Billion-Dollar Backers Drive 'Daewooistan'

ANDIJAN, Uzbekistan -- While an electronic rendering of Beethoven's F--r 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. About 70 percent of the parts should be produced locally at private ventures, often in conjunction with traditional Daewoo suppliers based in Korea. Several such ventures are about to start production. South Korea's Dong-young company has already set up a $2.5 million venture to make interiors for Daewoo cars.


"Daewoo is like a locomotive," says Farkhod Maksudov, director general of Uzbekistan's semi-official Foreign Investment Agency. "It pulls in other investments."


"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.


But 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. Even those who do bid and win a tender find negotiations dragging out for a year or more afterwards.


"They [the Uzbek government] are moving in the right direction, at a very slow pace," said one Western economist in Tashkent. "It's not a question of going slow or fast -- the most important question is consistency of the policy pursued. The Uzbeks have been fairly consistent in policy, but the implementation of that policy often negates the policy itself. The bureaucrats are unable or unwilling to implement the policies."


But that bureaucracy hasn't been as much as an obstacle for Daewoo.


"Daewoo's strength is that it took a risk. Others waited," Maksudov says. "To be the first, that counts. Daewoo gets a lot of support from the government. Daewoo took that psychological factor into account."


For Daewoo, it's a risk that has paid off handsomely. "Uzbekistan has good prospects and they are only improving. If we move in now I'm sure the government will appreciate that," 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. "But I have to admit that Daewoo is a good project for Uzbekistan. It's a great deal. There is a huge demand for new cars. Which car will be in the streets? Daewoo."


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.


Some officials, too, have grown irritated with Daewoo's domineering presence. They were particularly riled when Daewoo announced in August that it would invest $2.5 billion and listed the recipients as a number of telecommunications investments, even though those projects were still up for tender. The announcement smacked of heavy-handed lobbying and the Uzbek government quickly retorted that the report was incorrect.


"Through a tender we choose the partner who is most profitable to us," said Kudinov of the Communications Ministry. "We don't give anyone exclusive rights."


Shortly later his ministry issued Daewoo a license to start a cellular phone service -- indicating that it has yet to turn its back on the Koreans.


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.


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."


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 its dealership network. LogoVaz will price the cars, which Daewoo exports to Russia at reduced CIS import rates, $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.


The government at first took full responsibility for marketing and servicing of the cars but failed to set up proper dealerships or service stations. Daewoo intervened but has only managed to set up a handful of dealerships and servicing stations to service close to 10,000 Daewoo cars already on the road. The squabble over the servicing stations put a dent in Daewoo's cozy relationship with the Uzbek government but there have been no serious repercussions.


For Uzbek workers, the Korean work mentality takes getting used to. After collective calisthenics each 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?"