Iran aims to defy sanctions through domestic production

With an economy struggling through some of the most punishing economic sanctions in history, Iran is looking inward to meet its basic needs while attempting to change the consumption habits of a society accustomed to enjoying a range of foreign products.

Iranian officials call it "the resistance economy," reflecting their defiance of Western attempts to halt the country's uranium enrichment program. Efforts to wean Iran from imports and to produce more goods domestically, however, have proved challenging.

While Iran's non-oil exports have strengthened steadily in recent years, its total imports have risen more dramatically. Since Mahmoud Ahmadinejad became Iran's president in 2005, total imports have increased from $39.1 billion to $57.5 billion, according to statistics published by Tehran's Chamber of Commerce.

To reverse that upward trend, the Islamic republic has implemented a policy of reducing what has been deemed unnecessary consumption.

The plan lays out a hierarchy of imports, starting with essential goods, including medicines that Iran does not produce, and ending with luxury items that authorities believe could be produced at home.

But any effort to increase domestic production faces serious head winds.

An immediate issue for local producers is that sanctions have made accessing raw materials impossible or prohibitively expensive, forcing the closure of hundreds of factories and increasing Iran's already high unemployment rate.

"Unfortunately, this year the obstacles in production have increased," Seyed Hamid Hosseini, a manufacturer and member of Tehran's Chamber of Commerce, recently told reporters. He cited currency fluctuations, the difficulty of obtaining loans and increased labor costs as particular challenges.

Even before this year, domestic producers had been struggling with foreign competition. As a result of the Iranian currency's relative strength in recent years and a lifting of high import tariffs on luxury goods by the Ahmadinejad administration, many more Iranians have had access to foreign goods, especially appliances and electronics from East Asia. Domestic production and sales of locally made goods began to suffer.

With the currency, the rial, losing approximately 80 percent of its value in the past year, conditions would seem ripe for Iranian producers to recapture market share. But first Iranians will have to regain confidence in the domestic brands they have long shunned as inferior to imports.

At the Hyperstar, a Western style mega-market in the west of Tehran, many of the challenges facing Iranian producers are in plain view, as are some of the signs of hope.

In the electronics and home appliances sections, sales of LG and Sony flat-screen televisions come with attractive service plans and free home installations. Local brands, such as Pars, go mostly ignored.

Across the shop, though, one of the few potential bright spots for Iran's struggling economy is on full display.

Hyperstar's fresh produce section rivals the quality and selection of any Whole Foods or local farmers market. On the placard for each item is the price per kilogram alongside a flag representing its country of origin. All but a handful of the fruits and vegetables are marked by the green, white and red of the Iranian flag.

"If we exported our pomegranates to Europe, they'd sell them for five euros a piece," says a middle-aged woman doing her weekly shopping.

Iranians are proud of their nation's reputation for fresh produce. The country is the world's ninth-largest fruit producer and is tops in the Middle East, with exports worth nearly $3 billion annually.

But export opportunities have been badly damaged by sanctions. Iranian pistachios, long Iran's top non-energy export, dominated the U.S. market for years. In 2010, however, pistachios were included in a ban on luxury imports from Iran.

In the cosmetics aisle at the Hyperstar, Iranian and foreign brands occupy equal shelf space. The key difference between local and foreign-made products is price: A bottle of Dove shampoo, for example, costs roughly five times a bottle of the local brand, Parjak.

Facing rapid inflation, Iranians have been moving back to the local brands. Maryam, a 29-year-old teacher, said she and a group of her friends had all recently abandoned imports in favor of Iranian-made shampoo. "We feel that it's made for our hair and these dry conditions," said Maryam, who like others interviewed for this story declined to give her last name. "We were embarrassed that we were paying so much more for nothing, really."

But Iranians are not ready to trust all domestic products, even if they are cheaper. Locally made toothpaste, for instance, has had trouble catching on.

"Everyone is ready to pay 50,000 rials" — or $1.50 — "for a tube of Sensodyne. But no one will even consider paying a quarter of that for the local brand," said Reza, a shop owner.

Kevan Harris, a Princeton University sociologist who conducts research on Iran's economy and travels regularly to the country, said the choice to buy imports often comes down to status. "Iranians associate foreign — especially European and American — products with higher quality as well as higher status," he said. "People want to be seen consuming imports over domestic goods."

Automobile production was one industry in which Iran had staked an important share of the regional market, producing more cars than any other country in the Middle East. But production is down more than 40 percent this year, despite the fact that prices for foreign-made vehicles have climbed much faster than those for the national automaker, Iran Khodro, or for locally made Peugeot and Kia models.

Officials here are hoping that an appeal to nationalism will help made-in-Iran products recover lost ground.

"If the quality is high, I would definitely buy Iranian products," said Farnaz, a 53-year-old mother of three who has two grown children living at home, "because it helps our country's economy and provides more job opportunities for our children."