The much-ballyhooed Ukrainian-Korean marriage has hit the skids. The pompous wedding between the idle Ukrainian bride AvtoZAZ and the fearless Korean bridegroom Daewoo in March 1998 advertised promises of $1.3 billion in investment and the revival of Ukraine’s comatose car-making industry.
The plans were grandiose – by this year, the venture was projected to be cranking out 80,000 upgraded AvtoZAZ Tavrias and 150,000 Daewoo cars per year. In 1998, the joint venture’s first year, the plan called for producing and selling a total of 72,000 cars.
But of the 24,000 cars actually produced by the JV last year, only about 10,000 were sold – despite extensive tax holidays. The European Union has angrily denounced those tax privileges from day one and has said it could take the case to international arbitration.
There may be no need to bother. Daewoo-AvtoZAZ has suspended production, and its Ukrainian and Korean partners have begun to publicly accuse each other of bad faith. The Ukrainian side blames Daewoo for not meeting its investment commitments and for resisting further price cuts. The Koreans accuse AvtoZAZ of trying to run the JV by itself and the Ukrainian government of not enforcing restrictions on the import of used cars. Meanwhile, some parliament deputies have threatened to revoke the JV’s tax privileges.
In a recent interview, Jung-Ho Choi, president of Daewoo Ukraine, gave his company’s side of the story. By his request, questions were provided to him by fax in advance of the interview.
Q: Daewoo-AvtoZAZ’s business plan for 1998 called for selling 40,000 Tavrias and 32,000 Daewoos. In fact, the company sold only 5,000 Tavrias and 5,000 Daewoos. How could reality deviate so far from expectations?
A: The business plan for 1998 was based on the following two premises: a stable economy and effective implementation of the law restricting the import of used cars. But those two assumptions both collapsed like avalanches in the Alps, at the same time.
Considering that, we think the results were not so bad. Anyhow, we are convinced that the business plan should be revised based on the actual existing business environment.
Q: When the Daewoo-AvtoZAZ JV was set up, Ukraine was widely criticized for giving Daewoo exclusive privileges. The privileges were said to be so good, they even spoiled Ukraine’s relations with the European Union.
A: The benefits that the joint venture receives from tax privileges are barely enough to cover the extra burden that the joint venture is required to shoulder of providing jobs for 20,000 workers and maintaining old plants that were owned by AvtoZAZ. Also, the benefits are used to meet the costs incurred in the process of semi-knocked-down production [producing in-country from imported kits]. Those costs are an additional burden to the JV that importers of finished units do not have to bear at all.
Any company that can invest $150 million into the charter fund of a joint venture can enjoy the same [tax-privileged] status. The question is whether there is any other company willing to run the risk.
Q: Daewoo has been accused of using the JV to assemble its own cars rather than as a base to boost Ukraine’s car-making industry.
A: First of all, we invested about $20 million in Tavria production but only $1 million on production of Daewoo models in 1998. So it doesn’t make any sense to say that Daewoo used the JV to assemble only our own models.
To assemble the Korean cars, we don’t need 20,000 employees, we don’t need to renovate the assembly line, and we don’t need to modernize the Tavria. Don’t you think we spent too much for the assembly of 13,000 Daewoo models out of which only 5,000 were sold? Daewoo came here with the sincere intention to work together and cooperate.
Q: How will the revised business plan affect Daewoo’s investment commit-ments in Ukraine?
A: The new business plan will cover everything. How many cars the JV can sell, how many cars the JV should produce and so on. So we think we had better return to this subject as soon as we have the new business plan.
Mr. [Oleh] Kovalenko [head of the AvtoZAZ office in Kyiv] said that nobody [on the Ukrainian side] agreed to a new business plan. But [Industry] Minister [Vasyl] Hureyev and Mr. [Oleksandr] Sotnikov [AvtoZAZ-Daewoo chairman of the board] had agreed it was necessary in their letters dated respectively Oct. 6 and Nov. 18.
Q: Why is Daewoo’s joint venture in Uzbekistan doing so much better than your project in Ukraine?
A: In Uzbekistan there are no conflicts within the management and the Uzbek government supports Daewoo constantly and continuously.
Q: Will Daewoo and AvtoZAZ be able to work together after this dispute?
A: The JV’s management has reached a state of deadlock. Both sides cannot execute any decision. That’s why Daewoo proposed to change the composition of the JV’s managing board on both the Ukrainian and Korean sides.
Q: A member of the Reforms and Order party has said that parliament may cancel the JV’s privileges if Daewoo reconsiders its investment plan. Would Daewoo quit the venture if that happened?
A: We don’t want to make any comment on any Ukrainian political faction’s moves because Daewoo is only involved in the management of the JV, not in the political affairs of Ukraine. However, there is an article in the JV’s founding agreement relevant to this question. It says that the agreement can be terminated by Daewoo if any law is enacted or any regulation is adopted by any government authority that, in the reasonable opinion of Daewoo, makes the performance of the agreement impossible, unreasonably expensive or unreasonably difficult for Daewoo, or changes any of the privileges, benefits, rights and obligations of the parties [to the joint venture].
Q: Ukrainian media reported that anonymous leaflets were recently distributed at the JV’s plant promising secure jobs to workers who supported the Korean side of the venture in the dispute. Can you explain?
A: Those were not anonymous leaflets but a personal letter from one Korean worker who is not in a position to spell out anything related to the JV or Daewoo, officially or unofficially, to his Ukrainian colleagues. Therefore, we don’t consider it worthy of comment.
