NOVI SAD, Serbia – Serbia is the latest European country to start formal membership negotiations with the European Union, which could provide its auto industry increasingly unfettered access to the EU’s 500 million-strong consumer market.

To boost its own vehicle sales, Serbia already has agreed to shed import duties on EU-made cars through an interim cooperation agreement that took effect in February.

The deal includes promises to scrap Serbian auto tariffs by January 2012. But full free access to the EU market for Serbia-made cars will have to wait for successful negotiations on its membership now under way.

Serbia made a formal application to join the EU in December 2009, and the EU Council of Ministers started formal proceedings in October.

However, the negotiations could drag on for years, even if the Serb government arrests and hands over the last remaining major fugitive sought by the International Criminal Tribunal for the former Yugoslavia in The Hague – Ratko Mladic, the former Bosnian Serb army chief.

Nevertheless, foreign investment currently is pouring into Serbia’s auto industry through Italy’s Fiat Automobiles SpA, which has held a 67% share of its Fiat Automobili Srbija d.o.o. joint venture with the Serbian state since 2008.

Fiat plans to invest close to €1 billion ($1.3 billion) by the end of 2012 in the JV’s Kragujevac plant, which once served as the former Yugoslavia’s Zastava Vozila vehicle-production facility. The money will fund an ambitious expansion program, enabling the JV to build 200,000 cars annually in 2012, increasing to 300,000 in 2013.

That would mark a considerable increase in production over current levels. The plant manufactured just 33,000 cars, all of them Punto Classics, from April 2009 to December 2010. The last of the older models – the Yugo, Zastava 101, Zastava 128 and Florida – rolled off the assembly line in November 2008.

In addition to the Punto, Fiat is planning to build a new 5-seat B-segment vehicle at Kragujevac for the EU market and a 7-seat minivan that will be exported to the U.S., competing with the Mazda5 and Ford C-Max.

Test data will be published in September 2011, and mass production is scheduled to begin after the vehicles are unveiled at the 2012 Geneva Motor Show.

Aleksandar Ljubic, chairman of Grupa Zastava Vozila, which is responsible for company assets not taken over by the Fiat JV, was a member of the Serbian government’s delegation to recently visit the auto maker’s headquarters in Turin, where designers presented the visitors with prototypes of the two models.

“I still cannot believe we are going to produce such cars in Serbia,” Ljubic says. “They have excellent modern Italian design and engines. The equipment that will be set in the Kragujevac plant for this production is already ordered and its installation should start in first-quarter 2011.”

Serbian Minister of Economy Mladjan Dinkic also was in Turin and predicts strong sales of the B-segment vehicle. “I was pleasantly surprised when I saw it; it's a lot more than I expected.”

The new model will be a true Serbian car, he adds, noting 80% of its components will be localized, excluding the engines.

Both vehicles will have modern roof designs, although details are sketchy other than they will sport different colors from the rest of the car. Also, the 5-seater is 13.5-ft. (4.2-m) long and the 7-seater measures 14.4-ft. (4.4-m). Other details are top secret.

Fiat says it expects to generate €1.3 billion ($1.7 billion) in earnings from the two vehicles in 2013.

"That's one-fifth of Serbia's total exports last year,” Dinkic says. “Thanks to this investment, Serbia will finally begin with worldwide sales of high-value, finished products, not just cheap raw materials and intermediate product sales."

The minister of economy also hopes the new industrial investment for plants supplying components to the Fiat vehicles will boost Serbia’s gross domestic product.

Key Fiat-supplier Magneti Marelli SpA spoke with the Serbian government in December about its plans to build a €60 million ($79 million) factory in Kragujevac next year, he says. Magneti will invest €50 million ($65.8 million) and the Serbian government will provide €10 million ($13.2 million).

At first, two basic product lines will be installed in the supplier plant, one for producing significant mechanical assemblies and the other for making exhaust systems.

Against this backdrop, the EU membership negotiations, which will underpin the strategy of expanding Serbia’s auto sector, continue. October saw a request from the 27 existing EU member states for the European Commission to deliver a formal opinion on Serbia’s application.

EC officials have delivered detailed questionnaires to the Serb government to help it in its task, and further progress can be expected in 2011.

Serbia, meanwhile, is receiving EU assistance in a range of ways. In July, it secured a €200 million ($265 million) loan to help it recover from the global financial crisis.

– with Keith Nuthall