Smart taxation, an alternative to prescriptive pricing in the automotive industry

Mandatory pricing in the automobile industry is becoming a fundamental problem of this industry, the proposal of the representative of the majority of private sector shareholders of Iran Khodro Company to implement the automobile pricing model in Turkey can become a tested and successful solution to get out of this inefficient policy.

Iran's automobile industry has been struggling with a fatal contradiction for years; A policy that is implemented with the aim of protecting the buyer, but makes it more difficult for the same buyer to access a quality product. In all these years, experts have repeatedly warned about the negative effects of mandatory pricing policy in Iran, and the heavy losses caused by this policy are clearly visible in the accounts of the country's car manufacturers. Opponents of this policy emphasize that mandatory pricing always causes the price of the final product to be set lower than the finished product price, and ultimately this gap causes a price gap between the factory selling price and the price of the car in the market, and the profit of this price gap is often not deposited into the pocket of the final consumer but into the account of car dealers.

On the other hand, some government officials and supporters of mandated pricing policy believe that there is no alternative solution, and since this group basically does not believe in the reality of the country's current inflation and existing prices, they still believe in mandated pricing as a tool for market management.

Consumer protection, at the producer's expense

Prescriptive pricing ostensibly wants to keep cars cheap for people; But in an inflationary economy, when the cost of inputs, wages, currency and transportation increases and the selling price is not adjusted accordingly, the cost of this support will not disappear. This cost can appear in the loss of the car manufacturer, debt to the parts manufacturer, postponement of investment, loss of quality and limited supply. Finally, a policy implemented to protect the buyer may make it more difficult to produce a quality car and make it more accessible to the public.

This is why Jamshid Imani, the chairman of the board of directors of Iran Khodro, has spoken about the loss of about 300 thousand billion tomans of Iran Khodro and Saipa due to the difference between the finished price and the selling price. According to reports, about 300,000 billion tomans of potential lost profits were also mentioned by the Chairman of the Board of Directors of Iran Khodro, which brings the total lost financial capacity to about 600 hemats.

This figure is the estimate proposed by the industry officials, however, the scale of the problem is worth considering. According to Imani, the full development of a new platform costs about 10 hemats (10 thousand billion tomans); The resources that could be spent on product development, technology modernization and quality improvement if economic conditions are available remain far away from productive investment in such a situation.

Therefore, the cost of command pricing is not only on companies' balance sheets; It may also be imposed on society in the form of older products and missed development opportunities.

When the factory price deviates from the market price, buying a car at the official rate becomes an economic bonus. Part of the possible benefit comes not from the production and quality increase, but from the possibility of access to a lower price. In this situation, the person who has access to the quota or factory sale may benefit, while the other buyer is forced to pay the higher market price.

Of course, the entire price gap between the factory and the market cannot be considered equivalent to rent without accurate calculation; But such a gap can strengthen the incentive for intermediation and speculation. As a result, consumer protection is tied to the vehicle allocation mechanism instead of being transparent and targeted.

Will Türkiye's experience for car pricing be successful in Iran?

In Türkiye, the price of new cars is mainly formed in the framework of the market and supply and demand; The government also uses tools such as special vehicle consumption tax, known as ÖTV, regulation and market supervision. Tax rates vary based on legal classifications and vehicle specifications and can make a significant contribution to the final price. This tax is not only for cars: goods such as fuel, luxury goods, and certain electronic goods are subject to this tax. This method of tax regulation is not implemented only in Turkey, many other countries of the world also use this method. This type of tax applies to certain goods that are sold for the first time. In this way, the government can manage the prices by reducing or increasing this tax, based on the general use of the mentioned goods. For example, economy cars have a much lower tax than luxury cars, as a result, a person who buys a luxury product is obliged to pay more, and finally this difference is given to the government.

Türkiye's experience is important for Iran because it separates two tasks from each other: determining the economic price of the product and supporting the consumer. The main difference is not that Türkiye has removed the government from the car market; Rather, the means of intervention are different.

In Iran, sales price control can exacerbate producer losses and the gap between the official price and the market; In the Turkish model, however, taxes and regulations are part of the policy tools, and ultimately the price gap does not go to the dealers' pockets. This is the time for the government to decide to reduce prices and reduce its tax revenue if necessary.

Of course, this method also brings challenges and complications. In Turkey, high prices and the reduction of public purchasing power are a big problem, and its experience cannot be considered a perfect or copyable version for Iran. Because factors such as export orientation, connection with foreign markets, access to global technology and stability of rules have also been effective in the development of the Turkish automobile industry.

Remedy: Economic pricing versus more responsiveness

Türkiye's lesson for Iran is not price liberalization without supervision. The automobile manufacturer must be able to determine the price according to the economic conditions within the framework of competition and clear rules; On the other hand, it must be accountable for costs, quality, productivity, safety and after-sales service. In this context, the request of Hamid Keshavarz, the representative of Iran Khodro's majority shareholders, to review the Turkish model, becomes an effective reform when the transfer of more economic authority to the private sector is accompanied by measurable commitments in terms of quality, cost reduction, and product development.

But real consumer support starts from the point where the entire production chain can continue to work. A low price on paper, if it is accompanied by debt to the parts maker, reduced investment and production disruption, does not necessarily lead to a cheaper and better quality car. The lesson that can be studied from Türkiye for Iran is to move towards economic pricing along with effective regulation and targeted support. A path in which the cost of supporting the people is clear and the parts maker does not become an unwanted financier of the pricing policy along with the car maker.

Today, Iran's problem is not only the car price; It is the way of managing the automobile industry. If the goal is to support the people, one should ask who pays for this support and does the benefit really reach the target consumer? Keeping the number on the price tag lower doesn't make the car cheaper, higher quality, or more accessible by itself.

The comparison between Iran and Türkiye has a clear message: supporting the people should not be dependent on weakening production resources and creating rentier privileges. The sustainable way is to combine economic pricing, competition, effective monitoring, investment in production and targeted support for the buyer; A path in which neither the consumer becomes a victim of hidden costs, nor the car manufacturer replaces the commitment to quality by modifying the price.