Iran – A historic opportunity for automotive OEMs An overview of the key success factors for automotive OEMs entering the Iranian market

Munich, March 2016 Your experts at Roland Berger

Philipp Alexander Santiago Grosse Kleimann Brenner Castillo Senior Partner Principal Principal Munich Hamburg Dubai +49 89 9230 8718 +49 40 37631 4318 +971 4446 4080 [email protected] [email protected] [email protected]

Roland Berger_Iran_A historical opportunity_Final.pptx 2 Contents Page

A. Iran – Status quo 5

B. Why enter the Iranian market – 6 opportunities for growth 11

C. How to enter the Iranian market – 9 key success factors 20

D. What to do now – Next steps 31

Roland Berger_Iran_A historical opportunity_Final.pptx 3 Management summary

Iran – Status quo > Iran is the 18th largest economy globally with a positive trade balance and strong focus on oil products and A car manufacturing > IAEA confirmed that Iran met the relevant requirements under the JCPOA and all nuclear sanctions were lifted on January 16, 2016

Why enter the Iranian market – 6 opportunities for growth B > Lifting of major sanctions provides a historical opportunity for foreign automakers to re-enter the attractive Iranian automotive market – 6 opportunities for growth

How to enter the Iranian market – 9 key success factors C > OEMs need to thoroughly understand the national specifics before entering the Iranian market – 9 key success factors identified

What to do now – Next steps > Think: Thoroughly understand the Iranian market and analyze the existing dealership network D > Act: Decide on whether to take a greenfield approach or to partner with a local dealership network and define for each model a CBU vs. SKD/CKD strategy

Source: Roland Berger Roland Berger_Iran_A historical opportunity_Final.pptx 4 A. Iran – Status quo

Roland Berger_Iran_A historical opportunity_Final.pptx 5 As populated as , Iran is the world's oldest country, boasting a sophisticated education system and excellent growth potential

Key facts and figures

Iran is the oldest country in the world today > Iran's history as a nation dates back to 3,200 BC, making it the oldest country in the world today > All of this has been entirely witnessed by Sarv-e-Abarkooh, the world's third oldest tree at over 4,000 years of age

Iran is almost as populated as Germany > Iran ranks 19th in the world in terms of population, only 150,000 inhabitants short of Germany in 18th place (July 2014). Also, Iran's population is relatively young with a median age of 28.3 in 2014 (Germany: 46.1)

Iran has 2nd largest university globally and more female than male students > The Islamic Azad University is the 2nd largest university in the world with 2 m students. Iran also has the best educated population in the & > In 2012, approximately 60% of enrolled university students were female

Iran is one of the "Next-11" countries > Goldman Sachs identified Iran as one of the Next-11 countries offering the best growth potential beyond BRIC nations. It is estimated that growth of the Next-11 countries will outperform Triad and BRIC markets in the coming years

Source: Goldman Sachs; Boston Consulting Group; UN population division; World Bank; CIA World Factbook; Roland Berger Roland Berger_Iran_A historical opportunity_Final.pptx 6 Iran is centrally located between the Caspian Sea and Indian Ocean – Major cities are Tehran, Mashhad and Isfahan

Geographical overview

Ardebil

Tabriz Country size ['000 km²] 1,648.2

Orumieh East North Azarbaijan Khorasan Gilan Golestan Capital Tehran, Tehran province West Azarbaijan Mashad Mazandaran Zanjan Karaj Qazvin 1) 2) Kordestan Tehran Top 10 cities Inhabitants [m] [% ] Tehran Semnan Razavi Khorasan Hamadan Qom Kermanshah Qom Kermanshah Markazi Tehran 8.2 11%

Lorestan Mashhad 2.7 4% Ilam Isfahan Isfahan Yazd Isfahan 1.8 2% Chahar South Khorasan Mahall/ Khuzestan Bakhtiari Karaj 1.6 2% Ahvaz Kohgiluyeh/ Buyer 1.5 2% Ahmad Shiraz Shiraz 1.5 2% Kerman Fars Bushehr Ahvaz 1.1 2% Qom 1.1 1% Hormozgan Sistan and Baluchestan Kermanshah 0.9 1% Orumieh 0.7 1%

1) Based on 2011 census data 2) Share of total population

Source: Statistical Centre of Iran; Roland Berger Roland Berger_Iran_A historical opportunity_Final.pptx 7 Iran is the 18th largest economy globally with a positive trade balance and strong focus on oil products and car manufacturing

Economic overview – Iran in 2014

GDP [nominal USD bn]: 404 Main Petroleum, petrochemicals, GDP per capita [USD]: 5,183 industries: fertilizers, vehicle manu- facture & parts Population [m]: 78.5 Exports (goods and services) [USD bn]: 95.3 Unemployment [%]: 10.31) Export of mineral products 842) World bank GDP PPP based ranking: 18th [% of total exports]: Bloomberg Innovation Index: 47th 1) Most important , USD 22.0 bn2) export partners: 2) Global Competitiveness Index: 66th 2) India, USD 12.0 bn

Current account [USD bn]: 19.1 Imports (goods and services) [USD bn]: 81.0 Current account balance [% of GDP]: 4.8 Import of machinery and manufactured 552) Foreign direct investment [USD bn]: 3.1 goods [% of total imports]: Most important China, USD 11.0 bn2) Currency: Iranian rial import partners: Turkey, USD 9.9 bn2) Exchange rate IRR / EUR (avg.): 34,443.9 Exchange rate IRR / USD (avg.): 25,916.8

1) 2013 2) 2012

Source: International Monetary Fund; Oxford Economics; The Atlas of Economic Complexity; World Bank; World Economic Forum; Bloomberg; RolandRoland Berger Berger_Iran_A historical opportunity_Final.pptx 8 IAEA confirmed that Iran met the relevant requirements under the JCPOA and all nuclear sanctions were lifted on January 16, 2016

Details on sanction status

First sanctions Executive order 13645 – JCPOA3) – imposed by USA authorizes a range of phased sanction relief upon > The history of sanctions sanctions, also for non-US verification that Iran has on Iran dates back to companies that continue to implemented key nuclear 1979 service the Iranian automotive commitments – January > Several rounds of further industry (manufacturing side 16th the IAEA declares that reinforcement – latest in only). Non-US financial Tehran has fulfilled its effect since 2013 institutions are also subject of obligations and the lifting > In July 2015, the 6 this Executive Act of sanctions is announced nations (P5 + 1) signed 2010 2012 June 2014 2015 January the Joint Comprehensive Plan of Action > The plan includes a 1997 2013 November March 2016 1) gradual process of CISADA – Geneva Interim Agreement Preliminary sanction lifting based on expanded sanctions – temporary suspension of Agreement – IAEA-verified implemen- on supply of nuclear program on Iranian provisional agreement 2) tation of agreed nuclear- petroleum products . side triggers suspension of on framework for related measures Further expansion of sanctions in the Iranian permanent suspension existing sanctions on automotive segment. of sanctions imports or exports Automakers subsequently with value >100 USD reactivated their assembly allowed operations in Iran (e.g. Mercedes-Benz & Lexus)

1) Comprehensive Iran Sanctions, Accountability and Divestment Act 2) In 2010, Iran imported about 30% of its refined petroleum 3) Joint Comprehensive Plan of Action

Source: U.S. Department of State; U.S. Department of the Treasury; UANI; O´Melveny & Myers LLP; Roland Berger Roland Berger_Iran_A historical opportunity_Final.pptx 9 Almost all economic and financial sanctions imposed by the EU and USA have been terminated – Certain restrictions still in place

Impact of lifting of nuclear-related sanctions – Selection

All sanctions by the UN and some EU sanctions are terminated or suspended. US has lifted its nuclear-related secondary sanctions, thus allowing other countries to do business with Iran. However, primary sanctions are still in place, prohibiting US companies from conducting commercial transactions with Iran (few exceptions). Other sanctions Sanctions regarding specific industrial sectors have been lifted, e.g. , imposed by the shipping, shipbuilding and transportation sectors, and insurance and reinsurance of Iranian entities European Union, Iranian companies are again allowed to export Iranian oil, gas and petrochemical products as United States and well as gold, precious metals and diamonds, and the delivery of Iranian banknotes and coinage is United Nations due permitted to funding of terrorism (e.g. ban Foreign companies are allowed to invest in and export equipment for Iran's oil, gas and petrochemical sectors​ on missile technology, EU and USA lifted sanctions that impose asset freezes and travel bans on a set of companies conventional arms and individuals (mostly in the financial, energy, shipping and transportation sectors) embargo) are still in Most banking activities, including the opening of new branches of Iranian banks in the EU and place but have no the opening by EU entities of new offices, subsidiaries, joint ventures or bank accounts in effect on the Iran are allowed again – Also transfers of funds between EU entities, including financial and automotive credit institutions, and Iran industry Iran will also regain access to financial messaging services, including SWIFT, on Implementation Day, but banks that remain designated by the EU will remain cut off from those services until Transition Day

Source: Congressional Research Service; Iran Watch; Roland Berger Roland Berger_Iran_A historical opportunity_Final.pptx 10 B. Why enter the Iranian market – 6 opportunities for growth

Roland Berger_Iran_A historical opportunity_Final.pptx 11 Lifting of major sanctions provides a historic opportunity for foreign automakers to (re-)enter the attractive Iranian automotive market

Opportunities for growth in the Iranian market

1 Positive economic 4 Positive development of car outlook sales in all segments Economic outlook reflects positive influence Following the waiving of sanctions, new car of the JCPOA – Solid growth of almost 4.4% sales will grow from 2015 onward with a from 2016 onward CAGR of 18% p.a. until 2020

2 Increasing customer 5 Legislative initiatives to foster base modernization of car parc Iran's baby boom generation born in the Iran's authorities have introduced various 1980s represents an emerging group of initiatives to modernize the Iranian car parc – customers Increasing demand for foreign technology

3 Demand for foreign 6 Iran as an products export hub Iranian customers prefer imported goods Iran is centrally located with good access to because of their perceived better quality Middle Eastern and Asian markets

Source: Roland Berger Roland Berger_Iran_A historical opportunity_Final.pptx 12 1 Positive economic outlook Economic outlook reflects the positive influence of the JCPOA – Solid growth of almost 4.4% from 2016 onward Economic outlook – Overview

Consumer 40 price index > Iran's economy suffered under the sanctions in recent years (2012 & 2013) inflation [%] 30 > Oxford Economics predicts medium-term growth rates of 20 4.0% (2016) and 3.7% (2017) > Iran is an oil-dependent economy, but has gradually reduced 10 its dependency since the 1990s from 80% to 50-60% (2013) of government revenues based on oil exports 0 > As of December 2015, the share of oil in Iran's budget was 26.1% representing a decrease of 13.8% from the same period in the prior year Annual GDP 4 growth [%] > In the wake of the deal on the easing of sanctions, oil 2 exports are expected to double to pre-sanction levels by 0 2017, from currently 1 m BBL per day to 2.5 m BBL per day -2 > Successfully implemented measures brought inflation down from their peak of >30% in 2013 -4 > Furthermore, inflation is expected to decrease slightly and -6 may have downward potential if imports (esp. food) cheapen -8 after the lifting of sanctions 2012 2013 2014 2015e 2016e 2017e

IMF (WEO; Oct 2014) Oxford Economics (Jul 2015) IMF (WEO; Apr 2015)

Source: International Monetary Fund (IMF); Oxford Economics; The World Bank; Roland Berger Roland Berger_Iran_A historical opportunity_Final.pptx 13 2 Increasing customer base Iran's baby boom generation born in the 1980s represents an emerging group of customers today Demographic outlook – Overview

Total population 0.4% > After the revolution in 1979, birth rates rose 1.4% and led to a rapid increase in population with and growth 91 92 92 3.7% 83 86 89 90 growth rates of 3.7% rates 1990- 74 79 66 70 2050 [m] 56 60 > By the end of 1989, the authorities introduced 47 measures to prevent "overpopulation" 33 39 > Future growth rate is expected to be 0.4% > By 2030 Iran will have more inhabitants than 75 80 85 90 95 2000 05 10 15 20e 25e 30e 35e 40e 45e 50e Germany > By 2050, 74 m Iranians will be over 20 years Age 18 16 14 12 10 8 6 4 2 0 0 2 4 6 8 10 12 14 16 18 of age (55 m in 2015) > Iran's age pyramid is thus marked by the baby distribution 100+ 2015 & 2015 90-99 2050e boom generation from the 1980s, with 51% of 2050 [m] 80-89 the total population below 30 years of age 70-79 (2050: 29%) 60-69 > These generations will fuel demand for cars in 50-59 40-49 the future as they recently entered or will be 30-39 entering the workforce in the coming years 20-29 and will reach their peak purchasing power by 51% 10-19 29% approximately 2040 0-9

Source: United Nations – Department of Economic and Social Affairs (July 2015); Roland Berger Roland Berger_Iran_A historical opportunity_Final.pptx 14 3 Demand for foreign products Iranian customers prefer imported goods because of their perceived better quality – Survey shows highest interest in imported cars

Customer attitudes toward foreign companies, goods and services

Which nationality Which countries How good do you What is the main What kind of of company would are you interested in consider the quality reason you are imported products you consider working visiting? of products from interested in would you be for? these countries? imported goods from interested in? abroad? 87 83 85 80

66

49 40 40 37 38 33 29 31

9 9

USA Germany USA Germany France Germany USA Japan Better Latest More Car/ Personal Com- quality design choice motor electro. puting

Note: Survey conducted by On Device Research in August 2015 via mobile internet for a sample of 1,000 Iranians

Source: Roland Berger study "How to do business in Iran – successfully" 2015 Roland Berger_Iran_A historical opportunity_Final.pptx 15 4 Positive development of car sales in all segments Following the waiving of sanctions, new car sales will grow from 2015 onward with a CAGR of 16% p.a. until 2020 in an optimistic scenario

Passenger car sales in Iran 2010-2020 [m units]

> Imposition of sanctions on Iran reversed the growth of the car market in 2011 and Historic Forecast new car sales subsequently dropped to just 690,000 new cars sold in 2013 (-53% compared to 2011) 1.8 > After the Iranian vehicle market was -53% reopened to foreign automakers in 16% p.a. 1.4 1.5 November 2013, positive effects materialized as early as 2014 > The positive outlook with a CAGR of 16% 1.0 0.9 is based on the assumption of a gradual 0.8 0.7 waiving of sanctions – 2015, however, 1.4 was characterized by postponed purchases due to the anticipated lifting of sanctions

2010 2011 2012 2013 2014 2015 2016e 2017e 2018e 2019e 2020e

Base scenario Additional volumes in optimistic scenario

Source: IHS Global Insight; Frost & Sullivan; Roland Berger Roland Berger_Iran_A historical opportunity_Final.pptx 16 4 Positive development of car sales in all segments Premium car sales will outperform the overall market with expected growth of ~66% p.a. between 2015 and 2020

Passenger car sales in Iran by price segment 2010-2020 ['000 units] 2015 Volvo Other > Import tariffs on new cars Lexus 90 BMW (CBUs) have been lowered to Audi Group 66% p.a. 40% in 2013, supporting new Mercedes-Benz Premium car sales going forward car sales > The market collapsed in 50 5 4 4 6 7 7 2011/2012 due to the political situation

Toyota 2015 > The six-month period of eased sanctions starting on January 18, 2014 and later Others extended to November 2014 16% p.a. 1,700 has given a boost to Iran's 1,400 1,500 Hyundai KIA auto sales 900 1,000 > Premium market is expected 700 800 Volume 1,300 car sales to outpace the overall market, highlighting the shift in demand toward premium 2010 2011 2012 2013 2014 2015 2016e 2017e 2018e 2019e 2020e products

Base scenario Additional volumes in optimistic scenario

Source: IHS Global Insight; Roland Berger Roland Berger_Iran_A historical opportunity_Final.pptx 17 5 Legislative initiatives to foster modernization of car parc Iran's authorities have introduced various initiatives to cut emissions and modernize the car parc – Opportunity for foreign OEMs

Details on legislative initiatives

Emission Alternative Scrappage Initiative standards powertrains program

Details > Iran in the past followed EU emission > The government wants to foster the shift from > As of today, around 2.2 million vehicles are standards: petrol to natural-gas-powered vehicles affected by the scrappage program – In March 2005, Euro II standards were > As of 2015, Iran has the second largest fleet introduced to reduce the average fuel adopted for all gasoline and diesel vehicles of CNG powered vehicles globally consumption of the current car parc – Euro III norms followed in March 2008 > 60% of the total number of vehicles sold in > Authorities want to put some 200,000 vehicles – Since March 2012, compliance with Euro the country must run on natural gas or on per year out of the market, eventually to be IV standards is mandatory for all locally dual-fuel – However, this regulation is replaced by newer, more efficient cars produced gasoline and diesel vehicles and currently not enforced as it is not technically > Expected duration of this measure is 10–15 Euro V for import vehicles feasible years – It is expected that from 2016 onward > Focus has recently shifted toward hybrid > Program so far successfully reduced average imported vehicles will have to comply with powertrains (lower import tariffs, fewer age of vehicles in use from 17 years (2005) to Euro VI restrictions, etc.) 10.6 years (2013) – Authorities also reacted to air pollution with the introduction of restricted traffic zones

1) <6 l/100 km, 2 cars; 6-10 l/100 km, 4 cars; >10 l/100 km, 10 cars 2) Restriction is expected to be withdrawn when sanctions are lifted

Source: IHS Global Insight; Roland Berger Roland Berger_Iran_A historical opportunity_Final.pptx 18 6 Iran as an export hub Iran is centrally located with good access to Middle Eastern and Asian markets – Tax breaks to foster export of local goods

Iran as a gateway to other budget markets

> Due to its central geographic location and further positive location factors, Iran could serve as an export hub to other budget markets in the Middle East, CIS, Africa and Latin America

Belarus > Local manufacturers such as

Ukraine are already exporting their cars to countries like Russia, , Turkey, , Georgia , Ukraine, , , Azerbaijan Turkey Bulgaria and Syria Morocco Iraq Iran > Foreign manufacturer PSA has also

Algeria Pakistan announced plans to export 30% of their Libya Egypt locally produced vehicles after re- launching manufacturing operations > Iranian authorities announced a 50% tax Sudan break besides other incentives for foreign investors who build factories in Iran and export more than 30% of their products

Potential export markets

Source: Iran Khodro, PSA; Press research; Roland Berger Roland Berger_Iran_A historical opportunity_Final.pptx 19 C. How to enter the Iranian market – 9 key success factors

Roland Berger_Iran_A historical opportunity_Final.pptx 20 OEMs need to thoroughly understand the national specifics before entering the Iranian market – 9 key success factors identified

Key success factors in the Iranian market

How to import cars How to sell cars 1 Know the complex import and taxation 5 Know your customer requirements regulations

2 Establish a strong relationship with the 6 Know the competitive environment relevant stakeholders

3 Assess, for each model individually, 7 Cover the relevant markets with your whether to produce locally sales & after-sales network

4 Leverage the existing supplier and 8 Provide the best sales & after-sales manufacturing base service in your segment

How to grow in the market 9 Decide on the right market entry strategy: Greenfield vs. existing local partner

Source: Roland Berger Roland Berger_Iran_A historical opportunity_Final.pptx 21 1 Know the complex import and taxation regulations Iran's authorities have introduced various initiatives to cut emissions and modernize the car parc – Opportunity for local production

Import and taxation regulations

Overview of import regulations Import legislation Import costs

Engine > Limitation to 2,500cc for Import tariffs1) 40-75% depending on capacity gas and capacity > No limitation for Standard Check of conformity hybrid/electric inspection1) with vehicle standards > Various charges are applied on the vehicle FOB/CIF Emission > EURO 5 and EURO 6 for Red Crescent1) - – Import duty of 32-75% depending on powertrain type and engine standard new homologation capacity – Standard inspection, Red Crescent and other import and Other govern- Add. charges imposed Fuel con- > Limited 2) governmental charges amount to an additional ~7.5% sumption ment charges by different govern- > Importers also need to prove scrappage of cars in order to get import ment stakeholders allowances: Further > Homologation standards Other import Costs, e.g. for ware- – Number of cars to be scrapped is staggered and depends on fuel legislation costs2) house & transportation consumption of the imported car > Scrapping requirement > Since 2013, the import of cars with engines above 2,500cc has been Scrapping of 1, 4 or 10 cars have to banned – Recently a change to the import duty regulation was old cars be scrapped for each proposed that would allow engines up to 3,000cc, but the proposal is imported car depen- still pending ding on the fuel consumption

1) Based on CIF 2) Based on FOB

Source: IHS Global Insight; Roland Berger Roland Berger_Iran_A historical opportunity_Final.pptx 22 2 Establish a strong relationship with the relevant stakeholders Various ministries, institutions, authorities and communities are a part of the automotive ecosystem in Iran and need to be addressed

Most relevant stakeholders in Iran for automotive players

Role Ministry of > Key authority in Iran for import regulation, vehicle import licenses and homologation of imported vehicles Industry, Mine and > All imported vehicles in Iran must conform to 54 Homologation Standards and are then signed off on by the Ministry of Industry, Mine & Trade, the Department of Environment (DOE), Iran Fuel Conservation Company (IFCO) and Trade (MIMT) National Standard Organization (ISIRI) > Responsible for issuing production licenses for CKD assembly plants

Iranian Ministry of > Supervisory and regulation authority for the National Treasury, the Central Bank and in general the financial markets, including the Securities and Exchange Commission, as well as the banking and insurance sector Economic Affairs > Definition of all economic, financial and taxation policies (Iran) > Administration of Iranian customs including supervision of all activities regarding import, export, transit and collection of import duties

Department of > Responsible for enforcing environmental standards Environment (DOE) > Definition of all emissions regulations

Iranian Standard & > "Iran Standard and Quality Inspection Company (ISQI)" is the official auditor on behalf of the Ministry of Industry, Quality Inspection Mine and Trade > Responsible for ensuring the quality of products and protection of consumer rights (ISQI) > Definition and enforcement of standards required by the industry > Particularly relevant for the regular ISQI ranking1) and other evaluation procedures, e.g. during the homologation

Relevantstakeholders process

Relevance

1) ISQI ranks vehicle importers in terms of customer satisfaction

Source: International Monetary Fund (IMF); Oxford Economics; The World Bank; Roland Berger Roland Berger_Iran_A historical opportunity_Final.pptx 23 3 Assess, for each model individually, whether to produce locally Local CKD assembly results in significantly lower retail prices compared to CBU imports – Lower import duty is the main factor

Market price comparison CBU vs. CKD Exemplary calculation

20 21 32 39 33

100% ~80% 85% Share [%]

~50% ~52%

Import of HEV & BEV highly attractive due to low import duty of 4% and no scrapping requirement

Wholesale FOB cost CIF Import Other import Scrapping Landed Sales & Dealer Retail Additional Savings Retail price & Shipping tariffs related cost cost Distribution margin price CBU cost price CKD

> Wholesale vehicle price accounts for only ~50% of the retail car price in Iran > Main factors in the price increase are import tariffs, scrappage other import related costs > No scrappage requirements and lower import tariffs/cost of CKD production result in total cost savings of ~20% and a retail price difference of ~15% Value [EUR '000] > CKD business case to be validated for each model – Low volume models to remain CBU Note: Minimum local content assumed to achieve lower import tariff; retail price excluding all costs paid by customer (VAT, registration tax, mandatory 3rd party insurance); HEV = hybrid electric vehicle, BEV = battery electric vehicle Source: Roland Berger Roland Berger_Iran_A historical opportunity_Final.pptx 24 4 Leverage the existing supplier and manufacturing base Tehran is the automotive manufacturing hub in Iran, home to the main plants of IKCO and SAIPA and also various smaller producers

Main automotive plants and supplier network in Iran

Ardebil > Iran Khodro and SAIPA are Iran's main Tabriz automotive producers with capacities of Orumieh East Azarbaijan Golestan North more than 800,000 vehicles each – Total Khorasan Gilan West production capacity of 2.0 m units Azarbaijan Mazandaran Babol Mashad Zanjan Karaj estimated Qazvin Kordestan Tehran Tehran Semnan Razavi Khorasan Hamadan Qom > Besides CBU production of local brands Kermanshah Qom Kermanshah or older Peugeot/Renault models, Markazi Kashan typically Chinese and Korean brands are Lorestan Isfahan Ilam Golpaigan manufactured as CKD versions together Isfahan Yazd Chahar South Khorasan Mahall with Iranian partners Khuzestan and Bakhtiari Ahvaz Kohgiluyeh > The vehicle manufacturing industry is and Buyer Ahmad backed by a strong supply network of Shiraz Kerman more than 1,000 active parts Fars Bushehr manufacturers

Sistan and Baluchestan

Hormozgan

City with major production facilities Focus regions of Iran's automotive parts manufacturing industry

Source: Press research; SAIPA; GTAI; IHS Global Insight; Roland Berger Roland Berger_Iran_A historical opportunity_Final.pptx 25 5 Know your customer requirements Customers have clearly defined expectations of a dealer, on the basis of which they make a purchase decision

Key success factors for Iranian customers 1 Network coverage Key success 2 Knowledgeable, professional and friendly staff factors for the Iranian 3 Availability of the full range of technical support in workshops car market 4 Quality & speed of after-sales service 5 Availability of options, parts and accessories for cars 6 Reasonable cost of after-sales service 7 Favorable warranty options 8 Dealership appearance 9 Dealership brand image 10 Provision of other offers – Customer club, memberships, etc.

Source: Customer survey conducted by Roland Berger in Iran in April 2015; Roland Berger Roland Berger_Iran_A historical opportunity_Final.pptx 26 LON-35187-002-01-34.ppt 6 Know the competitive environment So far, only two dealers are official licensed by the OEM, but almost all brands have an officially recognized importer active in Iran

Overview of car importers

Setareh Ati Motors Persia Khodro

Multiple grey market players Irtoya Car Importers Moin Motors Ramak Khodro

Dealers officially Alfa Motors Afra Motors licensed by OEM Officially recognized importers Arta Motor Iran by the Iranian authorities1) Limited activities2) due to import restrictions Grey-market importers 1) Officially recognized by Iranian authorities but, except for Setareh (Mercedes-Benz) and Ati Motors, not by the respective OEM 2) Currently only service center

Source: Roland Berger Roland Berger_Iran_A historical opportunity_Final.pptx 27 7 Cover the relevant markets with your sales & after-sales network The top 10 car markets in Iran account for ~85% of automotive sales volumes – Majority sold through grey-market importers

Top 10 car markets in Iran

> Iranian car customers are concentrated Tabriz in 10 cities, which account for over 85% of automotive sales volumes in Iran Urmie Amol > Officially recognized importers by the Mashad Iranian authorities and dealers that are Karaj officially licensed by the respective OEMs focus on those main markets Tehran > However, grey importers are active all around the country – In 2015, 88% of Isfahan Yazd imported vehicles were imported by grey importers Kerman > Grey market typically offers better prices Shiraz due to lower regulatory charges (e.g. no warranty costs1)) > Since grey market importers can purchase cars through various sources they have a greater choice to offer the customers – Cars are mostly ordered on Top 10 car markets in Iran demand

1) Warranty can be transferred to official dealer for a fixed amount

Source: Roland Berger Roland Berger_Iran_A historical opportunity_Final.pptx 28 8 Provide the best sales & after-sales service in your segment National authorities regularly monitor the quality of the officially recognized importers

ISQI1) – Sales & after-sales customer satisfaction index (CSI) 2015

Responsiveness > Sales transaction > Simplicity of sales transaction Top 5 in sales – 2015 ranking > Personal approach Dealership Brand Attention to > Sales transaction diversity > Conformity of contract and customer > Meet customer expectations in delivered car 1 Atlas Khodro Kia requirements model color options 2 Mazda Yadak Mazda Costs and time > Official time for contract drafting > Proportionality of sales price and management > On-time delivery car 3 Persia Khodro BMW > Delayed final payment Asan Motor Hyundai

4 Car delivery > Ease of access to dealer > Cleanliness > Vehicle accessories delivery > Optional training 5 Setareh Iran Mercedes-Benz > Car in good condition > Document delivery Sales > Defect removal during delivery Timing > Time spent in the reception area > Repair duration and delivery Top 5 in after-sales – 2015 ranking on time Dealership Brand Quality > Quality of repair > Description of repairs and parts

Persia Khodro BMW > Parts availability replacement 1

> Personal approach 2 Atlas Khodro Kia sales - Cost > Cost of repair 3 Arian Motor Mitsubishi 4 Asan Motor Hyundai After Accessibility > Dealer service strategy > Dealer accessibility 5 Mazda Yadak Mazda 1) ISQI: Iranian Standard & Quality Inspection

Source: ISQI; Roland Berger Roland Berger_Iran_A historical opportunity_Final.pptx 29 9 Decide on the right market entry strategy: Greenfield vs. local partner OEMs can leverage a local partner – Greenfield approach more difficult due to existing officially recognized importers

Assessment of market entry strategy: Greenfield vs. local partner

Greenfield Local partner

> Build up a network with a clear strategy in mind > Existing dealer and after-sales infrastructure > Set up tight processes according to OEM standard > Extensive knowledge of import regulations > Leverage know-how from other markets > Typically, close relationships with the key decision makers > Full control over management within the respective authorities > Existing brand image for Iranian customers

> Slower market penetration, due to lack of knowledge of > Processes not according to OEM standard customer requirements, import legislation, etc. > Competence of management unclear > Strong competition from existing dealer networks > Network to be reviewed strategically > Unclear legal situation regarding officially recognized dealers – Potential lawsuits could delay an immediate market entry > Lack of relationship with key decision makers within the respective authorities – May lead to time-consuming homologation, registration, etc.

Source: Roland Berger Roland Berger_Iran_A historical opportunity_Final.pptx 30 D. What to do now – Next steps

Roland Berger_Iran_A historical opportunity_Final.pptx 31 With the lifting of sanctions, automotive OEMs must now quickly take the next steps to successfully (re-)enter the Iranian market

Next steps for automotive OEMs to enter Iran

Roland Berger has the necessary experience, THINK in-depth knowledge and > Thoroughly understand the specifics of the relationships with key Iranian market stakeholders to provide > Analyze the existing dealership network you with further advice on entering the Iranian ACT market > Decide on whether to take a greenfield approach or to partner with a local dealership network > Define for each model a CBU vs. CKD strategy

Source: Roland Berger Roland Berger_Iran_A historical opportunity_Final.pptx 32