output declined by around 15% between the first quarter of 2012, during which financial sanctions were imposed in Iran and the second quarter of 2013.
However, after this initial shock output began to rise, if haltingly, as the overall economy adjusted to the sanctions and their various impacts. By the first quarter of 2016, during which Iran benefited from the sanctions relief related to the implementation of the Iran nuclear deal, output had rebounded to about 95% of the level seen in the first quarter of 2012. The economic uplift of sanctions relief then saw output rise steadily until the first quarter of 2018, when secondary sanctions were reimposed on Iran following the Trump administration’s move to exit the Iran nuclear deal.
The manufacturing sector, and the wider economy, were once again thrust into a period of contraction. But while the impact of sanctions on output was even greater, with output falling nearly 20% between the first and fourth quarters of 2018, output did not fall to levels seen in the previous sanctions period and the rebound in output was more robust.
Clearly, manufacturing enterprises had learned lessons from their first experience with sanctions. One key lesson was how to create more resilient supply chains, identifying multiple suppliers—sometimes from multiple countries—in order to create redundancies and to ensure that inventories of raw materials and other inputs were not a constraint on production. While the economic impact of sanctions also depressed consumer demand in Iran, manufacturing firms understood that the exit of certain imported products from the market, driven by the devaluation of the currency and logistical challenges posed by sanctions, would leave market share up for grabs. The “pie” may have grown smaller, but the best Iranian manufacturers had a chance to grow their slice. Manufacturers also learned that while the devaluation of Iran’s currency may make many inputs more expensive, it also serves to make their products more attractive for export.
These lessons and the resilience of the manufacturing sector at large has had an impact on the overall composition of the Iranian economy. According to data from the Statistical Center of Iran, a governmental agency, in the Iranian calendar year 1390, which ended in March 2012, just one month after the imposition of financial sanctions on Iran, the manufacturing sector accounted for 14.3% of GDP. At the same point, the oil and gas industry accounted for 24.8% of GDP. By the Iranian calendar year 1399, which ended in March 2021, the share of the manufacturing sector had risen to 18.6%. Meanwhile, the share of the oil and gas sector had fallen dramatically to 13.6%.
In relative terms, the manufacturing sector is today more important than the oil and gas sector as a contributor to Iran’s economy. Of course, this is primarily explained by the impact of sanctions on Iranian oil production and exports. But as the industrial production index makes clear, the capacity of Iran’s manufacturing sector to maintain and even grow production and lucrative exports in the face of major economic pressures also contributes to the difference in fortunes between the two sectors. Made-in-Iran products are found on the shelves of Iranian stores, on e-commerce platforms like Digikala, and are also increasingly sold to regional markets.
Through its investments in Moheb and Pakshoo, Serkland’s positions in Iran tap into the sector-wide resilience of the manufacturing sector. For the best-managed of Iran’s manufacturing enterprises, the sanctions periods have been a kind of stress-test that has served to create more efficient, more resilient, and even more profitable businesses.