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Strategic sourcing in Iran

Take a country of around 80 million people, with high standards of education, an abundance of natural resources, as well as low energy and labour costs, and surely it would top of a list of sourcing locations. Not quite.

a guide to strategic sourcing in Iran


Iran is still emerging from around 36 years of international isolation and presents a unique set of political and cultural challenges. Buyers will have a lot to learn to make the most of the opportunities offered by the Persian nation and, indeed, other states that are slowly opening up.


In January 2016, Iran “opened a new chapter” in its ties with the world, said President Hassan Rouhani. The International nuclear watchdog, the International Atomic Energy Agency, agreed Iran had complied with limits to its nuclear programme designed to allay fears over the development of atomic weapons. Sanctions imposed by the US, the European Union and the United Nations since 2006 are being lifted and the isolation imposed following the country’s 1979 revolution is beginning to abate.


Financial transactions can now go ahead with Iran, through the Swift clearing system, provided no listed entities or individuals are involved. Nearly $100bn of Iranian assets held abroad have been freed and the country is soon likely to increase oil exports by one million barrels per day.


However, the effects on the procurement function may not be quite so immediate. “Iran has just got out of a cage of international sanctions after 36 years,” says Reza Yeganehshakib, Iran expert at Corr Analytics, a New York-based political risk consultancy.


“There are a lot of raw materials, commodities and products [in the country]. But there is a lot to do in the market.”


For those prepared to work with a developing nation, Iran has numerous advantages over other low-cost sourcing locations , says Yeganehshakib, who is also a doctor of Iranian history and a lecturer at the University of California.


While China, for example, has been a cheap producer largely due to inexpensive labour, Iran has structurally low energy costs, which reduces the cost of producing finished goods.


“In manufacturing, finished goods enjoy a competitive price. Iran has long enjoyed very low production costs in oil and gas; extraction is much cheaper than in Saudi Arabia or Qatar.


That has an impact on domestic energy costs and reduces the cost of producing goods, so manufactured goods can be available at very competitive prices,” Yeganehshakib says.

A world apart

Despite Iran’s strengths in categories ranging from ceramics to domestic appliances, buyers will have to be aware of the cultural and political differences in comparison to sourcing in western or even other eastern economies, he says. Not least of these is the power of the Iranian Revolutionary Guard (IRGC), which has nationalised foreign investments in the recent past and is still subject to sanctions.


Politically powerful revolutionary foundations, known as Bonyads, also control large segments of industries. There is, however, broad political support for exporting, such is the need for foreign currency, says Yeganehshakib.


In the event of contracts going sour, legal leverage is different to other countries, but foreign buyers can appeal first to the Ministry of Trade and Finance, then to the courts, he says. The international courts have also settled disputes with Iranian firms, as was demonstrated by the case between Sharjah’s Crescent Petroleum and National Iranian Oil Company, which was heard in The Hague.


Although he has had a positive experience working in Iran over the past decade, Handicare CPO François Roblin sounds a note of caution over the state of Iranian industries. “Because of the sanctions it can be difficult to get good machinery and high-tech
components, while the country lacks some infrastructure,” he says.


Meanwhile, the threat of future sanctions has not been lifted entirely, as the US decision to impose new limits to trade over a ballistic missile programme demonstrates. “We do not yet have normal relations with Iran. There is a risk of protectionist policies and sanctions, but [that is the case] wherever you go in developing nations,” Roblin notes.


Iran is not the only country to pique the interest of international buyers after a thawing of relations with the international community. After holding free elections in late 2015, Myanmar, formerly Burma, has embarked upon installing a democratically elected government and the US has begun to lift sanctions. Following periods of economic and political instability, Ethiopia and Tanzania are benefiting from similar trends.


Meanwhile, established locations for low-cost sourcing are changing. China is seeing wages grow quickly, while economies in Latin America stagnate and Russia presents continued political risk. As the global economy shifts, procurement professionals should view developments in Iran and elsewhere with interest and be ready to reap the benefits when the time is right.


Nations opening up and their sourcing potential


Tanzania: With cotton production a mainstay of the Tanzanian economy, the country is set to join the global garment industry.


But it is underground resources that buyers are particularly interested in. Tanzania sits on 55 trillion cubic feet of natural gas reserves and is viewed by many operators as an exciting new territory, even at a time of depressed oil prices, according to supplier information firm Achilles.


The company has partnered with BG Tanzania and Statoil Tanzania to create a common supplier prequalification system based in Tanzania, which will be used as the preferred mechanism to identify and select both suppliers and service providers for opportunities emerging in the country.


Country manager for Statoil Tanzania, Øystein Michelsen, says, “Service providers in Tanzania will have an open and transparent platform in which they could access the opportunities emerging from the sector.”


Ethiopia: H&M has also begun sourcing in Ethiopia, following in the footsteps of Primark and Tesco. Since 2013 apparel companies have grown increasingly interested in Ethiopia and other east African countries as potential sourcing destinations, according to analyst firm McKinsey. In 2015, the company surveyed 40 apparel CPOs, representing a combined $70bn purchasing value. “East Africa could indeed become a more important centre for apparel sourcing, but only if stakeholders – buyers, governments and manufacturers – work together to improve business conditions in the region,” the McKinsey report stated.


Myanmar: Myanmar is seeing a gradual thawing of relations with the outside world since the military junta was dissolved in 2011 and open elections were held in November 2015. Clothing retailers Gap and H&M are already sourcing garments from Myanmar. H&M supports a minimum wage policy and, in partnership with the United Nations Children’s Fund, has encouraged customers to help fund education programmes through a gift card scheme.


In a report published in 2014, McKinsey analysts stated: “It remains to be seen how Myanmar will develop. Several other industries are also interested in investing in the country, and Myanmar may decide to focus on industries other than apparel manufacturing.”

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