UZBEK AUTOMAKER HOPING FOR A BAILOUT FROM GM

C O N F I D E N T I A L SECTION 01 OF 02 TASHKENT 000511

SIPDIS

SIPDIS

DEPT FOR SCA/CEN AND EEB

E.O. 12958: DECL: 03/29/2017
TAGS: EIND ECON ETRD ELTN EINV KS UZ
SUBJECT: UZBEK AUTOMAKER HOPING FOR A BAILOUT FROM GM

REF: 06 TASHKENT 1948

Classified By: AMB. JON R. PURNELL, FOR REASONS 1.4 (B, D)


1. (SBU) Summary: UzDaewoo, Central Asia's largest auto
manufacturer, could face a serious sales disruption in
January 2008, when Russia introduces new emission standards.
Exports to Russia account for well over half of UzDaewoo's
total sales. According to optimistic company estimates, the
automaker would need at least two years to upgrade its
product line and facilities to meet the new standards. The
company's newly appointed General Director is reportedly
seeking technical assistance from General Motors to quickly
bring an upgraded product line to market. In the longer
term, UzDaewoo hopes for new investment, training, and
technological renovation. It also hopes to take advantage of
GM's extensive distribution network in Russia and Ukraine.
UzDaewoo already assembles vehicles using parts manufactured
by GM-DAT, a Korea-based GM subsidiary, and GM-DAT
representatives are in Tashkent this week for talks with
UzDaewoo on possible product upgrades and a long-term supply
contract. GM may assist UzDaewoo with these immediate
priorities without committing to any investment in the
company. If, however, GM is interested in deepening its
involvement through direct investment, it will need to
seriously consider the hostile political and operating
environment, particularly toward major U.S. investors in the
past year. End summary.


2. (C) Officials of UzDaewoo, Central Asia's leading auto
manufacturer, have told emboffs that the company may face a
major sales disruption when Russia introduces Euro III
emission standards on January 1, 2008. UzDaewoo's cars do
not meet the new standards, and company representatives
optimistically estimate that upgrading production technology
and certifying new products would take at least two years.
UzDaewoo currently exports to Russia an estimated 65 percent
of the approximately 150,000 cars that it produces annually.
Thus, Russia's planned transition to the new emission
standard could, in theory, eliminate well over half of
UzDaewoo's business overnight. UzDaewoo representatives
admit that the automaker has no solutions to meet this
challenge. The company is also experiencing critical
production problems due to the absence of qualified
maintenance and foreign technological assistance. Among
other issues, the firm's Chief Engineer told emboff,
"Pressurized oxygen facilities have not been maintained for
many years, and only God is saving us from an accident."


3. (SBU) UzDaewoo's recently appointed General Director,
Shuhrat Yusupov, reportedly hopes that cooperation with
General Motors would help him to resolve most of the
company's problems. Yusupov assumed charge at UzDaewoo in
February following the death of the previous director, Kudrat
Parpiev. This week, Yusupov is pursuing negotiations with
GM's South Korea-based subsidiary, GM-DAT, aimed at securing
technical assistance to quickly introduce a new product line
meeting Euro III emission standards, and concluding a
long-term supply contract with GM-DAT to support production
of the new vehicles. In the longer term, UzDaewoo is
interested in attracting direct investment from GM, taking
advantage of the U.S. automaker's extensive distribution
network in Russia and Ukraine, and arranging training for
UzDaewoo workers.


4. (SBU) UzDaewoo already assembles vehicles, principally in
the Ferghana Valley's Andijon Province, using GM-DAT
components imported from South Korea. The plant, originally
an Uzbek-Korean joint venture, is now wholly owned by the
Uzbek government. Because its technology is increasingly
obsolete, UzDaewoo is seeking renewed international
partnerships. UzDaewoo began talks with GM-DAT on expanding
its current relationship after Uzbek officials balked at a
2006 offer from Hyundai Motors (reftel). The Hyundai offer
would have entailed shutting down UzDaewoo's Andijon Province
production facility for 18 months, downsizing the operation,
and laying off most of its workers in order to rehire the
workforce at substantially lower wages. The move would have
been incendiary in the politically volatile region, which is
already suffering from severe unemployment. In October 2006,
President Karimov reportedly approved the plan to expand
cooperation with GM. In the immediate term, UzDaewoo is
seeking only GM's assistance in upgrading its product line
and establishing a long-term supply agreement. While neither
of these priorities requires investment from GM, UzDaewoo has

TASHKENT 00000511 002 OF 002


indicated that they may in the longer term seek a joint
venture agreement with GM-DAT as a partner.


5. (SBU) Shuhrat Yusupov's background suggests that he may
have the wherewithal to draw the necessary international
cooperation to salvage UzDaewoo's situation. He previously
served as the automaker's first General Director in 1994, but
lost his position following disagreements with senior
industry officials. Later, as an advisor to the Ministry of
Finance, he played a key role in rehabilitating SamAuto Bus
Company, Uzbekistan's second largest automotive plant, by
attracting technologies and technical assistance from Isuzu
Motors.


6. (SBU) Comment: An expanded supply relationship between
GM-DAT and UzDaewoo is a realistic short-term option for the
Uzbek automaker, particularly given the potentially
disastrous consequences of not reaching an agreement. If
UzDaewoo is interested in attracting direct investment,
however, it will need to overcome the issue of Uzbekistan's
hostile treatment of major U.S. investors in the past two
years. Uzbekistan's expropriation of Newmont Mining's assets
in 2006, and its heavy-handed legal pressure on cellular
communications provider COSCOM in late 2006 and early 2007,
have sent a chilling signal to all potential investors.

PURNELL