Trouble for Yugo : Declining Sales, Financial Woes Make Road Rocky
In the fall of 1985, Global Motors Inc. introduced American car buyers to a Spartan, Yugoslavian-built automobile called the Yugo with a $3,900 price tag. The New Jersey firm had hoped it would be the start of a long and profitable relationship, a storybook business deal.
But by the time the car was introduced in California a year later, critics were calling it “the worst car in America.”
And, now, three years later, Global Motors is beset by financial woes, plummeting sales and criticism of the Yugo by consumer and safety advocates. Global Motors suffered a nearly 35% sales drop in 1988 as Yugo sales plunged to 31,000, from almost 48,000 in 1987 analysts said. A number of dealerships also have severed ties with Global, which imports and markets the cars in the U.S.
This all comes at a time when a number of South Korean and Japanese cars are encroaching on Yugo’s turf. Yugo’s price tag is now closer to $5,000, and Ford’s South Korean-built Festiva and South Korea’s Hyundai Excel are two strong contenders in the basic-transportation market.
In addition, analysts said, limited resources have delayed the introduction of a host of new Yugo models and features, including models equipped with automatic transmission and convertibles.
To offset the resulting financial setback, Global has taken major cost-cutting measures. A Global vice president acknowledged last week that several dozen employees--a number of top-level executives among them--were laid off last Monday evening.
However, officials at Global, based in Upper Saddle River, N.J., downplayed the significance of the move.
Negotiations in New York
“It was prudent to cut back our staffing,” said Ronald Hoffman, Global’s senior vice president for operations. “It’s a concept of bringing staffing in line with our objective of being a basic-transportation vehicle. It’s no different than what other companies do.”
Meanwhile, in a search for more capital, Global executives were in New York City last week for negotiations with officials of Zavodi Crvena Zastava, the car’s Yugoslav manufacturer, and an announcement is expected soon. Auto industry observers expect Zastava to buy all or part of Global and provide the American company with a a much-needed infusion of cash.
“The Yugoslavians have told us they are interested in remaining in the U.S. market,” said Hoffman.
“I believe the meeting is crucial,” said Chris Cedergren, an automotive analyst at J.D. Power and Associates in Agoura Hills. “The current owners, Mabon, Nugent & Co. are looking for funding. When they bought out Global founder Malcolm Bricklin last year, they expected business to be different.” Among other things, Cedergren said, they spent huge sums to beef up the marketing of the car.
“That,” he said, “was a costly proposition. It was a wise move, but the market did not act to the tune they had hoped . . . Between 1985 and the present, Global has lost a lot of money.”
Indeed, many car buyers were discouraged from buying the Yugo early on. In February, 1986, Consumer Reports said “it is hard to recommend the Yugo at any price.” Two years later it called the Yugo “one of the worst cars” it has ever tested. Almost from its introduction, the Yugo was branded a shoddily built vehicle.
“The car was not very good when it came to the U.S.,” said Maryann N. Keller, an analyst at Furman Selz Mager Dietz & Birney investment firm in New York City. “It had many, many quality problems--many of which have been corrected.”
Sales of the car continue to feel the reverberations of the initial criticisms, so much so that some dealers across the country are backing away from the Yugo.
“We terminated our franchise about four months ago,” said Stan Krajenke, who owns a car dealership in Detroit. “Sales were not going too good. The bad rap in the beginning was one of the main reasons why.”
“Our renewal came up in August, but we didn’t renew,” said Ken Shepherd, the general manager of O’Donnell Motors in San Gabriel. “The Yugos just weren’t moving. We bought in because we thought it was a viable franchise . . . Without a doubt, it was the most serious business mistake we’ve ever made. I wish someone would have warned us before we signed.”