GH SUBSIDIARY SIGNS STRATEGIC COOPERATION DEAL

C O N F I D E N T I A L SECTION 01 OF 02 TASHKENT 000978 SIPDIS SIPDIS DEPT FOR SCA/CEN AND EB E.O. 12958: DECL: 05/18/2017 TAGS: EIND ECON ETRD ELTN EINV KS UZ SUBJECT: GH SUBSIDIARY SIGNS STRATEGIC COOPERATION DEAL WITH THE UZBEKS REF: TASHKENT 829 Classified By: CDA Brad Hanson for reasons 1.4 (b) and (d). ¶1. (C) Summary: On May 1, the Chief Executive Officer of General Motors' South Korean subsidiary, GM-DAT, signed a major cooperation agreement with the Government of Uzbekistan. The deal was personally endorsed by President Karimov and heralded in the state-run press, which, however, ignored the company's American connection. The agreement outlines plans to upgrade production at Uzbekistan's state-owned UzDaewoo plant, thereby enabling Central Asia's largest auto manufacturer to remain competitive in a growing export market. At present, GM-DAT will restrict its presence to a series of technical expert teams, but may open a local office later. The agreement is crucial not only to Uzbekistan's auto industry, but also to the depressed economy of the Ferghana Valley, where UzDaewoo is one of the few major employers. End summary. ¶2. (U) On May 1, during a brief visit to Tashkent, Michael Grimaldi, the Chief Executive Officer of General Motors' South Korean subsidiary, GM-Daewoo Auto and Technology (GM-DAT),and also a GM vice-president, met with President Islam Karimov and signed an "agreement on strategic cooperation" with the Government of Uzbekistan. The state-controlled national newspapers published long feature articles highlighting the agreement. Press coverage noted the growing output of Uzbekistan's auto industry and the importance to the country's economy of cooperation with GM-DAT. In keeping with the troubled state of U.S.-Uzbek bilateral relations, however, the press did not mention GM-DAT's American connection. ¶3. (C) GM-DAT and GM executives based in Europe had briefed emboffs on the agreement in advance of Grimaldi's visit (reftel). Following the signing, Grimaldi telephoned Charge with a readout of his meetings with Uzbek officials. He said that the Uzbek side raised the issue of troubled U.S.-Uzbek relations; Grimaldi reportedly told Karimov that he was not a politician, but a businessman looking for business opportunities. Nevertheless, he told Karimov, he would be pleased if cooperation between GM-DAT and Uzbekistan could help improve bilateral political relations. ¶4. (C) Grimaldi said that the agreement provides a framework for cooperation to upgrade production at Uzbekistan's state-owned UzDaewoo production plant in Asaka, near Andijon. (Note: UzDaewoo, Central Asia's largest automaker, already assembles vehicles that incorporate parts supplied by GM-DAT. End note.) It envisions cooperation on starting new vehicle production lines, adding new suppliers of parts, and significantly expanding Uzbekistan's export of vehicles to former Soviet countries, primarily Russia, Ukraine, and Kazakhstan. The agreement provides a six-month deadline for completing studies and finalizing contracts between the two sides. GM-DAT does not plan a permanent presence in Uzbekistan at this time, according to Grimaldi, but instead will continue to send teams of experts to discuss and negotiate with Uzbek counterparts. Later, he said, the company may open a small office in Uzbekistan. Grimaldi told Charge that GM's government relations office in Washington would likely be in contact with the Department to discuss further the company's plans and the agreement. ¶5. (C) Comment: The agreement with GM-DAT could potentially be quite significant. If successful, technical cooperation with GM-DAT promises to help revive UzDaewoo's increasingly obsolescent production line, most importantly in the near term as its chief export market, Russia, introduces new emissions standards in 2008. (Note: Russia is unhappy with Uzbekistan's automotive trade barriers, including import caps and heavy tariffs. Currently, Russia is limited to exporting 5,000 cars/year to Uzbekistan, but Uzbekistan exports over 97,000/year to Russia. End note.) The continued vitality of UzDaewoo is vitally important to the depressed Ferghana Valley, where the automaker is a principal employer and perhaps the only growth industry. The political significance of the deal was also critical: the signing came less than two weeks before the second anniversary of the 2005 Andijon violence; the six month deadline for concrete action falls on November 1, less than two months before the expected December 23 presidential election. TASHKENT 00000978 002 OF 002 ¶6. (C) Comment cont.: The next six months will be a real test of the GOU's desire to modernize and its internal ability to take on a larger role in the international economy. After a few failed attempts with other automakers, most notably Hyundai, UzDaewoo is left with one option. At present, GM and UzDaewoo are competitors in the CIS markets. Based on our dialogue with GM-DAT, the company is working to ensure that its technical assistance to UzDaewoo does not cause GM to lose its share of these markets. In theory, this should not happen if UzDaewoo agrees to export only uncompetitive autos (i.e. not sedans) or, in the longer term, sell Uzbek-built cars under the GM brand name. If UzDaewoo chooses to play a zero sum game and not deal, GM-DAT can always look for business opportunities elsewhere, unlike UzDaewoo. HANSON