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The oil boom of the late 2000s created significant headwinds for Iranian manufacturers. As the value of oil exports surged, the Iranian rial appreciated, real wages rose, and foreign goods flooded the Iranian market. Middle-class families relished in their newfound purchasing power, gladly buying French cosmetics, Korean appliances, and Turkish clothing while shunning domestic brands. This is how Iran caught a textbook case of “Dutch disease”—the oil bonanza undermined Iran’s manufacturing base. Given the strong rial, programs initiated by populist president Mahmoud Ahmadinejad redistributing wealth to Iran’s lower classes widened the trade deficit and set off an inflationary boom in housing and services. But when the Obama administration hit the financial and energy sector with heavy sanctions in 2012, thrusting Iran into a recession, things changed course.
Sanctions hit an already weakened manufacturing sector, precipitating a stagnation in Iranian industrial output that persists until today. But the volatility of US diplomacy—relief from sanctions following the 2015 Iran Nuclear Deal, reimposition of sanctions under the Trump administration in 2017—has also produced uneven effects for Iranian manufacturers. Some major players have experienced significant drops in production. Iranian automakers produced around 1.5 million vehicles in 2017, when the country was still enjoying the benefits of sanctions relief. Last year, they produced just 1.2 million vehicles. In the case of the auto sector, sanctions have constrained access to key manufacturing inputs, reducing both the quantity and quality of Iranian cars and trucks produced each year.
Other manufacturers have bucked sanctions by taking advantage of their macroeconomic effects, including currency devaluation and diminished imports. This has paradoxically enabled domestic Iranian capital to reverse the effects of “Dutch disease.” A closer examination of the home appliances sector in Iran reveals the significant degree to which firms can adapt to sanctions, creating new economic value in economies otherwise encumbered by the coercive measures. These adaptations contradict the commonly held view that resilience to sanctions arises from the allocation of state investment and top-down industrial policy. On the contrary, in Iran, resilience appears to be a bottom-up phenomenon, led by opportunistic private capital. In fact, how firms adapt to sanctions can influence both domestic economic policy and the international sanctions regime in unexpected ways. Today, the Iranian home appliances industry is being held back not by the effects of sanctions on production, but by the effects of overcapacity on price competition. Many Iranian manufacturers can only survive in a protected market, meaning these firms may actively oppose the kind of market liberalization inherent to sanctions relief.
Domestic manufacturing
The Iranian home appliances industry emerged during the first industrialization wave in the 1960s. By the mid-1970s, domestic brands like Arj and Azmayesh had become staples of Iranian homes, and, given decent quality and competitive features, were even exported to regional markets. After the Islamic Revolution in 1979, these factories were nationalized. Soon after, the outbreak of the Iran-Iraq war prevented further investment and modernization. Domestic brands became the low-price, low-quality option for Iranian consumers. By the mid-2000s, as Iran’s economic growth accelerated, foreign brands entered an increasingly segmented Iranian market. High-income families would outfit their homes with appliances from brands like Germany’s Bosch and Italy’s De’Longhi. Middle-income families became loyal to imported Korean brands LG and Samsung. Low-income families would choose Iranian brands, whose appliances could not compete on features, but could compete on price. By 2017, the major Korean brands had come to dominate the Iranian market, accounting for 65 percent of the refrigerator market and 77 percent of washing machine sales, according to market data compiled by GfK. The Korean market share ballooned following the intensification of Western sanctions on Iran, particular after 2012, which saw European brands reduce their footprint in the country.
Then, in 2018, everything changed. The Trump administration withdrew from the Iran nuclear deal, reimposing US secondary sanctions on Iran. Trump’s “maximum pressure” policies had a dramatic impact on the Iranian economy. Among the first effects was a steep devaluation of the Iranian rial, as Trump froze Iran’s access to its foreign exchange reserves and throttled oil exports, the primary source of hard currency revenues. In an effort to ration hard currency and defend the new exchange rate, the Iranian government introduced a ban on the importation of over 1,300 goods, including home appliances, effectively closing the market to foreign brands. Even before the protectionist measure from Iranian authorities, these brands had already faced difficulties in maintaining their Iran sales operations as international banks began to cut ties to Iranian counterparts.
The combination of protectionist policies and intensifying sanctions squeezed foreign brands out of the Iranian home appliances market, reversing two decades of market consolidation. Iranian home appliance manufacturers, as well as opportunistic investors with no experience in the sector, quickly recognized the opportunity. The return of sanctions would no doubt slow Iran’s economic growth and high inflation would erode household purchasing power. But the demand for appliances—a household essential—is stubborn. Suddenly three-fourths of the Iranian home appliances market was up for grabs, representing a $12 billion opportunity.
Iranian home appliance manufacturers began to invest heavily in new production capacity. To meet the needs of Iranian consumers that had been purchasing imported brands, appliance manufacturers also added new features. The investment was not limited to incumbent players. The home appliances market saw many new entrants, leading to a dramatically fragmented landscape. Today, there are 140 firms producing refrigerators in Iran and 100 firms producing washing machines, according to figures compiled by the Ministry of Industry, Mine, and Trade. Domestic firms now dominate the home appliances market. Foreign brands continue to be available in Iran, but products arrive as parallel imports. These imports tend to be more expensive than locally produced brands because of ongoing currency devaluation. Moreover, products imported unofficially lack the warranties and after-sales support now offered by Iranian producers. These factors have crushed the share of the once dominant foreign players. In 2022, the combined share of LG and Samsung in Iran’s refrigerator market was just 8 percent. The two Korean brands accounted for just 13 percent of washing machine sales.
Alongside the fragmentation of the market caused by the dramatic increase in the number of domestic home appliances manufacturers, data from the Ministry of Industry, Mine, and Trade shows that production capacity has also exploded. The home appliances sector is now the second largest contributor to manufacturing value-add, surpassed only by the automobile sector. For both refrigerators and washing machines, total production volume was flat in the years leading up to 2018. But after an initial drop in output owing to supply chain disruptions, the sanctions shock spurred significant growth in production volumes. Iranian firms produced 2.7 million refrigerators in 2022, double the 2017 total of 1.35 million. Washing machine production totaled 1.6 million in 2022, up from about 900,000 in 2017. Iranian officials have heralded the home appliances sector for adding jobs in an otherwise soft labor market.
If there has been one winner in Iran’s otherwise fragmented home appliances market, it is Entekhab, which accounts for 40 percent of the washing machine market and 27 percent of the refrigerator market. The company, which produces mid-price appliances, was well-positioned to expand production after sanctions were reimposed on Iran. For decades, Entekhab produced South Korean Daewoo appliances under license. In 2018, it even attempted to acquire Daewoo’s home appliances division for the second time (a first attempt was made in 2010). The deal eventually fell through, but it was a marker of Entekhab’s ambition and its desire to access valuable intellectual property.
Entekhab also has a partnership with Haier, a Chinese appliance manufacturer. It was this partnership that positioned the firm for growth after sanctions pushed the likes of LG and Samsung out of the Iranian market. Entekhab could tap its Chinese supply chain as it sought to boost production. Meanwhile, its competitors were scrambling to shift away from European, Japanese, and Korean suppliers, who largely stopped exporting to Iran due to sanctions risks. More importantly, Entekhab was an experienced company with a track record of supply chain localization and cash to invest. There have been many entrants into the Iranian home appliances market, but most lack these important competitive advantages. As such, no other Iranian firm in the home appliances market has achieved similar scale.
Overcapacity and industrial policy
While Iranian authorities might have at one time worried that sanctions would hobble the production capacity of home appliances manufacturers, the rapid and uncoordinated growth of the sector has instead led to overcapacity. The Majles Research Center, which is affiliated with the Iranian parliament, estimates that the current total annual production capacity for refrigerators is around 10.5 million units. Meanwhile, maximum domestic demand is less than 3 million units per year. As sanctions have constrained exports, the significant unused production capacity represents wasted resources.
In a recent report on the sector, the Majles Research Center warns that Iranian home appliances manufacturers are engaged in a race to the bottom. “Free entry into the home appliance industry has led to many operating licenses over recent decades. Yet, this freedom of entry has not allowed firms to benefit from economies of scale. Exploiting economies of scale is necessary to achieve competitive production with high localization,” the report finds. In other words, Iranian firms succeeded in increasing production capacity under sanctions. But the mobilization of private capital under sanctions reflects a partial success. In the aggregate, record high production volumes could indicate that Iran’s home appliances market has shrugged-off sanctions disruptions. But at the firm level, many home appliances manufacturers are contending with negative cash margins as they face intense competition in a fragmented market. Firms in a sector where production has surged can lose money much like firms in sectors where sanctions have constrained production or sales. In this way, overcapacity has become an unexpected headache for Iranian policymakers.
Whereas in many countries, industrial policy entails the use of subsidies to “crowd-in” private capital in strategic sectors where investment has been lacking, Iran has struggled to maintain government spending due to sanctions pressures. In a context where government investment is inherently constrained, efficient allocation of private investment is critical, and industrial policy should focus on addressing coordination failures in those sectors where private capital has been opportunistically deployed. The coordination failures evident in the Iranian home appliances industry also make clear how, despite calls to create a “resistance economy” in the face of sanctions, Iranian economic policymakers have failed to harness industrial policy to reign in and direct the adaptive behavior of private sector firms. This failure also has also created constituencies among various types of domestic manufacturers opposed to the kind of market liberalization inherent to sanctions relief—undermining a core belief held by Western policymakers that sanctions can spur behavior changes in countries like Iran through bottom-up pressure, including from business lobbies.
When rumors first emerged in 2021 that Iran might agree to a prisoner deal with the United States that would also result in the release of frozen reserves held in South Korean banks, a dozen home appliance manufacturers wrote an unprecedented open letter to the Supreme Leader Ali Khamenei, asking him to ensure that any such deal would not lead to the repeal of the import bans keeping the likes of LG and Samsung out of the market. The signatories opposed “the importation of international brands when local production meets the domestic market’s quantitative and qualitative needs.” Bizarrely, their letter name-checked Richard Nephew, an Obama administration official. Nephew is widely seen in Iran as the key architect of the US sanctions program, a reputation he earned after his book The Art of Sanctions was translated into Persian. The group of home appliance manufacturers claimed that “saturating the domestic market with Korean and Japanese brands aligns with Richard Nephew’s objectives,” presumably because it would lead to the underdevelopment of Iran’s manufacturing base. As the debate over the import ban continued, key officials, including Abbas Aliabadi, the industry minister, expressed support for its repeal, spurred by public anger at the letter. Aliabadi has noted that “in a perfectly competitive market, there is no need to impose such physical restrictions.” But for now, the policy remains in place.
Whether Iranian policymakers can turn Iran’s fragmented home appliances market into a competitive market remains to be seen. Policymakers could launch a rationalization program to enhance the capabilities of domestic manufacturers and prepare them for competition with foreign brands, including in export markets. Recent appraisals of industrial policy and its applicability of today’s economic challenges note the potential value of “entry control” measures that ensure only qualified firms are allowed to operate in strategic sectors. The Majles Research Center report notes that the “absence of effective industrial policies in the home appliance industry has led to a large number of issued licenses, many of which result in firms operating as assemblers with minimal localization.” That such measures have not been adopted indicates the limits of state capacity in Iran.
In their studies of the economic resilience of sanctioned economies like Iran and Russia, Western policymakers mistakenly see resilience as an outcome of policies enacted by centralized states that boast significant control over the economy. The Iranian economy has not been felled by sanctions. But its resilience, which is largely centered on the manufacturing sector, has been generated by firm-level adaptations, rather than state-led directives. In Iran, economic output has been sustained by opportunistic firms that took advantage of the conditions created by the sanctions and the kneejerk protectionist policies those sanctions elicited. But these firm-level adaptations have largely reached their limits in Iran’s sanctioned economy, and Iranian policymakers have been thus far unable to put forward a responsive industrial policy. The consequences of these developments for future sanctions negotiations should not be overlooked—a crucial segment of Iran’s business lobby has become the unexpected beneficiary of global economic warfare.
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