GM CLOSE TO A DEAL WITH UZBEK AUTOMAKER

UNCLAS SECTION 01 OF 02 TASHKENT 000829 SIPDIS SIPDIS SENSITIVE DEPT FOR SCA/CEN AND EEB E.O. 12958: N/A TAGS: EIND ECON ETRD ELTN EINV KS UZ SUBJECT: GM CLOSE TO A DEAL WITH UZBEK AUTOMAKER REF: TASHKENT 511 Sensitive but unclassified -- please handle accordingly. Contains proprietary information -- NOT for Internet distribution. ¶1. (SBU) Summary: General Motors executives based in South Korea and Hungary visited Uzbekistan for talks with officials and auto industry leaders on a proposed memorandum of understanding. The agreement would help automaker UzDaewoo in the critical task of developing a product line to meet advancing emissions standards in Russia, its primary export market. The executives are approaching the negotiations with a healthy level of caution. They said they are refraining from any financial investment at this point, and will insist that any new-generation vehicles from Uzbekistan be marketed under the Chevrolet brand name and distributed through GM's network. End summary. ¶2. (SBU) Executives from General Motors' (GM) South Korea-based subsidiary, GM-Daewoo, and Hungary-based executives of GM's Central and Eastern European Regional Office visited Tashkent for two days April 19-20 for talks with Uzbek officials and auto industry leaders. The goal of the talks was to negotiate a memorandum of understanding laying out common goals for GM and Uzbek automaker UzDaewoo over the next several years. On April 19, the GM executives briefed DCM and emboffs on the status of the relationship and how they view its prospects. ¶3. (SBU) When GM acquired South Korea's Daewoo Motors in 2000, it made an economic decision not to purchase Daewoo's stake in the UzDaewoo joint venture. The Uzbek automaker has since been wholly owned by the Government of Uzbekistan. UzDaewoo vehicles are assembled from locally produced components and from components supplied by GM-Daewoo and imported from Korea. GM-Daewoo supplies approximately 170,000 units annually for assembly in Uzbekistan. UzDaewoo, in turn, exports over half its production, primarily to Russia, Ukraine, and other former Soviet countries. Its exports to Russia qualify for duty-free status by having at least 50 percent of their content produced locally in Uzbekistan, a fellow CIS country. ¶4. (SBU) The GM-Daewoo executives told emboffs that the proposed memorandum of understanding, which the Uzbeks refer to as an "Agreement on Strategic Cooperation," will, in general terms, set out a series of common goals over the next several years. The executives said that if the negotiations are successful, it is likely that GM-Daewoo's Chief Executive Officer would travel to Tashkent in the near future for a formal signing and probably a meeting with President Karimov. ¶5. (SBU) Most immediately, the Uzbek side wishes to secure GM's assistance in upgrading its current product line to meet Euro III emission standards, which Russia plans to introduce at the beginning of 2008. More important, they emphasized, is the next advance in Russia's environmental regulations, which is expected to take effect in 2010. The executives said that UzDaewoo cannot overcome that hurdle with its existing product line. ¶6. (SBU) The executives noted that GM-Daewoo intends to consider a possible equity investment in UzDaewoo in the longer term; however, they do not envision any financial investment in the near future. Instead, GM-Daewoo will provide technological assistance and product licensing, while the Government of Uzbekistan will provide the necessary financing to retool the UzDaewoo plant. The executives estimated that an investment of $80 million will be required to re-engineer the existing plant to produce the next generation of vehicles meeting Russian emission control regulations. They said that GM plans to license a new sub-compact model, and possibly a small sedan. However, they stressed that they will insist that Uzbekistan market any new-generation vehicles under the Chevrolet brand and sell them through GM's existing distribution network in the former Soviet Union. They also said that GM is following a strict policy of not shipping components to Uzbekistan before receiving payment. ¶7. (SBU) Comment: The auto industry is one of a very few bright lights in the Uzbek economy for international partners like GM. It is a growth industry, as long as it can continue TASHKENT 00000829 002 OF 002 to produce exportable vehicles. If, as Post's industry sources indicate, President Karimov has already given his approval to advance cooperation with GM, then the memorandum of understanding is unlikely to encounter problems in the approval process. Judging from this meeting, GM is approaching the Uzbeks with the appropriate level of caution. Given the precarious economic situation in the Ferghana Valley, where UzDaewoo is one of the major employers, the cost of failing to secure a mutually beneficial agreement with GM might be more than Uzbekistan is willing to bear, especially in the run-up to the expected presidential election in December. PURNELL