Daewoo Crisis Worries Uzbekistan

Monday, 21 February, 2005

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Jennifer Balfour

Uzbekistan's infant car industry, based around a joint venture with the South Korean motor-manufacturer Daewoo, is continuing to operate normally despite the parent company's recent bankruptcy, Seoul diplomats said.

South Korean embassy officials and managers at the company's Uzbek factory insist car production is continuing and plans for the manufacture of a new model - the Matise - will go ahead in August next year.

The company's Uzbek subsidiary - UzDaewoo - employs 3,000 workers in its car factory in the eastern Fergana valley. The plant produces 60,000 cars a year and is Uzbekistan's most prized foreign investment project.

Although Daewoo's creditors agreed to provide $606 million in loans on November 29, the deal rested on South Korean trade unions accepting 3,500 job cuts at the company's domestic plants. The crisis did augur well for Daewoo's far-flung subsidiaries in Uzbekistan and Eastern Europe.

But Kim Heung-Soo, first secretary at the South Korean embassy in Tashkent, said the Uzbek government has stepped in to ensure UzDaewoo's car production business is protected from the problems being encountered by the parent company.

"The production of cars is a priority area in the Uzbek economy," Kim said. "That's why the Uzbek government is itself regulating the activity of the enterprise in order to protect it from risk.."

UzDaewoo - a joint venture set up in 1996 - brought hope to Uzbekistan's flagging economy and propelled the republic into the forefront of car manufacturing in the region. In addition to the Fergana workforce, thousands more have found employment supplying materials and components to the plant.

The Daewoo empire, which had borrowed heavily to diversify and invest, was severely hit by the Asian economic slump. The company was declared insolvent, owing $16 billion, on November 8.

The bankruptcy could jeopardize a take-over by United States car manufacturer General Motors and its Italian partners, Fiat. A sell-off bid to Ford collapsed in September.

Daewoo's arrival in Uzbekistan brought car manufacturing to the republic for the first time.

Uzbeks had grown up with Soviet cars - the famous Ladas, Zhigulis and Volgas. New owners expected their cars to last at least 20 years, patching, welding and sewing them together until they finally fell apart. Foreign cars were an unknown quantity and not to be trusted.

Drivers bowled along in their old relics, bumping up and down on heavy-duty suspensions, and negotiating potholes with steering long slack and haphazard through heavy use and lack of spare parts. Cracked windscreens were par for the course, together with missing window wipers, door handles, and mirrors.

Uzbek President Islam Karimov, tired of seeing his country lurch from one financial crisis to the next, embraced high-investment Daewoo, in the hope of revolutionizing transport at home and enabling his country to become a major exporter to the rest of Central Asia.

Owning a new, shiny Daewoo set you apart and sent out a clear signal of where you stood in the social pecking order. A Daewoo became an essential badge of office for any aspiring "new Uzbek".

UzDaewoo produces three models - the top of the range Nexia, beloved of government ministers, the diminutive Tico, and the Damas, an eight-seater mini-van, which has revolutionized Uzbek public transport.

The traditional three-hour long wait and stampede for government buses has become a thing of the past, as enterprising Damas owners now provide an alternative service ferrying passengers to all points of the Uzbek compass.

But many locals are not impressed with the new-fangled machines. They gleefully exchange horror stories of the latest Daewoo crash, tut knowingly at the cars' inability to cope with Uzbek bends and potholes.

"These cars were never for the likes of us," said a local farmer. "My car is like my own child, I know every bolt, every hinge and part intimately. There's nothing I haven't repaired myself. Our cars last for decades. Word is in the West people replace their cars every two years! What kind of cars are those? We don't want them here. No, I won't miss Daewoo."

But the Fergana plant has produced 200,000 cars since opening. Between 1997-1999, UzDaewoo accounted for 92-93 per cent of the total car sales in Uzbekistan.

One foreign journalist on arriving in the country reportedly said, "This isn't Uzbekistan, it's Daewoostan!"

Despite the red-carpet treatment afforded UzDaewoo, the company has had its problems setting up a successful operation in Uzbekistan, and not all of them stem from the financial crisis plaguing Daewoo itself.

Uzbekistan's draconian exchange regulations and refusal to give full convertibility to its currency made importing parts for the Fergana assembly plant prohibitively expensive. The company has so far only succeeded in making 8 per cent of parts inside Uzbekistan, the remainder need to be imported.

Despite recent moves by the Uzbek government to set-up a special business exchange rate, this still falls short of reflecting real foreign currency values. As a result UzDaewoo effectively sells its cars at a loss inside Uzbekistan.

In 1998 a locally made Nexia cost $4,000, compared to around $5,500 for a Russian made Volga. Today the same car costs $7,000, but the Volga only $4,500-$5,000. Given price is the major decisive factor in which car people buy, Daewoo is now under extreme pressure from its Russian competitors. Hence the decision to switch from the Nexis to the new, smaller Matise next year.

Coupled with the grim news from Seoul, UzDaewoo workers have every reason to worry about their future. So too do the "new Uzbeks" - a Daewoo pull-out from Uzbekistan could have serious repercussions for foreign investment in the republic generally, and with it the economy as a whole.

Jennifer Balfour is a regular IWPR contributor