Iran is open for business and the opportunities in the Iranian market are worth exploring.
The Demographics of Iran
Iran has a population of a little over 80 million, (about the size of Germany), a sizable portion of which is young and well educated. After decades of sanctions, there is a great deal of pent-up demand among Iranians for Western products. There is also tremendous demand from Western companies to access the market opportunity that 80,000,000 people represents.
Context is everything when examining an opportunity. We sought out perspective from two Iranian businesspeople, Ahmed Al-Hayderi of Wesley Clover, and Aidin Tavakkol of Limespot, to provide us context in a review of some of the opportunities and challenges available in Iran.
Context is everything, so Aidin provided us perspective on the demographic segments that make up Iran. These segments are key to understanding the relationship between modern and traditional values in the country.
I’m from Tehran, the largest metropolitan in the country, so my take is really only relevant to one segment of the country. The national population is almost evenly divided into three groups; urban population living in the largest urban centers; urban population living in smaller cities; and the population living in rural areas. There is a big disconnect in the statistics describing each of these demographic segments. The population in the major urban centers have modernized culture and standards as well as a thirst for education, internet and new technologies. The population in the rural areas have a more traditional culture with less of an appetite for modernization. – Aidin Tavakkol
Aidin sourced some statistics for us that accentuate his point. Nationwide, Iran’s internet penetration is 49% while Tehran’s is 77%. The United Nations Education Index for Iran as a whole is 0.683, whereas for Tehran by itself the index is 0.804. By comparison, Canada’s nationwide education index is 0.850.
There are two key takeaways here. Iran has a highly divergent economy that parallels the urban-rural divide seen in many developing nations, and there is still support for the more traditionalist world view. The struggle between traditionalism and modernism as symbolized by the Islamic Revolutionary Guard Corps (IRGC) and the current reformist government respectively continues to shape Iran and will determine how “open” Iran becomes. To understand the Iranian business opportunities, one must consider the political situation and recognize that as with any closed society, there are always significant external issues that affect the economy in diverse ways.
Iran has a very sophisticated government. The rules of engagement for businesses aren’t necessarily visible at first, you don’t know them unless you live there. – Aidin Tavakkol
Iran is a Land of Software Developers
It may surprise many readers, but Iran has a vibrant software environment. As Aidin pointed out, this has been developed primarily out of necessity.
Iran has been under sanctions of one sort or another for as long as I have been alive. We have never had access to software outside Iran so there’s a lot of homegrown software. Chargoon is an example of this. ERP software wasn’t available in Iran and we filled this void. -Aidin Tavakkol
It is not only necessity that built Iran’s software environment; Iran’s higher education system and the incentives to attend higher education also played a big role. For example, Iran has one of the highest percentages of women with higher education in the world. Aidin gave us his take on why this is.
When you finish [high school], men can do their military service or postpone it by going to university, women can get married or go to university. Unsurprisingly, most choose university. There are exceptions for sure, depending on financial status and other factors. For example many people choose to leave the country or start working right away. But these are the dominant options for the majority of people. -Aidin Tavakkol
Because this strong homegrown software industry exists, Western software companies should not expect Iranian companies to immediately go on a buying spree for their products and services. While Iran is rapidly upgrading its technology infrastructure, both in terms of hardware and software, the homegrown software industry has extensive experience serving Iran’s specific needs, and they do it fairly cheaply as labour costs in Iran are still low relative to their neighbours. Iran has Digikala instead of Amazon, Aparat instead of YouTube, Takhfifan instead of Groupon and SnappCab instead of Uber. The average after-tax salary in Tehran is between $500 and $600 per month US, so well-educated people are available at very low costs by international standards. As the Iranian market opens up with the sanctions being lifted and the economy becomes more integrated with the world, we do expect that wages will naturally increase. This increase is likely to be closely managed to prevent unwanted economic turmoil.
Iran is a Land of Auto Manufacturers
Iran’s largest industry after the petrochemical industry is indeed auto manufacturing, making up approximately 10% of GDP. This industry’s desperate need of foreign investment makes it an unexpected opportunity for foreign investment. Iran manufactures cars for a thriving local market, as well as for export to Syria, Lebanon, Iraq, and former Soviet bloc countries. The number of employers in this sector and the overall economic contribution of the sector is so important that the government placed a 75% tariff on imports to protect it.
Because of its strong automotive industry it is no surprise that prior to the imposition of sanctions, Iran’s strongest trading partner was Germany. At one point, Germany was the largest destination for Iranian exports and Iran was the second largest destination for German exports. China and other Asian countries have since filled the void, although Germany is eager to rekindle the relationship.
Doing Business in Iran
In the context of a re-opening of the Iranian markets to foreign companies, we considered how culturally unique Iran is and how each nation’s culture shapes business and personal interactions. We asked Aidin what people need to know to do business in Iran and he summed it up as follows:
Iran has a high context culture. There are hundreds of layers of unsaid things going on in every conversation. Take meetings for example. In Iran they are 1.5 hours minimum and the majority of the time goes to chit-chatting and eating cookies and tea, not necessarily the subject of the meeting. The time is needed to develop the personal relationships you need, building and maintaining trust in the other person. This isn’t easy for most North Americans to understand. Without experience with the culture, it would be pretty much impossible for a foreigner to build business relationships there. Foreigners need an Iranian on their side that speaks for them in Iran. -Aidin Tavakkol
The importance of personal relationships cannot be overstated, which is why countries like Germany and France have a leg up in the race to invest in Iran as they have a more recent historical relationship that can be tapped into. Although, as Aidin pointed out, North Americans have their own relationships to draw upon through a multitude of Iranian ex-pats.
The United States had one of the strongest ties with Iran prior to the Islamic Revolution of 1979, the echo of which lives on as the US has the largest Iranian ex-pat community in the world. Also, while the Iranian government has not been fond of the US, most Iranian people do not echo that sentiment. Any product that has Made in the USA on it will get sold there. -Aidin Tavakkol
One other country worth mentioning as a bridge to Iran is the United Arab Emirates (UAE). Dubai has for a long time served as a sort of shadow broker between Iran and the West. For example, Aidin recounted a story of how in 2006 Chargoon a company he co-founded was the largest Enterprise Resource Planning solution provider in Iran. It also was the largest software solution using ASP.NET in Asia, despite the sanctions. The UAE was not affected by the sanctions on Iran, and so Dubai-based / Iranian-related businesses such as Chargoon could operate freely without restriction. In an effort get around the sanctions and become a Microsoft Gold partner, Chargoon set up an office in Dubai. While they ultimately did not receive the ASP.NET certification, Dubai proved to be a valuable channel. As addressed in this Economist article, Iranian companies leveraged the opportunity to do business through Dubai as a means to trade with the world. While in some situations Dubai’s role as a broker will be lost as relationships with Iran become more direct, overall Dubai is expected to benefit from a more open Iran. Western business people looking to do business with Iran would be wise to talk to any contacts they have in Dubai first.
Which Industries to Invest in Iran
Near the end of our conversation with Aidin we asked him what Iranian industries he would invest in.
My first choice would be software for obvious reasons. After software I believe agriculture technology has huge potential. There is a serious lack of industrial agriculture systems in Iran and the government wants to create more food independence for the country. Next I would say water technology. Iran suffers from a water crisis, so there is lots of money being spent on water conservation, purification, etc. Finally, there’s tourism. Iran is a beautiful country with an old civilization and great architecture. Many tourists are thinking about Iran, but the infrastructure to support tourism is acutely lacking. Concepts like AirBnB may have great potential. -Aidin Tavakkol
Ahmed Al-Hayderi of Wesley Clover in Dubai added that the most active western blocks dealing with Iran are the EU Bloc countries, and their trade has grown significantly between 2014 and 2016. In contrast, be it due to proximity, or an uncertain political relationship, North American firms are lagging way behind. Like Tavakkol, Al-Hayderi points to the opportunities in the Telecom sector as an area that deserves a significant attention from Western organizations in the opening of Iran. As Al-Hayderi puts it:
“A significant area of opportunity lies in Telecom Infrastructure and the whole ICT sector, involving both hardware and software. During the sanctions, Iran managed to get some spare parts and modernized equipment to support their existing infrastructure from western countries but the lack of easy access resulted in them looking heavily to the Chinese. The magnitude of the shift was significantly limited due to lack of foreign currency and sanctions. However, due to the difficulty of obtaining new Telecom gear from the West, efforts in support of the necessary modernization and growth in Telecom was curtailed. Notwithstanding the sanctions, European exports to Iran still grew from approximately 4.4B Euros in 2013 to around $5.4Bn in 2014 (+18%) (source; Eurostat), and Iran imported around 4B in electronics in 2013 compared to around 6B in 2014 (Source: ZVEI German Electrical and Electronic Manufacturing Association). However this in no way was sufficient.The business environment in Iran is challenging as some senior staff in key technology areas have emigrated, but many are now returning. The speed of growth will initially be slow but will quickly accelerate. Now is the time for suppliers to begin building bridges and position themselves to play a significant role in the growth that will take place.It is also notable that the UAE is projected to continue playing a key role in the next 3 to 5 years as a gateway to the Iranian market. The opportunities that the required overhaul presents mean that over the next 5 years, the total value of the Iranian opportunity alone exceeds the combined value of all other Middle Eastern states. Finally, it is worth noting that there are significant Iranian assets that were locked up abroad, and these asset owners and other investors are keen to return and invest in the growth and recreating a vibrant economy.”
Iran is a Risk, but Opportunities Always Are
The potential Iran represents as it opens up is massive, particularly in consideration of the potential of a well-educated cohort of young Iranian people.
Despite this potential, businesses should remember these new markets have limits to their openness,and are prone to unstable transitions. While Western companies theoretically have access, cultural barriers, as well as tangible ones such as tariffs, will continue to play a huge role. In addition, the political situation is still evolving.
As any entrepreneur knows, there can be no reward without risk.