Daewoo sinks, but AvtoZAZ must survive
Being threatened with unemployment, South Korean workers would hardly envy almost 9,000 of their Ukrainian colleagues from AvtoZAZ who get paid a mere two-thirds of their wages for forced idleness (latent unemployment to be more exact), a practice rendering the cars made by AvtoZAZ noncompetitive.
The Daewoo Corporation has been declared bankrupt in Seoul. This occurred after the trade unions had rejected a restructuring plan for Daewoo which included workforce reduction. Now, the claims of creditors and the appointment of a new administration is next on Daewoo’s agenda. Apart from President and Daewoo Group founder Kim U Chong, Twelve more heads of sister companies, including among others Daewoo Motors, Daewoo Telecom, Daewoo Heavy Industries, and Daewoo Electronics, have also resigned, explaining their decision by the need to speed up the restructuring of the corporation and the readiness to assume full liability for Daewoo’s collapse. Rumors about Daewoo’s likely bankruptcy have been in the air for awhile. The corporation has had its ups and downs throughout the 33 years of its existence. However, faced with a $73 billion debt burden, which is $21.5 billion in excess of the cost of Daewoo’s own assets, The Large Universe (that is how Daewoo is translated from Korean) began to stagger, with the corporation’s net profits standing at a mere 0.3% of its total revenue for a number of years now. Such low profitability called for high-speed cash flow and made Daewoo extremely vulnerable to any failures to attain revenue growth targets.
That is why one of the main causes of the Daewoo fiasco, according to the experts, was the corporation’s overoptimistic attitude toward transition economy countries and miscalculation of demand growth rates in them, with large investments in Uzbekistan, Poland, India, and Ukraine failing to produce the profits projected. The financial slump in Southeast Asia was the final blow that brought Daewoo to its knees. According to some experts, should Daewoo’s present attempt at restructuring fail, this could trigger more financial problems in the whole region, leading to an even more dramatic world financial slump. It is unlikely that its repercussions would bypass Ukraine whose small car industry has basically been brought into the world orbit.
Naturally, this assumption need not be a cause for a panic, the more so that when meeting with Ukraine’s visiting Verkhovna Rada Speaker Ivan Pliushch, Korea’s Prime Minister Lee Kwan Dong said, answering a Ukrainian journalist’s question on the AvtoZAZ-Daewoo Joint Venture’s prospects, that the government of South Korea “will do its best to secure normal work of Daewoo subsidiaries in the world.” Ivan Pliushch urged “maintaining the existing stable trend” showing the growth of foreign trade between both countries, which presently stands at about $500 million, including $200 million in investment. The Korean Prime Minister also spoke about “the growing volume of foreign trade and investment.”
There is, however, one more question which remains to be vital for Ukraine: why was the preference among other car producers given to Daewoo with all the unprecedented tax breaks that followed? On November 3, Kievskie Vedomosti accused the Reforms and Order Party, its leader, Viktor Pynzenyk, and Reforms and Order Zaporizhzhia oblast branch chairman cum AvtoZAZ director, Oleksandr Sotnikov, of lobbying the AvtoZAZ-Daewoo project. “Those persons, including the representatives of Reforms and Order, who had lobbied the creation of a joint venture with Daewoo had, experts believe, either failed to identify the venture’s sales markets or purposefully misled the country’s top leaders. Moreover, it was common knowledge during the creation of the Ukrainian-Korean car-making giant that Daewoo’s condition was far from stable and there were hints at that time at Daewoo’s likely bankruptcy,” the newspaper article continues.”
Incidentally, Viktor Pynzenyk told The Day, “We did not initiate this bill, and we did not send a single letter to the government on this issue. It was the government’s, not our fraction’s project. We backed it in parliament, for there was no other alternative to it at the time. The Americans had backtracked from the talks by that time. When I was in the government we had more proposals but it’s anybody’s guess why the appropriate agencies turned them down. At that time I was not involved with specific investment projects.”
In his comments to The Day on the future of AvtoZAZ-Daewoo, Verkhovna Rada Deputy Taras Stetskiv who, as a member of Reforms and Order also voted for the influx of Korean capital in Ukraine, said, “We are left with no choice but to sell AvtoZAZ-Daewoo to the Ford Corporation,” specifying later that “If Ford does not buy it, there will be no other buyers.” According to Mr. Stetskiv, the joint project with the Koreans failed “because of Daewoo’s failure to make the required investment,” which in the lawmaker’s opinion was due to Daewoo’s having been dogged by major financial problems for a number of years. The only way to save Ukraine’s car industry would be to sell AvtoZAZ-Daewoo to Ford, Stetskiv argues.
In the meantime, the major mistake of Daewoo’s former supporters in Ukraine was that they should not have put all of their money on one company. At the time, this seriously marred the relations of Ukraine with the EU, which we are still eager to join. On the eve of EU head Romano Prodi visit to Ukraine, the PAP news agency predicted that he would voice his protest over the state’s protectionist policy of giving tax breaks to Ukraine’s car plants bought by Daewoo.
It seems likely that the protectionism saga could repeat itself, as the present government, like all former ones, is ready to lend an ear to those who say that there are no other bidders for the joint venture (although this might not always be disinterested advice) for, as many experts point out, not only Ford but such leading car manufacturers as General Motors, Renault, Scania, and Nissan have announced their plans to vie for AvtoZAZ-Daewoo’s hand.
Interestingly, this time Ukraine’s only car plant could be sold for a song. It is true that AvtoZAZ can hardly match modern car plants just like a Tavriya is no match for a Mercedes on the highway. Still, it should be borne in mind that along with the plant a sizable chunk of Ukraine’s less than saturated car market will also go to the highest bidder. It is a lucrative project, and the bidders should pay full price. By contrast, Mr. Stetskiv believes that Ukraine could sell the plant even for a token price. What is important, he believes, is that “Ford would invest money and technology as well as start production, otherwise Ukraine’s automotive sector has no future.”
Speaking to The Day, Zaporizhzhia Oblast Governor Oleksiy Kucherenko clarified his alternative stand. He thinks AvtoZAZ- Daewoo’s links with Korean Daewoo are not that vital to the venture’s future existence. Recently, the governor continued, AvtoZAZ- Daewoo took steps to reorient its production toward domestic market demands, launching production of special-purpose vehicles and increasing car sales to budget supported organizations. The use of Polish-made car bodies and engines to be manufactured at a plant in Melitopol could help put AvtoZAZ-Daewoo back on its feet, he believes. However, there is no legal basis, Gov. Kucherenko argues, to sell the plant to a new investor since the issue is to be resolved by Daewoo’s liquidators during the bankruptcy procedure. In his opinion, the plant has some price and efforts should be made “to sell it at a maximum profit but not at the expense of our plant which, under its charter, cannot be held accountable for the debts of its founders.” Speaking about the reasons which had prevented the joint venture from entering its projected markets, Kucherenko cited a 26% tax on domestically-made cars as compared to only a 21% tax on imported cars. In addition, due to various tricks by smart importers, no taxes are paid at all on the bulk of vehicles brought in Ukraine while AvtoZAZ- Daewoo’s hands have been tied by its commitments to retain the number of jobs and pay for its forced idleness. Still, the governor believes Ukraine should not resort to protectionist measures and ban imports of foreign vehicles to appease domestic car producers, for this will only cause harm to Ukrainian consumers. The Ukrainian government’s policy to protect the car market in response to Korea’s demands turned out to be a dud because it ignored the interests of other partners, Kucherenko is convinced. At the same time, the governor sees some future for the venture. While on his recent visit to Uzbekistan, which has a similar joint venture, the governor was able to see that the Uzbeks succeeded in entering Russian markets with their relatively cheap Korean cars, while Ukraine did little in this area, “which is clearly a managerial mistake,” he said.
