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Ukraine: Analysts Question Daewoo Deal

Kyiv, 23 February 1998 (RFE/RL) -- Ukrainian officials have eagerly proclaimed Daewoo's promises to invest $1.6 billion in a car factory and a construction project. But, Western analysts are questioning whether the over-extended South Korean giant has the money to honor these commitments. And, the deal threatens to jeopardize Ukraine-European Union (EU) relations.

Daewoo has already broken ground on a $283 million office-and-shopping complex in central Kyiv. And it is expected soon to sign a joint-venture deal with Zaporizhya's AvtoZAZ car factory, which will require it to spend another $1.3 billion over the next seven years. But both of these deals were set in motion long before Asia's financial markets collapsed last Autumn, roughly halving the value of both South Korea's currency and its stock market.

Overly diversified South Korean conglomerates like Daewoo were among the crash's prime victims; their credit-and-cash flow drying up and shredding ambitious expansion plans. Yet, Daewoo insists its plans to become Ukraine's largest single foreign investor by a wide margin are still on track. "Of course we will keep our commitments. We have the resources," a Daewoo executive (anonymous) tells RFE/RL Kyiv. "After all, it is not one billion dollars all at once, but over seven years or more." The Daewoo executive did caution that the timing of the AvtoZAZ joint venture has not yet been finalized, even though Ukraine acceded last week to Daewoo's major demand by imposing a $5,000 duty on imports of used cars, and banning such imports altogether if the car is older than five years.

The EU had already formally notified Ukraine that Kyiv's access to EU markets could be restricted if Ukraine does not rescind discriminatory tax benefits granted Daewoo last year. The EU has said it believes the benefits will make it virtually impossible for anyone else to sell cars in Ukraine. An EU-Ukraine trade agreement comes into force next week (Mar 1).

Analysts remain skeptical.

"That is a very, very, big sum of money for them. You have to wonder whether Daewoo has it or not," said Richard J. Pyo, an auto industry analyst in the Seoul office of the investment bank Credit Suisse First Boston.

During the early 1990s, Daewoo executives presided over an ambitious $11 billion expansion plan intended to make the conglomerate one of the world's top five manufacturers by the year 2000. Daewoo set up car-making ventures in places as diverse as Poland, Uzbekistan and the Philippines. Ukraine's Zaporizhya was to have become one of Daewoo's latest, and locals still believe the deal is solid.

AvtoZAZ Assistant General Director for Investment Nikolai Lastovetsky tells RFE/RL, "we expect to announce the signing of the joint venture's preliminary documents at the end of April. ... The first joint-venture cars will be on the market by Summer."

But, analysts say signing the deal may be a lost easier for Daewoo than finding the money.

After ten years of expansion, South Korea's car industry has much too much capacity and dangerously little cash.

"Much of the growth in production capacity came from loans," said Michael L. Small, managing partner at the Planning Edge, a Troy, Michigan automotive consultancy. "The domestic car market is down by 20 percent, competition abroad is stiff, and the Korean companies still have all that money to pay back."

Faced with increased financing costs, too much capacity and smaller profits, can Daewoo afford to set up another factory in Ukraine?

Daewoo's prospective partner in Ukraine is hoping for the best.

AvtoZAZ's Lastovetsky says, "we believe Daewoo has the money - we want to believe they have the money."