Surrounded by the two automotive hubs of Iran and Turkey, Azerbaijan's car manufacturing industry is gaining momentum and set to boost the non-oil export potential of the country.

While neighboring Iran strives to regain its position as a regional automotive center, Azerbaijan is looking to benefit from its post-sanctions offensive. The CIS has always been a traditional market for Iranian automobiles, and now major carmakers such as Iran Khodro (IKCO) have drawn up plans to incorporate the land of fire into production bases.

IKCO, the largest car manufacturer in the Middle East, with 600,000 vehicles per annum, announced its intention of opening an assembly plant in Azerbaijan just two weeks after the much-lauded Iranian nuclear deal, on July 2015. The objective is to boost the domestic demand for Iranian cars, in sharp decline due to a rise in import prices as a result of manat devaluation, while exporting 20% of the factory's output.

In April 2016, IKCO signed an MoU with AzEuroCar to launch joint car production in Azerbaijan's Neftchala Industrial Park. Six months later, the two companies decided to put their project into practice and create a JV plant to produce 10,000 vehicles per annum. With the first cars expected to be ready in late-May 2017, the overall cost of the project amounts to USD15 million. As per the agreement, IKCO will provide the equipment and install the production line accounting for 25% of the whole investment. Moreover, talks are underway to export to regional countries such as Georgia or Ukraine.

However, the experience of the Iranian giant automaker in the Azeri market goes back to 2005, when it started selling the Samand, Soren, and Runna brands as complete built up (CBU) units. Over this decade, AzEuroCar purchased 5,000 Iran Khodro-made cars. Moreover, AzSamand, a factory in Shamakhi owned by Evsen Group, was already cooperating with the Iranian manufacturer by assembling Samand and Runna cars.

But IKCO's plans in Azerbaijan are not limited to passenger car production. The leading truck manufacturer, Iran Khodro Diesel, is also looking into the opportunity of launching a factory in Azerbaijan in what could be the first joint project for the production of heavy vehicles between the two countries. The Ganja Automobile Plant specializes in assembling Russian, Belarusian, and Chinese vans and trucks, and therefore could be the final destination of Iran Khodro Diesel's investment.

Another option would be the Nakhchivan Automobile Plant (NAZ), close to the border with the Islamic Republic. In fact, the plant reached an agreement in 2016 with the Chinese car manufacturer Lifan on a full renewal of a range of cars assembled in Azerbaijan. This new stage of cooperation includes assembling three different models of the Asian automaker to meet domestic demand and export to Central Asian countries.
As Azerbaijan is taking bids to develop the non-oil sector in order to diminish the side effects of low oil prices, the intentions of foreign automakers to turn the country into an export hub in Central Asia and the Caucasus is considered to be a step forward in the development of the Azeri industrial sphere. From this perspective, Azerbaijan seeks to create new industrial parks and districts in cities around the country to increase vehicle production, and the government foresees an increase in the manufacture of trucks by 32.6% in 2018.

Consequently, joint production represents a double-edged sword that Azerbaijan is gripping to encourage interior purchases as well as become an export hotspot in the region. On one hand, the government targets 3 million cars in the market by 2025, and with the recent monetary reforms the only way to achieve that is to cut off imports and produce locally. On the other hand, the country aims to increase non-oil exports, and reading the rapid changes in the region appears to be fundamental to identifying potential partners and buyers. In this sense, Azerbaijan has drawn a clear roadmap toward industrial development, and joint automotive production in cooperation with foreign respected carmakers along with the subsequent transfer of knowledge and technology is one of the cornerstones of the change of paradigm in its economy.