Fiat plans to use the Zastava factory in Kragujevac, Serbia, to produce a new low-cost B-segment model that will be a replacement for the long-running Fiat Palio  and will be sold on Eastern European markets.

Serbian Minister of the Economy Mladjan Dinkic has revealed that Fiat is just weeks away from committing the first 100 million euro investment in producing a new model at the Zastava factory in Kragujevac and along with President Boris Tadic he will visit Turin in November to view a prototype of the new model.

Fiat will make the first 100 million euro investment in Zastava at the end of next month, with a total of 800 million euros being invested in Serbia to realise the project. The news comes almost exactly a year after Fiat signed up to ambitious plans to buy a majority stake in the ailing state-owned carmaker and turn it into a hub to build two new models, a new sub A-segment city car dubbed the Topolino and a low-cost B-segment hatchback targeted at emerging markets that would replace the long-running Palio "world car family" model.

However the deep impact on the car industry in Europe caused by the global financial crisis and resulting recession threw these plans almost immediately onto the scrap heap and instead the Series 2 Fiat Punto which had been built by Zastava under licence but ditched late last year to make room for the new models was hurriedly put back into production in the Spring. Instead a new and more scaled back plan will see just one of these planned new cars initially put into production.

Dinkic revealed the news that Fiat's plans for Zastava were back on track this week during a forum of Serbian and Italian businessmen that was called "Possibilities for investing in Serbia" and which included a delegation of more than a hundred Italian businessmen led by the Deputy Minister for Economic Development Adolfo Urso. Addressing the delegation Dinkic said that "Italian suppliers will have a comparative advantage in Serbia if they decide to station their factories here" as they will be able "to export their products without customs duty to a market of over 800 million people thanks to the CEFTA." Dinkic also noted that Italy is currently the third biggest investor in Serbia with US$1 billion coming in last year.

There are more than 200 Italian companies employing around 18,000 people now represented in the country with a combined turnover of US$2.5 billion. "Italian-Serbian trade has doubled in the past three years, and there is still room to improve the two countries economic cooperation in a number of areas," added Urso. Economic recovery in Serbia is expected during the final half of the year and year-on-year GDP growth of 1.5 percent is being targeted by the state government.

Dinkic and Urso also signed a declaration between the two countries on co-operation in the automotive components sector. The arrival of Fiat is expected to bring more than 100 supplier companies into Kragujevac and a parcel of land has already been set aside for the construction of a new supplier park, especially important as the plant will be adhering to the latest industry standards of "just-in-time" component supply. Fiat Group’s Iveco trucks-to-buses unit will also be setting up a factory to build buses in the area while Magneti Marelli is also planning a new facility.