Yugo Begins Selling Cars in the United States

Date 1985

Introduction of the Yugo into the growing U.S. low-priced automobile market led to the marketing of competitive products by other firms, competition that contributed to the ultimate failure of Yugo.

Locale United States

Key Figures

• Malcolm N. Bricklin (b. 1939), Founder of Yugo of America, Incorporated
• William E. Prior (b. 1946), president of Yugo of America and Global Motors Corporation, 1988 and 1991
• John A. Spiech (b. 1937), president of Yugo of America, 1989-1991
• Marcel J. Kole (b. 1944), acting chief executive officer of Global Motors at the time of its bankruptcy in 1989
• Ira Edelson (b. 1946), chief financial officer of Global Motors and a principal investor in the company

Summary of Event

In 1985, Yugo introduced the lowest-priced new automobile available for sale in the United States, at a price of $3,900. The market for economy cars grew from about 13 percent of all automobile sales in 1985 to slightly under 20 percent in 1988. A large number of firms, including Ford, General Motors, Chrysler, several Japanese and Korean firms, Volkswagen, and Renault, introduced products that competed with Yugo as the market expanded.

Rising fuel costs associated in part with oil crises in 1973 and 1979 made the public more interested in fuel-efficient automobiles. The economic recession of 1981 and 1982 increased consumer price consciousness. During the recession, median family income in the United States, measured in constant (inflation-adjusted) 1990 dollars, declined from more than $35,000 in 1979 to about $31,000 in 1982. In 1985, median family income still was below the 1979 level.

During the 1980’s, the fastest-growing segment of the U.S. population consisted of people between twenty-five and forty-four years of age. From 28 percent of the U.S. population in 1980, this group increased to 33 percent of the population in 1990. Growth in this age group, which contained a heavy concentration of first-time new-car buyers, combined with the forces of young families wanting second or third cars, fuel-efficiency concerns, and a weak economy to establish conditions favorable for the marketing of low-priced, fuel-efficient cars.

Historically, low-priced automotive transportation has appealed to U.S. consumers. Fifteen million Model T Fords, known for economy and durability, were produced between 1908 and 1928. Between 1949 and 1978, Volkswagen of Germany shipped nearly six million of its small, economical Beetles to the United States. In the 1950’s, Nash and its successor, American Motors Corporation (AMC), Hudson, Kaiser, Willys, and Studebaker introduced compact cars. The success of the AMC and Studebaker small cars led the “Big Three” U.S. automakers (General Motors, Ford, and Chrysler) to introduce compacts in 1960. In 1959, Studebaker, AMC, and imported compacts constituted 18 percent of the U.S. market. By 1962, domestic and imported compacts accounted for 30 percent of U.S. auto sales.

Zavodi Crvena Zastava of Kragujevac, Serbia (Yugoslavia), manufactured Yugo automobiles. The enterprise began in 1854 as a tool and armament producer. In 1954, the worker-managed Zastava enterprise entered the automobile industry. A number of the cars built by Zastava were produced under license from the Italian firm Fiat, including the Yugo, which was based on the Fiat 128 model introduced in the 1970’s.

The venture to sell Yugos in the United States was important for both Zastava and Yugoslavia. The goal was to increase the production of the enterprise from 204,000 vehicles in 1985, with 30 percent exported, to 400,000 units by 1989, with 75 percent exported. The objective was to become globally competitive and increase foreign-exchange revenue for Yugoslavia.

Yugos were imported into the United States through Yugo of America, Incorporated, a distributor operation founded by Malcolm N. Bricklin in 1985. Bricklin previously had been the distributor for the Japanese firm Subaru and briefly had run his own unsuccessful automobile manufacturing firm. In 1987, Yugo of America became part of Global Motors Corporation, a New York firm that planned to import both the Yugo and a Malaysian subcompact car called the Proton. Importation of the Proton never materialized, but Global remained the U.S. distributor for Yugo until 1989.

The marketing strategy for the Yugo aimed directly at the demographic and economic conditions of the mid-1980’s. The four-passenger, two-door car had a small four-cylinder engine capable of delivering thirty-two miles per gallon of gasoline. The goal was to sell 60,000 Yugos in the United States in 1986 and increase sales to more than 100,000 units by 1990. Yugo aimed its marketing at young first-time new-car buyers and families desiring a low-priced, economical new car as an alternative to a used car. Yugo’s advertising drew parallels between the Yugo and the Model T Ford and Volkswagen Beetle as reliable, low-cost transportation.

Yugo’s U.S. sales were disappointing. Fewer than 4,000 were sold in 1985. Peak sales were achieved in 1987, when sales reached almost 49,000. Quality problems and unfavorable test reports in the media caused Yugo sales to decline in 1988 and 1989.

In 1988, Bricklin sold his interest in Global Motors to a group of private investors headed by the New York investment house of Mabon Nugent and Company. As Yugo sales continued to decline, Global Motors experienced serious financial problems. Following its filing for reorganization under Chapter 11 of the bankruptcy statutes in 1989, Global Motors fell under control of the manufacturer, Zavodi Crvena Zastava.

Between 1988 and 1992, Yugo of America underwent a series of management changes. When Global Motors was sold in 1988, the presidency was assumed by William E. Prior, a cofounder of Yugo of America. Prior was replaced in late 1988 by Marcel J. Kole, who became acting chief executive officer at the time of Global Motors’ bankruptcy. After reorganization, John A. Spiech, a former Fiat executive, and Kole, who became chief financial officer, assumed the task of rebuilding Yugo of America.

Yugo had difficulty recovering from the bankruptcy reorganization, even though its competitors continued to enjoy a relatively prosperous market for low-priced automobiles. By 1991, Yugo sales had declined to 3,000 units. In April, 1991, Spiech resigned and was replaced by William E. Prior, who assumed the presidency a second time.

Prior left Yugo in November, 1991, and management was turned over to Ilia Pavlovic, a Yugo of America board member representing the parent firm, Zastava. In April, 1992, Yugo of America filed for Chapter 7 bankruptcy and was liquidated. The declining sales situation at Yugo was worsened by the war in Yugoslavia. Zastava was unable to obtain parts from suppliers in Croatia, Macedonia, and Bosnia, and by the middle of 1992, production of Yugos had ended. United Nations sanctions against Serbia meant that Zastava was not able to export replacement parts.

Significance

At its peak in 1987, Yugo obtained only 2.5 percent of the U.S. subcompact automobile market and less than 0.5 percent of all U.S. automobile sales. The impact of the Yugo entry into the United States, however, was much greater than sales statistics suggest. Yugo’s sales of nearly 49,000 cars in 1986 signaled other automobile firms to enter or strengthen their positions in the low-priced auto market.

The Yugo automobile was in the class of the smallest and lowest-priced subcompact vehicles. Rapid growth in that market had begun by 1984. In that year, the industry forecast the market for entry-level vehicles would grow to 600,000 units annually. Compact and subcompact cars were expected to account for 40 percent of auto sales, or 4 million units per year, by 1990.

In 1984, Chevrolet introduced its Sprint model at a price of $4,949. The Sprint, a three-cylinder small car produced for Chevrolet by Suzuki of Japan, was the lowest-priced car available in the United States until the introduction of the Yugo in 1985. Sales of the Sprint increased from 11,000 units in 1984 to more than 60,000 in 1986. Meanwhile, Ford Escorts, Honda Civics, Toyota Tercels, Nissan Sentras, Dodge Omnis, and Plymouth Horizons, all priced below $6,000, enjoyed strong sales. In 1985, when the average price of all cars sold in the United States was about $12,000, ten domestic and import firms marketing autos priced below $6,000 sold 1,466,115 units, more than 13 percent of the market.

In 1987, Ford introduced a new subcompact car called the Festiva, built in Korea by Kia, a joint venture of Ford and the Japanese firm Mazda. The Festiva, at $5,490, was priced between the Yugo and small cars built in the United States and Japan. Ford sold 69,000 Festivas in both 1988 and 1989.

Hyundai of Korea entered the U.S. market in 1986. Hyundai Excel prices began at $4,990. U.S. sales were 168,992 units in 1986 and 264,282 units in 1988. Hyundai planned to enter the U.S. market with a low-priced car, and then as a reputation for reliability was established, it hoped to move its customers up to more expensive models. By 1991, however, quality problems with Hyundai Excels caused adverse publicity, and sales declined to 66,376.

Volkswagen reentered the basic transportation market in 1987 with the Brazilian-built Fox. Volkswagen hoped that the Fox, priced at $5,690, would be its Beetle of the 1980’s. The VW strategy was similar to that of Hyundai: Entry-level customers would purchase the Fox and then in the future trade up to more expensive VW models. Sales of the Fox were 57,000 by 1988 but declined to 13,000 in 1991. Brazilian currency problems and quality deficiencies of the Fox contributed to the decline.

In 1988, at least twelve firms contributed to the total of two million entry-level low-priced cars sold in the United States, 20 percent of the auto market. Only two of the firms, Yugo and Hyundai, had been new entrants to the U.S. market in the 1980’s. The other American, German, and Japanese manufacturers were able to distribute their low-priced cars through existing company-owned distribution networks and established dealer organizations.

Hyundai entered the United States by becoming its own distributor. Hyundai assumed control over all aspects of the distribution and marketing of its cars, including advertising, pricing, marketing, and dealer and warranty relations. Yugo initially distributed its cars through an independent firm, Global Motors. Only after the bankruptcy of Global, with its negative impact on the Yugo image, did Zastava assume control over Yugo distribution in the United States.

Yugo had planned to introduce upscale versions of its cars, including a convertible and four-door sedans. Except for a few convertibles, these models never entered the U.S. market. Yugo thus entered the highly competitive auto market of the late 1980’s and early 1990’s with a weak distribution system and limited product line. Yugo became the only seller of entry-level cars to exit the market by 1992.

After declining in the late 1980’s, the share of the market accounted for by low-priced, entry-level cars stabilized at about 13 percent in the early 1990’s. The forecast growth to 40 percent of the market had not materialized. Lower fuel prices, a stronger economy, and a decline in the number of young people entering the market contributed to the shortfall in market share. The quality reputation of the Honda Civic, Toyota Tercel, and Nissan Sentra, which had a combined 42 percent of the entry-level U.S. car market, assured Japanese producers of a continued strong market position. The Ford Festiva and Geo Metro (formerly the Chevrolet Sprint), sold through strong dealer networks, continued to sell well as the lowest-priced Ford and General Motors products.

Bibliography

Altshuler, Alan, et al. The Future of the Automobile. Cambridge, Mass.: MIT Press, 1984. First published work of the Massachusetts Institute of Technology’s International Automobile Program presents a thorough analysis of the place of the automobile in American society and the condition of the auto industry. Includes informative discussion of the prospects for major auto manufacturers in the context of global competition.

American Automobile Manufacturers Association. Automobiles of America. 5th ed. Lakeland, Fla.: Cars & Parts, 1997. Excellent chronicle of the development of the U.S. automobile industry and the major persons involved. Features an appendix that lists all the makers of automobiles in the United States since 1893.

Arnholt, Mike, and Tim Keenan. “Foreign Invasion: Imports, Transplants Change Auto Industry Forever.” Ward’s Auto World, May, 1996. Brief article in a magazine aimed at members of the automobile manufacturing industry discusses the numerous changes in the industry that have been stimulated by foreign competition.

Clark, Kim B., and Takahiro Fujimoto. Product Development Performance: Strategy, Organization, and Management in the World Auto Industry. Boston: Harvard Business School Press, 1991. Excellent source of data and information on the costs and problems of automotive product development, although somewhat technical. Includes discussion of the convergence of products as firms seek to compete in several countries with similar products.

Feast, Richard. “Zavodi Crvena Zastava: From Cannons to Cars.” Automotive News 70 (November 25, 1985): 39. Survey article covers the history and U.S. marketing strategy of the manufacturer of Yugo. Describes the Yugoslav worker-management system and its impact on Yugo. Also discusses the production system of Zastava.

Henry, Jim. “Pawned Yugos Push Global to Bankruptcy.” Automotive News 77 (February 6, 1989): 1, 124. Provides thorough coverage of the marketing and financial problems that led to the bankruptcy of the U.S. distributor of Yugo. Gives an explanation of the role of principal persons in the bankruptcy filing. Important article for those seeking information on how Yugo was financed in the United States.

Sobel, Robert. Car Wars. New York: E. P. Dutton, 1984. Well-written and informative business history of the U.S. automobile industry includes discussion of the impact of U.S. and Japanese manufacturers on the small-car market. Intended for a general audience. Includes footnotes and excellent bibliography.

Stojanovic, Dusan. “Civil War Destroys Yugo Workers’ Dreams.” Automotive News 84 (November 30, 1992): 8. Brief survey article relates the history of Yugo sales efforts in the United States. Discusses the impacts of civil war in Yugoslavia and United Nations sanctions on Yugo.

White, Lawrence J. The Automobile Industry Since 1945. Cambridge, Mass.: Harvard University Press, 1971. Presents a comprehensive economic analysis of the U.S. automobile industry in the quarter century following World War II. Includes a thorough discussion of the failure of the independent manufacturers and the entrance of imports into the U.S. market. Chapter titled “The Small Car Story” is especially informative. Includes comprehensive bibliography.

Womack, James P., Daniel T. Jones, and Daniel Roos. The Machine That Changed the World. New York: Rawson Associates, 1990. Definitive work on the concept of lean production presents the results of a five-year study of the global automobile industry conducted by the Massachusetts Institute of Technology. Analyzes global linkages of U.S., European, Japanese, and Korean firms and their impacts on the small-car market. Includes graphs, tables, footnotes, and bibliography.