The war in Kosovo looks certain to end Yugoslavian automaker Zastava's hopes of linking with a top European manufacturer.
Zastava, which makes Yugo cars, has been desperate to reach a partnership agreement with PSA/Peugeot-Citroen SA or Fiat S.p.A. to turn around its ailing fortunes. Talks with PSA/Peugeot-Citroen on a deal to assemble the Peugeot 106 in Serbia had reached an advanced stage but have been frozen by the political situation.
Zastava produced just 14,000 passenger cars last year - down from the 200,000 units in 1990 before the breakup of the former Yugoslavia. The company's auto division still employs 26,000 workers in Kragujevac, which is 60 miles south of Belgrade. Apart from the 1998 launch of a pickup version of the aging Florida hatchback, Zastava has not introduced a new vehicle for 10 years.
PSA sources said a letter of intent was signed with Zastava in December. The proposed deal called for PSA to supply 10,000 to 40,000 knockdown kits a year. Zastava would assemble and sell them in Yugoslavia.
A final agreement was expected to be signed in early 1999, a PSA executive said.
Last summer Zastava President Milan Beko said Zastava planned to make new cars and components under license in Serbia. He calculated that reviving production facilities would require a $650 million investment over five years.
Meanwhile, Zastava had been trying to negotiate repayment of an outstanding debt to Fiat estimated at between $36 million and $84 million. Most Zastava models are based on Fiat designs.
Hyundai had been in talks with Zastava in 1997 but pulled out of partnership discussions because of the Korean economic crisis.