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