Identifier
Created
Classification
Origin
09TASHKENT2098
2009-11-30 11:40:00
UNCLASSIFIED//FOR OFFICIAL USE ONLY
Embassy Tashkent
Cable title:  

UZBEKISTAN: AUTOMOTIVE POWERHOUSE OF CENTRAL ASIA

Tags:  ECON ETRD EIND EINV ELTN BEXP UZ 
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VZCZCXRO2656
RR RUEHAST RUEHBI RUEHCI RUEHDBU RUEHLH RUEHLN RUEHPW RUEHSK RUEHVK
RUEHYG
DE RUEHNT #2098/01 3341141
ZNR UUUUU ZZH
R 301140Z NOV 09
FM AMEMBASSY TASHKENT
TO RUEHC/SECSTATE WASHDC 1574
INFO ALL SOUTH AND CENTRAL ASIA COLLECTIVE
CIS COLLECTIVE
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC
UNCLAS SECTION 01 OF 04 TASHKENT 002098 

SENSITIVE
SIPDIS
DEPARTMENT FOR SCA/CEN
COMMERCE FOR DANICA STARKS

E.O. 12958: N/A
TAGS: ECON ETRD EIND EINV ELTN BEXP UZ
SUBJECT: UZBEKISTAN: AUTOMOTIVE POWERHOUSE OF CENTRAL ASIA

UNCLAS SECTION 01 OF 04 TASHKENT 002098

SENSITIVE
SIPDIS
DEPARTMENT FOR SCA/CEN
COMMERCE FOR DANICA STARKS

E.O. 12958: N/A
TAGS: ECON ETRD EIND EINV ELTN BEXP UZ
SUBJECT: UZBEKISTAN: AUTOMOTIVE POWERHOUSE OF CENTRAL ASIA


1. (SBU) SUMMARY. 2009 has proved to be one of the most difficult
in the history of the U.S. auto industry, but in Uzbekistan
business is booming as consumers rush to buy new vehicles and
traffic has become noticeably heavier. GM-Uzbekistan announced a
$124.5 million USD project to produce the new Chevrolet M-300 in
addition to its current line, and GM is moving forward with a
Powertrain engine and casting plant outside Tashkent. JVs with
Isuzu and MAN Nutzfahrzeuge AG are flourishing in Samarkand.




2. (SBU) The paradox of the Uzbek automotive miracle has a simple
explanation: strong government support combined with strong
domestic demand. The automotive industry is the government's
official showcase illustrating the success of its import
substitution, export-oriented industrialization policy. Although
exports of Uzbek automobiles have dropped by half since the onset
of the world financial crisis, the GOU compensated by allowing
increased domestic sales for hard currency. In the long term,
continuation of the Uzbek automotive miracle will depend on greater
efficiency, greater local value-added, and a new generation of
trained automotive engineers. END SUMMARY



INDUSTRY OVERVIEW

--------------




3. (SBU) Uzbekistan's automotive industry is the largest in Central
Asia. GM-Uzbekistan, a joint venture (JV) with General Motors, has
two manufacturing/assembly plants, one in Asaka (Fergana Valley)
and one in Tashkent, with a combined annual capacity of 250,000
passenger cars. (NOTE: The Asaka plant assembles the Matiz,
Nexia, and Lacetti passenger cars. A smaller plant on the grounds
of the Tashkent Aviation Production Association assembles the
Chevrolet Epica and Captiva.) In a separate venture begun this
year, GM is building an engine and casting plant near Tashkent that
will have an annual capacity of 360,000 engines. Two JVs with
Japanese ISUZU and German MAN Nutzfahrzeuge AG for production of
commercial vehicles are in operation in Samarkand. More than 60

domestic companies and JVs produce more than 800 types of
automobile parts and components. By some estimates the automotive
sector provides 20,000 jobs in the country.




4. (SBU) The following factors have driven the growth of the Uzbek
auto industry:



- Duty-free access to neighboring markets -- in particular Russia
-- under the CIS free trade agreement;



- Stable demand in the domestic market, the largest in the region,
which is protected by high import tariffs that effectively keep
non-CIS auto manufacturers out (NOTE: Russian auto manufacturers
are blocked in a different manner, as will be explained shortly.);



- Strong government support, which includes not only a wide range
of preferences but also financing of a large part of the cost of
foreign investors' doing business in the country (e.g.,
co-financing, soft local loans, guarantees for foreign loans, tax
holidays, and access to foreign exchange);



- Industrial infrastructure inherited from Soviet times and
low-cost labor resources.



IN THE BEGINNING

--------------

TASHKENT 00002098 002 OF 004



5. (SBU) Shortly after declaring independence in 1991, the GOU
chose an import substitution policy and export oriented
industrialization as its route to economic development. The
government identified priority industrial sectors in which most
firms would remain wholly or partly state-owned. A system of
multiple exchange rates -- later abolished but replaced by limits
on access to foreign exchange -- acted as an effective tax on
non-favored sectors. These and other taxes served to divert
resources to favored industries.




6. (SBU) The automotive industry has been a high priority from the
beginning. The industry was born in 1992, when the GOU and the
Korean Daewoo Corporation established a 50/50 JV named Uz-Daewoo
Auto. The government created exclusive, protected conditions in
the domestic market for this JV, exempting it from all taxes for 10
years, guaranteeing all foreign loans, and giving $250 million USD
as government investments and soft loans. The GOU granted similar
preferences to all foreign investors in the automotive sector,
including producers of commercial vehicles, automotive parts, and
auto components.




7. (SBU) Uzbekistan also provided duty-free access to the growing
Russian market as a member of CIS free trade agreement. At the
same time, prohibitively high duties were imposed on imports of new
and used cars from outside the CIS. This protectionist policy
forced most non-CIS brand dealers to suspend operations in the
country, and severe limits on currency conversion have effectively
blocked Russian brands from the market. (NOTE: The Russian Trade
Representative in Tashkent has gone so far as to approach the
American Chamber of Commerce on behalf of Lada dealerships for
advice on how to speed the conversion of soum to hard currency.)
Uz-Daewoo focused its marketing on the export market, and growing
demand in Russia consumed most of the cars produced in Uzbekistan.




8. (SBU) Later, in 1999, Uzbekistan stepped further into the
automotive industry when it formed a JV with the Turkish Koch Group
in Samarkand. Named Sam-Koc Auto, the new JV produced medium
trucks and small busses.



GROWING PAINS

--------------




9. (SBU) In the early 2000s the Uzbek auto industry had to contend
with the bankruptcy of Daewoo in Korea. Daewoo's
post-restructuring management turned its back on Uzbekistan and
told Uz-Daewoo to come up with its own self-rescue plan. The GOU
reacted by nationalizing Uz-Daewoo and by building its relationship
with Daewoo's new owner GM on a purchase contract basis. In other
words, Uzbekistan changed its role from that of investment
recipient to that of a large importer and assembler of car kits and
related parts. Furthermore, the GOU invested an additional $255
million USD of its own money into plant modernization.




10. (SBU) It was clear that the company needed a new foreign
partner to maintain the technical and engineering capabilities at
the needed level. (NOTE: Daewoo had provided most of the senior
technical staff, while local employees had done the more routine
manufacturing tasks.) The company needed technical assistance and
access to updated technologies in light of greater competition and
the external market's increasing technical and safety standards.
Uzbek officials actively courted GM to replace Daewoo as its JV
partner, but at first GM was not interested. GM had its own plants
in Russia, the primary market for Uzbek cars, and did not want to
compete against itself. Only when the GOU began negotiations with
Hyundai did GM agree to become a minority stakeholder in what was
renamed GM-Uzbekistan, in which GM holds 25 percent of the shares
and the GOU holds 75 percent.

TASHKENT 00002098 003 OF 004



11. (SBU) Uzbekistan's venture in small trucks and busses
experienced a similar crisis when the Turkish Koch Group pulled out
in 2006. In this case the GOU turned to the Japanese Isuzu Motors
Company. In 2007 it concluded a technical assistance agreement
with Isuzu, which later became its new JV partner after buying 8
percent of company's shares. The company was re-named Sam-Auto.
In 2009 the government managed to attract yet another foreign
company, German MAN Nutzfahrzeuge AG, to partner with it to produce
busses and trucks at the Sam-Auto factory.



GLOBAL FINANCIAL CRISIS

--------------




12. (SBU) In 2008-09 the Uzbek auto industry faced a new challenge
as exports fell by half due to low external demand brought on by
the global financial crisis. (NOTE: Sales in Russia of the
GM-Uzbekistan Nexia and Matiz fell by 50 and 52 percent,
respectively, in the first ten months of 2009, and sales could fall
still further if Russia takes measures to protect its own auto
industry.) The GOU responded aggressively by increasing financial
support in the form of loans and tax holidays, guaranteeing
payments to external and internal suppliers, providing soft loans
to foreign dealers, and allowing domestic sales of the most popular
models for hard currency only, thereby creating its own domestic
export market.




13. (SBU) The steps taken by the GOU have given positive results.
A dozen new companies including eight JVs for production of auto
parts and components were established this year. Despite
difficulties in other markets, GM announced the beginning of a
$124.5 million USD project to produce the new Chevrolet M-300 city
car model in its GM-Uzbekistan JV, and it is moving forward with
construction of the power-train plant near Tashkent. Eight new
JVs, mainly with Korean manufacturers, were established to produce
parts and components for GM-Uzbekistan.




14. (SBU) Unlike in much of the rest of the world, the global
financial crisis has been a boon for the Uzbek auto consumer. In
early 2008, auto dealerships in Tashkent were empty, but by
mid-2009 they were full not only in Tashkent but in the regions.
New cars, in particular the popular 3-cylinder Matiz that sells for
roughly $7000 USD, are everywhere. Even young people are buying
cars as families pool resources to make the purchase. The black
market for currency conversion that has taken on new life over the
past year was undoubtedly fueled in part by Uzbek consumers
converting soum to dollars to make their automotive dream a
reality. (NOTE: A few less-in-demand models can be purchased for
soum, but such purchases usually require payment of hard currency
"service fee.")



INEFFICIENCY: A HIDDEN PROBLEM FOR THE FUTURE

-------------- -




15. (SBU) Despite its visible successes, the Uzbek auto industry is
plagued by inefficiency, a weakness the GOU chooses to ignore.
Although foreign partners frequently express appreciation for the
GOU's strong support to the automotive sector, a closer look shows
they are more interested in their own profit than committed to
assembling automobile products in Uzbekistan. The volume of direct
foreign investment is negligible in comparison with sales income,
which since 2002 has averaged $500-600 million USD annually. Much
of the technology at the JV plants in Uzbekistan is overvalued and
out of date; even the new GM Powertrain facility will be building
engines that fail to meet the advanced emission standards observed
by the EU, Japan, and some U.S. states. There is little local
value added during the production process, certainly less than 10
percent for engines; even seats are built from kits shipped from
Korea. Uzbek industry is not able to provide many basic materials
and equipment, not to mention engineering and equipment maintenance
services. All of these are imported from abroad, and thus the

TASHKENT 00002098 004 OF 004


GM-Uzbekistan and Sam-Auto factories are little more than assembly
plants. To date there has been little to no foreign investment in
the after-sale services market.




16. (SBU) Inefficiency is also manifest in the Soviet-style
centralized management exercised by government bodies. There is no
competition between local vendors, a fact that would be seen as a
disadvantage in any other country but is looked on as a positive in
Uzbekistan. All prices are regulated by the GOU. Credits and
budget funds are allocated administratively, much as they were in
Soviet times. In addition to being inefficient, this helps to fuel
corruption as unofficial paybacks and "reimbursements" to
government officials are seen as part of the cost of doing
business.




17. (SBU) Finally, the auto industry suffers from a serious
shortage of qualified managers and engineers. The GOU has insisted
that foreign partners bring not only investment but also
educational opportunities. A prime example of this is the new
Tashkent branch of the University of Torino, which was brought to
Uzbekistan under the umbrella of the GM-Uzbekistan JV specifically
to train engineers to work in the automotive sector.



COMMENT

--------------




18. (SBU) The automotive industry is the GOU's official showcase
illustrating the success of its import substitution, export
oriented industrialization policy. Uzbekistan can rightly make
this claim, as cars bearing the "Made in Uzbekistan" label have
come to occupy a solid position for economy cars in Russia and
other export markets. The GOU's direct financial support and use
of administrative mechanisms have to a great degree compensated for
market challenges and internal weaknesses, particularly during the
current global financial crisis. There is every reason to believe
that Uzbekistan will continue in its role as the automotive
powerhouse of Central Asia. It will flourish even more so if it
can remove systemic inefficiencies and evolve a more value-added
manufacturing capability.




19. (SBU) But past experience shows the GOU can be fickle in its
choice of foreign partners. Newmont Mining and Coca-Cola are just
two examples. Recently the GOU failed to provide a large payment
to GM at the scheduled time, and senior GM management has had to
come to Tashkent frequently to keep the relationship on a sound
footing. In the months and years to come, the GM-GOU relationship
will be the barometer by which other U.S. corporations judge
whether they should come to Uzbekistan.
BUTCHER