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Ukraine: Daewoo Car Production Runs Into Trouble

By Vitaly Sych

Kyiv, 18 January 1999 (RFE/RL) -- Rarely has a business story in Ukraine generated as much fuss as the Daewoo-AvtoZAZ joint venture to produce new cars.

Agreed in September 1997 and finalized last March, the deal promised to bring $1.3 billion of much-needed foreign currency into Ukraine, reinvigorate what had once been one of the Soviet Union's most robust car makers, and create thousands of jobs for the ailing Ukrainian economy.

One of the biggest foreign investment deals in Central and Eastern Europe in 1997, the deal remains Ukraine's largest foreign investment pledge by far.

The government hailed the deal as proof Ukraine was finally prepared to nurture foreign investment. But the sweet package of protectionist measures laid out by the Ukrainian government to secure the deal has drawn the wrath of the European Union and the World Trade Organization.

Now, almost a year after the first car rolled off AvtoZAZ's freshly modernized production lines, one result has become clear: not even the most pampered investor is immune to the well-publicized horrors of doing business in Ukraine.

AvtoZAZ Deputy Director Mykola Koval told Reuters early this month the joint venture would suspend production of Daewoo models for at least three months, and would simultaneously suspend upgrades on Tavrias, the staple of the AvtoZAZ fleet. Koval blamed the production stoppage on poor sales. He said that out of the 11,000 Tavrias and 13,000 Korean-designed cars the plant has produced thus far, about 6,000 and 7,000 respectively remain unsold in warehouses.

These numbers raise the question of whether the original deal, which called for AvtoZAZ-Daewoo to produce 80,000 upgraded Tavrias and 150,000 new Daewoo models a year beginning in 1999, was realistic. The 1998 plan called for selling 40,000 Tavrias and 32,000 Daewoos produced at the companies' two factories in Zaporizhya and Illichesk.

Jung Ho Choi, the president of Daewoo Ukraine, admitted the joint venture overestimated its planned 1998 sales figures. But Choi noted the Daewoo plan was contingent on two key conditions that were not met: a stable economy and effective implementation of the government-imposed restrictions on importing used cars into Ukraine.

Choi could have a point. Just two months after the joint company started mass production in June, the financial crisis razed the Ukrainian economy, sending the hryvna into a free-fall and sealing off the market Daewoo has been trying to reach -- the gradually emerging lower-middle class. Choi also said that used-car importers continued to exploit various ways of avoiding the import restrictions. The key import restriction was a ban on imports of cars more than five years old.

He noted that "according to some statistics, imported used cars accounted for 84 percent of the car market in Ukraine between January and August of last year. If it is true, it is natural that the JV's sales should slow down and survival itself might be threatened."

Daewoo's competitors said there is more to the company's woes than the reasons given by Choi. They blame high prices, poor advertising and the overall lack of appeal of Daewoo cars as major reasons for the lack of sales.

The price issue has reportedly been a problem between Daewoo and AvtoZAZ, which have disagreed over the price of Daewoo models. Choi disagreed the cars are overpriced.

Choi noted that despite halts in production, Daewoo does not plan to lay off any of its 20,000 employees, and brushed aside allegations his company is suffering from shaky finances.

The European Union has been complaining about perquisites granted to Daewoo since last September, when the Ukrainian government passed a series of what the EU described as "discriminatory fiscal advantages to the Korean investor."

Those included exemptions from all import duties on inputs used by the joint venture as well as several tax breaks. The growing pains being experienced by Daewoo-AvtoZAZ have not gained the sympathy of the EU, whose efforts in settling the dispute have been fruitless thus far.

In February, the EU issued a press release stating the law granting fiscal advantages to Daewoo made it "virtually impossible for anyone else to sell cars in Ukraine."

Almost a year later, it is clear that, at the very least, the advantages granted to Daewoo have significantly curtailed Ukraine's car-import business -- at least the portion that takes place outside the shadow economy.