Billion-Dollar Backers Drive 'Daewooistan'

Daewoo has pumped almost $1 billion into Uzbekistan over the past four years, helping break the country's reliance on cotton exports. Sander Thoenes reports on a company that has taken huge risks and found itself in the government's favor.

ANDIJAN, Uzbekistan - While an electronic rendering of Beethoven's Für Elise plays in the background, 200 cars a day roll off the conveyor belt at Daewoo's car assembly line in Andijan, an industrial town in the eastern part of Uzbekistan. In the capital of Tashkent, Daewoo workers assemble televisions, video recorders and audio systems. Their colleagues in the desert town of Urgench put together telephone switching stations. In Fergana, they spin cotton.

Some call it Daewooistan. Daewoo has invested and lent close to $1 billion for nine projects in the past four years, making the South Korean conglomerate by far the largest investor in Uzbekistan and a major presence in the former Soviet Union.

On the way, it has gained tax holidays, preferential treatment, favorable protectionism - and considerable grumbles of favoritism from other foreign investors who have been left out of the action.

Daewoo is the largest supplier of telecommunications equipment in Uzbekistan, outbidding competitors with soft loans and investment pledges as the country rushes to fully upgrade its decrepit phone network by the year 2010. It buys a sizable share of the cotton crop, is due to open a fully licensed bank and is considering new assembly lines for trucks and excavators. All in all, Daewoo's total investment in the country is worth more than four times the next largest investment project in Uzbekistan.

Daewoo's investments promise to help Uzbekistan steer away from its traditional reliance on cotton exports. By the year 2000 Daewoo hopes to produce 160,000 sedans, compact cars and minivans a year.

"They're not afraid to take a risk," says Anatoly Kudinov, spokesman for the Uzbek Communications Ministry, which has penned numerous deals with Daewoo for supply and assembly of switching stations. "And they trust the government, our laws, our contracts. The others are, how do I put it politely, cautious. They drag their heels and demand guarantees."

Daewoo has used its own funds for soft loans where other investors rely on demanding multilaterals, such as the European Bank for Reconstruction and Development, for backing. Among foreign firms, Daewoo is unique in its ability to gain the government's go-ahead. Western executives in Tashkent, and those who do not even bother to set up an office, complain of a stifling and corrupt bureaucracy and a leadership overly suspicious of getting cheated. But that bureaucracy hasn't been as much as an obstacle for Daewoo. "Daewoo's strength is that it took a risk. Others waited," says Farkhod Maksudov, director general of Uzbekistan's semi-official Foreign Investment Agency. "To be the first, that counts. Daewoo gets a lot of support from the government."

For Daewoo, it's a risk that has paid off handsomely. "Uzbekistan has good prospects and they are only improving," said Hee Choo Chung, Daewoo's managing director in Uzbekistan. "In the beginning they thought every foreigner was the same, they were suspicious. Now we are gradually being appreciated."

Uzbekistan's appreciation has come in the form of lavish tax holidays and preferential treatment for Daewoo, at the expense of other investors. The car venture has a full tax holiday for five years, buyers are wooed with soft government loans and an exemption on the country's 5 percent road tax. An import tariff on cars of about 50 percent discourages competitors, and on Oct. 1 an excise tax of 40 to 60 percent on imported cars was added to persuade the

last remaining Western car dealers to skip town.

"They want to kill the car market for all except Daewoo. That's unfair," says Hikmet Ozmaden, general manager for Tashkocauto, a dealership of Turkish-made Tofash cars, Daewoo's closest competition.

Competitors in the telecommunications tenders and other projects complain privately that they feel Daewoo has gained so many Brownie points with the government that it wins orders even when its bid is not the best. "I'm sure that if they wanted a gold mine they could have one tomorrow," said one Western consultant in Tashkent, who asked not to be identified.

Olga Rahimjanova, planning director for the Andijan auto venture, said Daewoo has little trouble converting its local revenues back into dollars, while most other investors can convert only a fraction because the government is short on hard currency. The car plant has a Russian order for 7,000 sedans and is exempt from the obligation to sell part of hard currency revenues to the Central Bank.

But the downside of such deals is the price that Daewoo is paying by opting to invest in Uzbekistan - it is far away from pretty much anywhere, and is the world's only landlocked country to be surrounded by landlocked countries. "All our industries here are mainly targeted for export," said Chung. "The transportation sector has to be very seriously reviewed and developed. It's very difficult to export your product to other countries."

But Daewoo has already started to export its cars to Moscow. Earlier this month, Russian car dealer LogoVaz took delivery of its first 800 Uzbek-produced Daewoo Nexia and Tico passenger cars, which it will sell through itsdealership network for $7,500 to $15,400.

Even Daewoo cannot escape some of the pitfalls of Uzbekistan's go-slow approach to market reforms. Strapped for cash, the government took much longer than expected to come up with a promised $100 million, its half of the investment for the $200 million Andijan auto joint venture. Intent on maintaining full control of its economy, it has already issued three decrees this year full of instructions to the venture. Government approval of this year's business plan took four months.

For the Uzbek workers, the Korean work mentality takes getting used to.

After collective calisthenics in the morning, the car factory's 2,600 workers put in 10 hour days, plus occasional Saturdays.

For Daewoo, marketing in the former Soviet Union has brought some surprises as well. Planning director Rahimjanova said Uzbeks prefer their cars white - while the Russian clients will take anything but. Both scorn the cheap compact car in favor of the most deluxe version of the sedan, a car Daewoo had not even planned to produce for fear that it would be unaffordable to the Uzbeks. Says Rahimjanova: "A farmer will come and ask - it does have automatic locks, doesn't it?"

DAEWOO IN UZBEKISTAN

  • Auto assembly plant, Andijan:
    • $200 million joint venture with Uzbekistan government ($100 million provided by each side)
    • Plus $458 million in loans (Of which: $396 lent by Daewoo, $62 million by local investors)
  • Cotton spinning mill, Fergana:
    • $60 million investment (first stage) by Daewoo
  • Telecom switching station assembly, Urgench
    • $6.5 million charter capital
    • $15 million planned investment by Daewoo
  • Electronic parts assembly line, Tashkent
    • $3.5 million
  • Cellular telephone venture, Tashkent
    • $390 million investment pledge
  • Daewoo bank project
    • $20 million founding capital (Of which: 55 percent Daewoo)