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 
 
¶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