Ranging from traditional handicrafts to aviation, manufacturing forms the backbone of the country's diversification plans.

Long overshadowed by the dominance of the oil and gas industry, manufacturing is beginning to emerge and assert its place in the economy. The sector encompasses a broad range of activities, from traditional handicrafts such as carpet weaving to heavy manufacturing and metallurgical products. As a result of extensive government support and a carefully weighted system of protective tariffs on some 1,300 goods, local industry has been able to move from simply being an import-replacement mechanism to being a regional exporter of manufactured products.

The manufacturing sector alone grew by 9.8% in 2007 and 6.3% in 2008, according to the last figures available from the Ministry of Economy. Such growth was registered substantially above total GDP growth figures over the same period (8.0% and 2.7%, respectively) indicating the strong emphasis industrial policy is playing in diversifying the economy. Overall, in 2008 the share of manufacturing in GDP increased to 18.5%, higher than any other domestic-oriented sector except for services.

The performance of Iranian industrial products in international markets is another testament to the development of the industrial base. In 2Q-4Q 2009, Iran exported over $12 billion worth of industrial and mineral products. Mineral products worth $3.7 billion made up most of the exported goods. In 2Q 2008-1Q 2009, industrial and mineral exports reached $15 billion, showing a 5% increase by weight, though a more important 25% increase by value. Figures for non-oil exports, mostly comprised of industrial and mining products, were valued at $19.2 billion over 2009, up on the $18.1 billion recorded in 2008. In the first five months of 2010, non-oil exports were valued at $9.7 billion, according to the Ministry of Commerce, indicating another strong year for export performance.

Manufacturing units are classified mainly by the size of the workforce employed. Large-scale industries that employ more than 50 people are mainly located in and around large urban conurbations such as Tehran, Esfahan, Mashhad, and Tabriz. Large-scale industries create 70% of the total value-added of the industrial sector.

According to the ISIPO, a development organization affiliated to the Ministry of Industries and Mines that actively supports SMEs, there are more than 71,000 SME industrial units in Iran, accounting for more than 94% of all registered enterprises as well as 45% of total employment. Industrial units comprise a wide range of activities, including producers of Iran's world-famous handicrafts such as carpet weaving, engraving, glass and ceramics, needlework, and miniatures. The carpet-weaving industry in Iran has maintained its dominant position globally, controlling more than 40% of the hand-made carpet trade internationally, while employing more than 1.5 million people across the country.

One of the main tasks of ISIPO is to plan and develop industrial parks across the various regions of Iran and to promote the creation of industrial clusters among small industrial units. In November 2009, there were 795 industrial townships containing roughly 23,000 industrial units employing some 500,000 people. ISIPO expects that up to 11,000 industrial units will be located in the industrial parks and regions currently under construction. In addition to enabling coordination and interaction between industrial units, industrial parks offer further advantages such as decreased bureaucratic procedures, improved infrastructure provision for telecommunications, energy, road and natural gas, enhanced availability of supplementary services such as banking and insurance, and close interaction with the R&D centers sponsored by ISIPO.

General government policy towards industrial development favors strengthening the ties between universities and R&D centers on the one hand, and industrial units on the other. The mobilization of domestic talent, the shift towards the private sector, an increased emphasis upon quality, and selective foreign investment are among the other policy priorities of the government. Steel production, automotive industries, and agri-food industries are the dominant sectors in Iranian manufacturing today.


Iran is blessed with abundant deposits of iron ore, with ore prices set by the government at levels generally below those found internationally. These two factors together form the steel industry's main competitive advantages that together with subsidized energy prices have allowed the industry to flourish in recent years. The annual production of steel was estimated to stand at 12 million tons per year by the end of 2009, which makes Iran the 19th largest manufacturer in the world and the second largest in the Middle East.

Currently, Mobarakeh, Esfahan, and Khouzestan are the three largest raw steel production units with 4.4 million, 2.6 million and 2.2 million tons per annum in capacity. In 2007, both the Mobarakeh and Khouzestan steel plants were privatized, in a move to further liberalize the market following the removal of price controls over commodities in 2003 after the establishment of the Iranian Mercantile Exchange (IME). Between 2004 and 2007, steel manufacturers benefited from price hikes on the global market, as the price for steel on the IME closely matched that of the prevailing international trend. Full interaction with the global steel market caused some negative effects in 2008, as prices fell in response to the global financial crisis, yet they have managed to stage a recovery in 2010.

The government aims to increase steel production capacity to 29 million tons per annum, which would require a further $2.5 billion in investment. Both public and private companies are taking part in these plans and, according to Iran Investment Monthly, the government hopes that foreign investment will cover at least 3 million tons of the increased production. The longer-term plan is to increase steel production to 42 million tons by the end of the Fifth Five-Year Development Plan (2010-2015) to ensure self-sufficiency and provide steady exports to regional customers.


One of the main success stories of Iranian industrialization is that of the automotive industry. It is currently the most active and largest sector of the economy after the oil and gas industry. In 2009, Iran was the 12th largest automotive manufacturer in the world, producing more vehicles than the UK, Thailand, Turkey, Italy, and Russia. Light vehicle production rose from 372,000 units in 2001 to almost 1.4 million units in 2009, an increase largely attributed to strong domestic demand. Iran is only 69th in the world in terms of motor-vehicle ownership levels, at some 140 cars per 1,000 people, and the country's automobile producers expect that growth in vehicle ownership will continue well into the future. By 2016 demand is estimated to increase to 2.1 million units, after which demand growth will flatten out and reach 2.3 million units by 2021.

The Iranian automotive industry produces in six segments: passenger cars, pick-ups, 4WDs, minibuses, buses, and trucks. In addition to 1.1 million light vehicles (passenger and pick-up), local manufacturers produced 9,000 4WDs, 2,200 minibuses, 4,000 buses, and 24,300 trucks in 2008.

There are 13 public and privately owned automotive manufacturers in the country, though the industry is dominated by two large holdings: IKCO (Iran Khodro Company) and Saipa Group, which together make up 92% of passenger car production and 96% of all automotive total production in 2008. The other important manufacturers in the sector include the Bahman Group, Kerman Motors, Kish Khodro, Run Iran, and Shahab Khodro, which together make up 3% of the country's production.

Iran's automotive manufacturers initially went down the cooperation route, joining up with major European manufacturers such as Peugeot and Renault in the licensed production of models in Iran. However, IKCO has already managed to produce a “national platform" model, the Miniator, while Saipa is looking to do the same. Both companies still continue their fruitful partnership with foreign companies, IKCO mainly with Peugeot and Renault, and Saipa with Citroën and Kia. Javad Najmeddin, the President of IKCO, told TBY that the company had recently begun to work with Suzuki of Japan. The company also has also been cooperating with Mercedes-Benz for the last 30 years, though mainly in the commercial bus and truck segment.

The localization rate for car parts produced in Iran, which in many models has already reached 100%, demonstrates just how strong the industry and its supply chains have become. Organized primarily in two different sectors, original equipment manufacturing (OEM) and after-market parts manufacturing (AMPM), there are more than 1,200 companies producing automotive parts.

In addition to the growing domestic market, Iranian automotive producers aim to increase their international presence through increased exports and production sites abroad (see box). This is very much in line with the industry's aims of becoming a major player in the international automotive industry.


The Iran Aircraft Manufacturing Industrial Company, better known as HESA, has been working with Antonov of Ukraine on the production of a medium-range passenger/cargo aircraft based on the AN-140. The IrAN-140 Faraz, in passenger format, can seat up to 52 and has a range of 2,330 kilometers. Initially assembled at HESA's facilities from kits supplied by the Ukrainian factory, Iran expects to shift to the full local production of spare parts over the coming decade. The IrAN-140 Faraz is initially targeted at the plethora of small regional airlines that are popping up in Iran, while short to medium haul cargo carriers are also looked on as potential clients.

The South Pars natural gas field is also spurring investment in the shipbuilding sector. Iran estimates it will need 500 new ships over the next two decades, including 120 oil tankers, 40 liquefied natural gas (LNG) carriers, and over 300 commercial vessels. The government aims to implement policies to encourage domestic producers to fill this need.

Iran Marine Industries Company (SADRA) is the main shipbuilder in Iran, and it has a good track record in fulfilling international orders for shipbuilding. For Exmar of Belgium the company has been contracted to produce 10 LNG carriers, one of the largest ever shipbuilding contracts signed in the region for a local producer. More recently, SADRA also secured an order from Venezuela to produce four Aframax vessels of 113,000 tons capacity each. M. Etesam, President of SADRA, told TBY that on top of its work producing rigs and other offshore platform equipment, SADRA was looking to make a larger splash in the international shipbuilding industry over the medium term.


The agri-food industry in Iran continues to grow at a fast pace, as increased urbanization and more refined palates up demand. The industry has become a major source of employment, with 18% of the workforce involved in some way in the agri-food production chain. The government provided the industry with extensive support in the past, going hand in hand with the state's desire to break Iran's food import dependence and transform the country into an exporter.

Iran exported $736 million worth of processed foodstuffs in 2007, and estimates for 2010 put the end-of-year total at around $1 billion (or 600,000 tons in weight terms). Candy, confectionery, dairy products, tomato paste, fruit juice and concentrate, mineral water, and pasta are among the main export items. Iran's network of agri-food producers is quite complex, with some estimates putting the number of industrial units at over 10,000. In the short term, a period of consolidation is likely in the sector as smaller players with less developed supply chains are overtaken by larger manufacturers. Behrouz Foroutan, President of Behrouz Food, told TBY that a reduction in the number of facilities in the future should be expected, but the new generation of factories will utilize larger machinery and more technology, and this will help increase productivity.