The emergence of a bidding war for the Serbian automaker formerly known as Yugo took a lot of people by surprise. Wasn't the company bombed into the Stone Age a decade ago? Far from it, as Mark Bursa discovers

In times of financial hardship, a window of opportunity opens for less ostentatious, more utilitarian brands. Conspicuous consumption is out during a credit crunch - and that's one of the reasons why the no-frills Dacia Logan is doing so well in Western Europe. It wasn't designed to appeal to sophisticated European consumers - but last year the second and third-largest markets for the car were not emerging nations: they were France and Germany.

Volkswagen's experience with Skoda proves conclusively that it's possible to turn around the image of even the worst car brand. The same approach is working for Renault with Romania's Dacia, so why not the other former Communist car brands? Already Renault is looking at helping Russia's AvtoVAZ build exportable Ladas. Poland's FSO has a deal to build Chevrolets for GM, but could make a comeback in its own right.

And then there's Zastava. Urban mythology has us believe that Zastava, maker of the much-derided Yugo range, ceased to exist in the 1990s, its factories blown to rubble by NATO Tornado bombers during the Balkans war. Zastava's other line of business was military weapons, which made it a prime target.

And it's true that Zastava's factories suffered considerable damage during thirty days of intensive bombing in 1999 - not to mention the disruption to its supply chain following the break-up of Yugoslavia. But Zastava refused to die, and the resilient Serbian automaker is staging something of a comeback. This year Zastava forecasts it will produce 18,600 cars, a mixture of old designs and some surprisingly modern new models, thanks to production deals with GM and its old partner, Fiat.

More significantly, Zastava is up for privatisation. This has triggered something of a bidding war for the company, with surprising participants. Volkswagen appears keen, and has had talks with Serbian government officials. But VW is up against China's FAW, looking to build a production foothold in Eastern Europe. And don't rule out Fiat, the company whose technology built Zastava more than half a century ago. Fiat is smarting from losing to Renault in the bidding for AvtoVAZ, and doesn't want another slap in the face from a former partner.

Indeed, Fiat CEO Sergio Marchionne already seems to consider Zastava as part of the family. Last year he gave a far-reaching presentation about the company's global strategy - and tucked away among the list of partner companies was Zastava. And in June 2007, Zastava quietly started production of a new model, the Zastava 10, or more recognisably the second-generation Fiat Punto - not the Grande Punto, but the facelifted version of the car that won European Car of the Year in 1995. In return for renewed cooperation with Zastava, Fiat agreed to write off 72.5% of the EUR43m owed to it by Zastava, which also agreed to pay off the remaining EUR11.5m within a year, raising the money largely through the sale of unused buildings and other assets.

Zastava has the rights to sell the Zastava 10 in Croatia; Bosnia-Herzegovina; Montenegro; Macedonia, Romania, and Bulgaria. "We cannot sell more than 6,000 Zastava 10s per year in Serbia, but our line can produce 800 cars per month. If we get licenses to sell the Zastava 10 outside of the immediate region, we can raise production to 20,000 per year," said a spokesman.

Talking of European Cars of the Year, Zastava has another one-time winner in its range. The Skala 55 is basically a Fiat 128, which won the award way back in 1970, and has been built by Zastava since May 1971. This was a very advanced car in its day, with front-wheel drive. It had been reported extinct in 2001, but Zastava has kept it on life-support, and revived it last year as an entry-level model - it costs less than EUR4,000.

Indeed, all the models that comprised the Yugo range pre-1991 have survived. For obvious reasons, the Yugo name has been discontinued - everything is badged Zastava, and the company even has a new, smart logo. The old Yugo Tempo/45 - based on the Fiat 127 platform - is now called the Koral In, priced around EUR4,300. And the Yugo Florida/Sana, the more modern hatchback styled by Giugiaro and launched in 1987, is now pitched as Zastava's answer to - wait for it - the Logan.

This is not as odd a move as it looks. The car, now badged Florida In, has since last year been available with common-rail Ford-PSA diesel engines, the same as fitted to the Ford Fiesta or Peugeot 207. And its price is competitive with Logan, ranging from EUR5,000 to EUR8,500. The Zastava 10 starts at EUR7,990, and Zastava claims to have sold 9,000 since launch.

In July 2007, Zastava signed a deal with Opel to build the old T3000 Astra Classic II under licence. The contract allows for 30,000 Astras to be assembled between 2008 and 2012. Initial sales started last year with CBU imported Astras from Poland. In the first three months, 1,092 were sold, and 3,300 of these will be imported this year. Production at Kragujevac will start in the third quarter of 2008. The car is the most expensive Zastava dealers can offer - it costs EUR10,800.

These figures suggest that Zastava's production plan for 2008, announced last year, may be exceeded. Zastava said it planned to produce 18,600 cars in 2008; a combined 11,000 of the three older models, Florida In; Koral In, and Skala 55; 6,000 Zastava 10s and 1,500 Opels. Certainly the Kragujevac factory can handle more - its capacity is claimed to be 60,000 cars - not bad, but only a fraction of the 250,000 Yugos churned out in the 1980s peak.

Additional business includes a plan to export EUR6.5m worth of 5-speed manual transmissions to AvtoVAZ, and Zastava claimed another parts export contract worth EUR3.5m would be signed shortly. CKD kits of Florida and Skala are also exported to Egyptian automaker Nasr.

Why would a foreign automaker want Zastava? Because taking on a relatively easy-to-fix plant, with a decent, trained - of unionised - workforce in place, is a lot easier than starting with a Greenfield site. There's also a useable supplier base in the Balkans, and demand for new cars is growing in the region. The Serbian vehicle market is predicted to reach 80,000 units by 2010, a rise of almost 50% over 2005.

And finally, there's the Dacia factor - having a budget brand in the portfolio makes sense, especially if the Chinese are looking to enter the European market's bargain basement.

Money has been spent at Kragujevac since its devastation in 1999, including a modern, robotised full production line installed by Fiat's Comau automation division. Zastava Auto Director Zoran Bogdanovic said the quality of the Puntos produced in Kragujevac was "better than even the Italian original" thanks to the new production equipment. "We've invested EUR4m in the chassis line alone," Bogdanovic added. "A part of it has been purchased from Fiat and renovated, while the main line is totally new and completely robotized. This is the very latest in auto production technology."

For VW, Zastava would add to its low-cost base in Central and Eastern Europe, joining the plant in Bratislava. And then there's the appeal of adding a genuine budget brand to the VW stable - a role that the increasingly upscale Skoda clearly no longer performs in Western Europe.

For Fiat, one suspects it's more personal. Fiat already has a model plan mapped out for Zastava, including the new low-cost model being planned in Brazil, which will replace both Palio and Mille - the Brazilian-market version of the 1982 Fiat Uno which is Fiat's point-of-entry in Latin America. The new car, which will have a target price of €5,000, could revive the Uno badge, according to Fiat insiders - and it could provide a major production boost for Zastava of up to 50,000 units a year. Fiat also wants to build the Doblo Cargo van at Kragujevac, as this would give Zastava a rival to the Dacia Logan van and MCV wagon.

Zastava is clear as to what it requires from an investor - the funds to build an all-new car to replace its ageing trio of Communist relics. Zastava estimates this will cost about €1.2bn. The company is adamant that it has the ability to build the car - but it doesn't have the money. Just in order to keep going - and to secure the 100,000 Serbian jobs that depend on Zastava in suppliers and retailers, Zastava has to sell at least 50,000 cars per year.

Zastava Group CEO Zoran Radojevic wants to see the new owner provide much more than this; the tender requires the buyer to raise Zastava's annual production capacity to between 120,000 and 150,000 cars per year. "We figure that investment must minimally reach €151m over a period of two years, but it is more than likely that the number will reach several times that amount," he said.

Despite the Astra deal, GM has apparently pulled out of talks, and though there has been mention of interest from MagnaSteyr, Hyundai and Tata it looks like the chosen partner will be Italian, German or Chinese. My money would be on Fiat - simply because it has a better understanding of Zastava thanks to a relationship that started in 1954. Of course, a similar sort of relationship didn't help Fiat win a deal with AvtoVAZ, but there's a difference here in that the Italian firm is already working with Zastava on the Zastava 10, and Comau is re-equipping its factories.

Fiat also has a better grasp on low-cost car programmes - VW's motivation appears to be more focused on finding a low-cost production base so it can move more manufacturing away from Germany. And the FAW bid may not be strong enough to convince the Serbs, who have worked hard to rebuild their car company in the past nine years and want to see it flourish in safe hands.

We'll find out soon enough. And it's not just the car firm that's up for grabs - Zastava Kamioni (Zastava trucks, which makes a range of ageing Iveco lorries and vans) and Zastava Specijalni Automobili of Sombor (Zastava commercial vehicles, which builds a pick-up derivative of the Florida) are also to be privatised. The closing date for bids is April 15, and a final decision will be made shortly after that. Let's hope it's a good deal - if any car company deserves a break, it's Zastava.

Mark 'Coolbear' Bursa

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