WARSAW, Poland -- Ukrainian automaker ZAZ is on the brink of forming an eastern European auto manufacturing power.
ZAZ, its majority owner UkrAvto, and Polish treasury officials have agreed on a timetable for ZAZ to buy Polish automaker FSO, although neither will disclose a date.
Neither ZAZ nor FSO have attracted much notice in western Europe since both former Daewoo Motor assets were shunned by General Motors when GM acquired the bankrupt Korean automaker in 2002. But that could change quickly.
Combined, ZAZ and FSO have the capacity to manufacture 400,000 vehicles annually. As a single entity, ZAZ/FSO also would have several intriguing attributes:
UkrAvto is keeping its options open on future development -- it doesn't want to offend any of the major automakers with which it does business.
"It depends on what is economically appropriate [to develop] production," said Tariel Vasadze, honorary president of UkrAvto and a member of the Ukrainian parliament.
What UkrAvto and ZAZ are missing is a car brand that is both modern and distinctly their own property.
ZAZ might develop its own product or create a design studio, Vasadze said. "But at the moment we are interested in developing production cooperation with General Motors and DaimlerChrysler," he added.
What is UkrAvto?
UkrAvto is a vertically integrated group that includes car manufacturing, car sales and maintenance. It is even looking into establishing a network of fuel stations. UkrAvto had nearly 60 percent of the booming new-car market in the Ukraine in 2004.
It controls the ZAZ factory in Zaporozhye, near Odessa, jointly with the Swiss investment company Hirsch & Cie.
UkrAvto and its ZAZ subsidiary are the prime points of entry for outside automakers into the Ukraine. Beyond manufacturing its own Tavrija-brand vehicles and a modified version of the Daewoo Lanos, UkrAvto assembles kits for Opel, GM Daewoo, DaimlerChrysler's Mercedes brand and AvtoVAZ.
"The company has had significant legislative help that helped push its local market share to 58 percent in 2004 from 41 to 45 percent in 2003," said Ewa Root, an analyst at consultancy Global Insight in London.
In May 2004, new legislation exempted local automobile producers from paying value-added tax for five years if profits are reinvested. The law let ZAZ import machinery and certain components. At the same time, the Ukraine raised customs on imported new cars to as much as 20 percent from a former high of 3 percent and restricted used-car imports.
Eager to learn
Rivals and partners in central Europe see ZAZ as a competitor eager to learn the entire industry.
"The basic thing you have to understand about ZAZ is that they want to do everything," said an executive at Skoda Auto, central Europe's best-selling brand.
UkrAvto and ZAZ have a growing relationship with GM that extends from manufacturing to sales.
"The measurement of success for any relationship is, when the opportunity arises again, do you commit further," said Chris Lacey, GM's executive director for north, central, and eastern Europe who is based in Budapest, Hungary. "At General Motors, we have committed further in our relationship with UkrAvto."
For GM, UkrAvto assembles Opel and GM Daewoo vehicles and distributes vehicles and parts for Opel and Chevrolet. It also distributes parts and Daewoo cars that ZAZ assembles from kits shipped from Korea by GM Daewoo.
GM says ZAZ's best chance of becoming a modern auto manufacturer is through cooperation with a strategic partner.
"Current development of the partnership gives us confidence that GM could become, if required, such a strategic partner for ZAZ in the future," said Lacey. "To be a long-term partner with any manufacturer, ZAZ should secure powertrain manufacturing, improve supplier network and secure a long-term product platform."
Lacey also sees a geographical opportunity.
"Ukraine is one of the major countries in eastern Europe and therefore very important for GM to establish business there," he said.
He is less specific about whether UkrAvto could use FSO to enter either Poland or other markets.
"With regard to any activity for FSO in Poland or to [UkrAvto] having a greater role in the regional strategy, those issues and any options that may be available to GM or GM Daewoo Automotive and Technology have to be discussed," he said. "It is not appropriate to comment."
Even before an acquisition, UkrAvto and FSO already have forged a close working relationship. The Ukrainians send cash advances to FSO and take 80 percent of FSO production.
Without the cash influx, FSO might have shut down in 2004, when Polish parts suppliers demanded cash before delivery. FSO and the Polish government negotiated with British automaker MG Rover in 2003 and 2004, but MG Rover backed out.
The key FSO export to ZAZ remains the first-generation Daewoo Lanos. But the Polish content has changed. Initially, ZAZ imported the Lanos as semi-knockdown kits with minimal Ukrainian value added.
During 2003 and 2004, the Ukrainian content progressively increased, pushed by UkrAvto's plans to move up the value ladder and changing legislation. ZAZ added a 1.3-liter gasoline engine and transmission produced at its AvtoZAZ-Motor subsidiary in Melitopol, Ukraine, and branded the car as a Daewoo Sens.
Plans in Poland
UkrAvto plans to move FSO beyond the current Lanos, including starting FSO licensed production of new Chevrolets by 2007, said UkrAvto spokeswoman Yulya Mandzyuk.
UkrAvto is negotiating with other potential partners to use FSO to supply vehicles to other European Union markets and to former Soviet Union states, she said.
Said Global Insight's Root: "We think it is possible for them to move the new Lanos or even some Chevy production to Poland."
UkrAvto also wants to use FSO's integrated suppliers. These are former Daewoo joint ventures with Korean suppliers that FSO now owns, including Koram ZZM (large plastic components), Dongwon ZS (exhaust systems) and Sungsan-ZEM (lighting).
ZAZ plans to use them to supply its Ukrainian production of existing and future models and for the Ukrainian aftermarket, said Mandzyuk.
UkrAvto is historically a fast follower, taking in models designed elsewhere and manufacturing them for the local market. In the last two years, UkrAvto has pushed upward and to the West.
In 2003, ZAZ started making -- welding, assembling and painting -- Russian VAZ 21093 and VAZ 21099 cars from complete knockdown kits.
Also in 2003, UkrAvto became a partner for GM's German subsidiary Opel, which provided the financing to start semi-knockdown and complete knockdown production of older-generation Opels in 2004.
ZAZ started making the second-generation Lanos (code-named T-150) in December 2004.
UkrAvto also has well-established vertical integration.
In 2002, UkrAvto brokered a deal between ZAZ and DaimlerChrysler to assemble the Mercedes E class and M class in the Ukraine.
UkrAvto owns Avtokapital, D/C's exclusive representative for Mercedes in the Ukraine, as well as several Mercedes dealerships.
Both Poland and the Ukraine offer more raw potential than developed markets.
Their population is slightly greater than France and Spain combined, but only 498,000 cars were sold in the countries last year. The Economist Intelligence Unit expects the two markets to grow to 743,000 units by 2009, up 49 percent.