As the largest producer of vehicles in the region, Tehran sees itself as the motorcity of the Middle East. It aims to privatise its carmaking industry to generate new investment and cement ties with international vehicle manufacturers.

The most recent figures – from 2007 – show that vehicle manufacturing accounted for 4 per cent of Iran’s industrial exports and was among its fastest-growing industries. The question now is how ready and able the industry is to embrace change.

Amid the flight of private capital following the revolution, the Islamic republic nationalised and protected domestic car production. Since the late 1980s, however, it has actively sought foreign partners to form joint ventures.

With US economic sanctions excluding the Big Three carmakers, Iran has forged successful ties with nearly 30 foreign carmakers, including French, Korean, German, Italian and Japanese companies. In 2004, it launched Renault Pars Company, a three-way venture between Renault, Iran Khodro and local rival Saipa.

For the first time in Iran, the foreign partner held the dominant 51 per cent stake in a venture. Renault plans to export Iranian-built Renault L90 Tondar saloon cars to China, Russia, Latin America and North Africa. Nevertheless, the government has pressed Renault to source a greater proportion of L90 parts from Iranian suppliers.

In July 2006, Iran amended its constitution to allow privatisation of all major industries, excluding oil and gas.

In 2009, the government sacked Iran Khodro’s long-time chief executive officer (CEO) Manouchehr Manteqi, who reportedly opposed a planned merger of Iran Khodro and Saipa.

Iran is already a major car manufacturing nation. In 2008, the International Organisation of Motor Vehicle Manufacturers ranked it 16th in the top vehicle-producing nations. With 1.05 million vehicles, Iran outperformed Italy, the Czech Republic and Poland. And state-backed Industrial Development and Renovation Organisation (IDRO) wants Iran to increase production to 1.13 million units by 2012.

Iranian carmakers are under pressure to become competitive and invest in automated production procedures and global quality benchmarks.

Although Iran’s growing middle-class generates healthy domestic demand, Iran needs to boost vehicle exports.

In 2006, it exported just 15,000 units, most to neighbouring Syria, Saudi Arabia and Kuwait.

While IDRO is targeting exports of 60,000 units by 2013, vehicle exports from Iran halved last year to 23,692 units, and are unlikely to recover before 2015. The global economic downturn has weakened demand for cars. Global sales peaked at 54.9 million in 2007, falling to 52.9 million in 2008 and 51.9 million last year. Iran Khodro is therefore unlikely to hit its export target of 55,000 units this year.

But the company is moving ahead with overseas production plants in Belarus and Azerbaijan for assembling Samand kits.

With global carmakers fighting for share in a dwindling market, only the most efficient and productive will survive.

Despite rising sales, the past decade has seen Iran Khodro struggle with debt. The new CEO Najmeddin announced losses of $940m for the 2008-09 financial year. In July, the government unveiled a $1bn rescue package that requires Iran Khodro to divest from non-core businesses, selling shares in interests that include Parsian Bank.

Now, with the Privatisation Organisation planning to sell off 160 government entities by June, Tehran’s stock exchange is poised to float the state’s shares in Iran Khodro and Saipa. But analysts say the government is rushing through privatisation ahead of anticipated tougher international sanctions.

Will the privatisation of Iran Khodro prove a success? Iran’s car industry remains heavily protected, with just six foreign carmakers licensed to import. Privatisation will expose Iranian carmakers to genuine competition, and not all will succeed.

Furthermore, the protests over Ahmedinejad’s disputed re-election have created a new flight of Iranian capital.

Even without a global recession, Iran is a volatile prospect for investment. And even though Iran Khodro has started to restructure, hasty privatisation seems risky at a time of deepening economic and political uncertainty.