GM-DAT, UZDAEWOO IN JOINT VENTURE TALKS; CHEVROLET

C O N F I D E N T I A L SECTION 01 OF 02 TASHKENT 001662

SIPDIS

SIPDIS

DEPT FOR SCA/CEN

E.O. 12958: DECL: 09/19/2017
TAGS: ECON EINV EIND ELTN RU UZ
SUBJECT: GM-DAT, UZDAEWOO IN JOINT VENTURE TALKS; CHEVROLET
BRAND TO COME TO UZBEKISTAN

REF: A. A) TASHKENT 511

B. B) 06 TASHKENT 1948 (NOT TOL)

Classified By: CLASSIFIED BY ECON OFF B. OLSEN FOR REASONS 1.4 (B, D).


1. (C) Summary: GM-DAT, a Korean-based GM subsidiary, is in
talks on the establishment of a joint venture (JV) with
UzDaewoo. GM-DAT intends to sign the formal contract with
President Karimov in October and then publicly announce the
JV. GM-DAT views the JV as a long-term investment in which
it will lend its technical, design and marketing expertise,
not hard currency, to knitting UzDaewoo into the broader GM
family. The result should be exceptional growth for the
Uzbek auto plant, the introduction of the Chevrolet brand to
the domestic market, and increased GM exports to Russia and
other Commonwealth of Independent States. GM-DAT still must
work out the specific terms of the contract, including tax
breaks and customs issues. End summary.


2. (C) Three GM-DAT representatives, including the Amcit
President and Chief Executive Officer, also a VP of GM in
Detroit, visited Tashkent September 11-14 and met with Charge
and econoff on September 12. They said GM-DAT is now in
serious discussions with the GOU on the terms of a 40-60
GM-UzDaewoo JV. In order to finalize the specifics of the JV
contract by the end of September, numerous GM-DAT teams have
visited Uzbekistan in the past few months. GM-DAT shortly
hopes to publicly announce the JV and the launch of the
Chevrolet brand in Uzbekistan.


3. (SBU) The decision to establish a JV was made in order to
grow the GM brand. GM-DAT considers the JV a long-term
investment; while it is not investing its own funds, it is
contributing qualitatively with its oversight, distribution
and marketing expertise. GM's Europe goal is to knit
Uzbekistan into its marketing and production strategy for the
Commonwealth of Independent States. It already has trained
over 250 Uzbeks in South Korea and has tentative plans to
send Uzbeks to work at a GM plant in St. Petersburg.

What are the Real Changes?
--------------


4. (SBU) Because its technology is increasingly obsolete,
UzDaewoo is seeking GM-DAT's assistance in upgrading its
product line and establishing a long-term supply agreement.
Without foreign assistance, UzDaewoo's production would also
precipitously fall as its export markets, approximately 70
percent of total production, adopt modern environmental
regulations, with which UzDaewoo's current factories and
expertise cannot comply.


5. (SBU) GM-DAT would provide the technical expertise to
retool assembly lines to produce autos compliant with the new
environmental standards Russia is adopting (ref A). GM-DAT
hopes to expand production from 175,000 to 250,000 units/year
by around 2010, half each going to the domestic and foreign
market. The firm is focused on increasing efficiency. No
additional workers will be employed to produce the additional
vehicles; and a few may be RIFED with the automotive plants'
increased efficiency.


6. (SBU) All UzDaewoo showrooms and dealerships will be
co-branded as Daewoo-Chevrolet. Three new vehicles will be
marketed that are partially built in South Korea and finished
in Uzbekistan: the SUV Captiva, the midsize Epica and a
seven-person minivan. Currently nine Uzbek firms supply core
parts to UzDaewoo; the majority of these firms are
Korean-Uzbek JVs. GM-DAT intends to use its expertise to
bring the suppliers' products into compliance with Russian
and European standards in order to continue the supply
relationship once GM-DAT and UzDaewoo begin exporting to
Russia.

President Karimov's Auto-Vision
--------------


7. (C) On a previous visit (ref A),the GM-DAT CEO met with
President Karimov. GM-DAT Amcit said Karimov stressed that
the automobile industry is one of his top priorities (another
is education). He reportedly wants long-term investment and

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increased growth for UzDaewoo and its domestic part
suppliers, including exporting parts to GM globally. The
representatives opined Karimov needs the hard cash the JV
could supply Uzbekistan (and by default, Karimov).


8. (C) Last week, the GM-DAT team met with one of the lead
Uzbek negotiators, Minister of Finance Azimov. They plan to
meet with Karimov closer to the final signing of the
agreement, tentatively scheduled for the first or second week
in October. GM-DAT CEO said he would return to Tashkent for
a signing ceremony with Karimov.

Sticky Points
--------------


9. (C) In light of the economic risks associated with
investment in Uzbekistan, GM-DAT is meticulously working on
the details of its contract. According to the GM-DAT Amcit,
the firm is discussing tax breaks valid for at least 25
years. (Note: Tax breaks for foreign companies are usually
in the form of a Presidential decree. Such decrees are
approved and terminated only by President Karimov. Karimov
abolished Newmont Mining's permanent tax break in early 2006,
resulting in the government assessing Newmont with back taxes
(ref B). End note.) The GM-DAT CEO said he was concerned
about customs regulations and obtuse trade agreements with
neighboring countries, especially with Kazakhstan and Russia.
Uzbek officials have repeatedly assured GM-DAT that its
trade agreements with Russia are very strong and the Russians
will not obstruct exportation.


10. (C) Comment: GM-DAT is the knight in shining armor for
the Uzbek auto industry. It offers everything that UzDaewoo
needs to stay in the game and expand. Plus, GM has a strong
international reputation. GM-DAT's new role as a foreign
investor in Uzbekistan likely will improve Uzbekistan's
reputation, tarnished most recently by Newmont's
expropriation (partially rectified by an out of court
settlement) and Coscom's forced sale. Karimov desperately
needs GM-DAT to resuscitate the auto industry, the heart of
which is in the Ferghana Valley. Also, the timing of this
new JV with a blue ribbon American corporation conveniently
coincides with the start of the presidential election
campaign.
NORLAND