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