***** The New York Times January 5, 2001, Friday, Late Edition - Final SECTION: Section A; Page 3; Column 1; Foreign Desk HEADLINE: The Yugo, Wartime Survivor, Faces Open Market BYLINE: By STEVEN ERLANGER DATELINE: KRAGUJEVAC, Serbia
After surviving the breakup of Yugoslavia, 10 years of international sanctions and two NATO bombings, the Zastava company is still making the cheap, boxy Yugo in six colors, including Hollywood pink and Hawaii yellow. But the new era of democracy and the open market may prove fatal to the oldest industrial enterprise in the Balkans.
The general director of Zastava, Miljko Eric, is putting his hopes on the German connections of Serbia's prime minister-designate, Zoran Djindjic, who paid a visit recently and promised to talk to Volkswagen.
The Yugo and its more upmarket model, the incongruously named Florida Business, will never survive a modern market, conceded Mr. Eric, a thin, lugubrious man. If Zastava has a future, he said, "it's making a global brand," putting together cars for a bigger company like Peugeot or Volkswagen.
Volkswagen has shown little interest before, Mr. Eric said with a sigh. Even moving along the newly renovated assembly line, the Yugo looks old before it has been finished.
"What happens to Zastava matters for Kragujevac," said Vesna Pajevic, who heads the City Social Welfare Department. A city of nearly 200,000 people in the center of Serbia, 90 miles south of Belgrade, Kragujevac has up to 60 percent unemployment and at least 22,000 refugees, most of them from Kosovo.
In 1990, the Zastava group of 47 companies employed 56,000 people. It still has 31,000 on the books, including 11,000 at the car factory. But at least half the 31,000 are on "paid leave," receiving $7 a month and living on the gray economy. They will never work again for Zastava, Mr. Eric conceded, but he is trying to save the jobs of the others.
Since automobile production resumed a year ago, 4,500 people work at the car factory. In 1989, Zastava produced 180,000 vehicles and exported to 70 countries. In 2000, after the bombing and its other travails, Zastava produced 13,000 cars and 700 trucks. In 2001, Zastava plans to make 28,000 cars and 1,400 trucks.
"But how much we can succeed in producing will mostly depend on the new government, the conditions they create and access to foreign capital," Mr. Eric said, waving a copy of his business plan.
What happens to Zastava matters to Serbia. More than 220 companies are tied to Zastava in some way and employ an additional 65,000 workers. That is why the old government of Slobodan Milosevic spent $80 million to help Zastava rebuild after the bombings on April 9 and 12, 1999.
Zastava was founded in 1853 to make cannons. A century later, it began making cars. When it was bombed, the sole weapon that the company produced was high-priced hunting rifles, Mr. Eric and others said.
A quarter of the buildings were destroyed, including the computer center, the forging machinery and the paint shop, as well as the plant that provides heat to the factory and to the city, too. More than 645,000 square feet of glass had to be replaced. Oddly, the building that makes rifles was not hit. And although NATO spokesmen talked of the military value of the plant and whispered of tank-engine repair, nothing was ever proven.
"After the bombing, we were brought back to yet another beginning," said Snezana Andjelkovic, a Zastava manager.
Mr. Milosevic imposed a trusted aide, Milan Beko, as Zastava chairman, and at least some reconstruction money was laundered and went to finance the political parties of Mr. Milosevic; his wife, Mirjana Markovic; and their allies. After Mr. Milosevic resigned on Oct. 6, Mr. Beko quit.
Mr. Eric said that the money the company received from the Milosevic treasury was carefully budgeted and accounted for and that there was no political pressure put on him on how to spend it.
Zastava is still an honored name in Serbia, and if it goes down in the new climate it will be hard for the new democratic government to argue to Serbs about the benefits of change.
In an interview with a magazine, NIN, after he had visited Zastava, Mr. Djindjic said Zastava was part of his plans for economic recovery.
"The story of an economy based on small- and medium-size companies sounds nice, but without several industrial giants there is no competitive economy," Mr. Djindjic said. "There must be five or six strongholds. Zastava is one."
He took it as a personal obligation, he said, to try to bring Volkswagen to Kragujevac to see if it could take a technologically backward East European car and transform it into something new and competitive, as it did with the Czech Skoda.
More likely, Mr. Eric acknowledged, any company that forms a partnership with Zastava will simply make its own cars. In the meantime, "we have to keep the factory working," he said.
"No one buys an empty, cold house," Mr. Eric said. "We have to keep a fire in the kitchen and the oven warm."
Zastava still has a market in this country, where the average monthly salary is $40. A new Yugo can be had for less than $3,000, which will be even more attractive as the new world of legality makes the market in used -- i.e., stolen -- cars more regular and, thus, more expensive.
With international sanctions now lifted, Zastava, with its factory and low wages, can once again make components for other manufacturers. It used to make generators for Fiats and Ladas. And it will try to revive its lagging cooperation with Iveco to make more trucks. Mr. Eric is particularly proud of the new forging shop, rebuilt since the bombing.
"We have to expect that it will be better," he said. "We've had enough of worse. It will be nice if life just can become normal. While we breathe, we hope. Otherwise, we'd be working against ourselves."
An office worker in her 30's was both more blunt and more ashamed. "Humiliation is in our souls at Zastava," she said. "Will anyone bring dignity back to us? We almost don't think about money anymore, but just the chance to live and work with some dignity."
GRAPHIC: Photos: Inspection on the Yugo assembly line, above, in Kragujevac. The Zastava factory, left, after the first of two NATO bombings in April 1999. The government spent $80 million to rebuild the plant, and production resumed a year ago. (Reuters); (Wade Goddard for The New York Times) *****