(FORTUNE Magazine) – A TV COMMERCIAL for the Yugo, the new, boxy Yugoslavian car that sells in the U.S. for a base price of $3,990, opens with a classic Volkswagen Bug sitting in a white one-car garage, vintage late 1950s. A narrator waxes nostalgic: ''The beloved Beetle. Once the lowest-priced car in America. Dependable. Basic transportation. But homely. And then it went away. Leaving an emptiness in the hearts of America.'' Yugo America, the U.S. importer, wants its homely auto to be the next Beetle. So do at least ten other automakers whose cheap little cars will putter into U.S. showrooms over the next three years. Each will be trying to fill the void left by the Bug, the best-selling car ever (21 million worldwide vs. 15 million for the Ford Model T, its nearest competitor). All the new models will sell for under $6,000. Some will be subcompacts with 1.5-liter engines, the same as Toyota's Tercel. But most will be what some in the industry call minis -- a new generation of cars that are no more than 150 inches long, that sell for less than $6,000 fully equipped, and that have engines smaller than 1.2 liters. Yugoslavia's Zastava, South Korea's Hyundai Motor Corp., and General Motors are leading the new small-car rally. Anxious not to be left behind, Japanese auto companies such as Honda, Nissan, and Subaru are readying minis. Ford and Chrysler, as well as Volkswagen and Renault, are also moving quickly to develop or import new small cars. Only a few manufacturers have their cars on American roads, but others are well along in plotting marketing, distribution, and advertising strategies for the new cheap cars. For newcomers, introducing a no-frills small car can be a way to gain a toehold in the huge U.S. auto market. For those already established, offering an entry-level vehicle is strategically important because satisfied first- time buyers tend to trade up to more expensive and profitable models. Automakers hope that big sales will make up for the minis' tiny profit margins: only a few hundred dollars per car. According to J.D. Power & Associates, a Los Angeles auto industry consulting firm, U.S. sales of cars costing under $6,500 will grow from 375,000 in 1985 to nearly 1.4 million in 1991 -- about 12% of the market. Chris Cedergren, an auto researcher at Power Associates, projects that the under-$6,000 models will account for most of the industry growth as the total U.S. market expands from an estimated 11 million cars in 1985 to 12.1 million in 1991. Should oil prices head back up, small cars could account for an even greater share of the market. Competition will be fierce. Industry analysts predict a brutal price war that could slash automakers' profits and used-car values. Detroit in particular may get socked. GM is spending $3.5 billion on its Saturn project to manufacture small cars that can compete in cost with Japan's current small cars. Ford and Chrysler have similar projects. But by 1989, when the first Saturn rolls out of the factory, the market may have shifted to the new minis. The demand for dependable low-priced cars has remained fairly constant among young, first-time buyers as well as among incorrigible bargain hunters, the working poor, and the well-heeled looking for funky but practical second or third cars to drive to the station or to shops. But the supply has seemed to dwindle. THE AVERAGE PRICE of a new car has jumped from $4,750 in 1975 to $11,394. Though U.S. per capita disposable income has more than doubled too, many potential new-car buyers feel that they have been priced out of the market. Suffering from what the industry calls sticker shock, some have flocked to the used-car market: the average price of used cars sold by dealers has jumped - from $3,380 in 1980 to an estimated $5,200 in 1985. Others have stuck with their old bombs a few years longer: on average, owners waited six years before trading in cars in 1985, vs. four years in 1980. A common misperception is that the Japanese have already cornered the low end of the market. While Honda, Toyota, Nissan, and others entered the U.S. market with low-priced cars, quota agreements have led them to focus their sights higher over the past five years. Since the agreements limited the number of cars the Japanese could sell, the only way they could increase profits was to introduce pricier and more profitable models. At the same time, they quietly reduced shipments of cheaper models and raised the prices well above $6,000.

Shoppers who set out to buy a stripped-down Civic, Tercel, or Sentra find them hard to come by. These cars are known as price leaders: their low prices lure consumers into showrooms, where dealers persuade them to buy more expensive models. According to industry sources, in 1984 Toyota, Japan's largest automaker, shipped only 1,100 cars a month with a base price under $6,000, about 2% of its U.S. shipments. That's one car per month for every Toyota dealer. ''The Tercel is not designed to be bought, but to lead you into buying an upgraded car,'' says William Prior, president of Yugo America. ''There's a myth out there that you can find Japanese cars with a port of entry price of $4,000 to $5,000, but it just isn't true.'' In the past year, however, as import restrictions have been relaxed, the Japanese have rekindled their interest in lower-priced cars. Like the U.S. Big Three, they want to hook the first-time buyer. ''Somebody comes in and buys a Tercel. He becomes accustomed to Toyota quality, and the next time he buys another Toyota,'' says Art Garner, a spokesman for Toyota Motor Sales USA. An important catalyst of the low-priced car boom has been the success of Chevrolet's Sprint, the first mini on the market. Chevrolet, which buys the three-cylinder model from Japan's Suzuki Motor Co., launched the car on the West Coast in 1984. With little ballyhoo Chevy sold 37,000. The company expects to sell 60,000 Sprints, currently priced at $5,380, nationwide this year -- all that Suzuki can ship. CHEVROLET cannot afford to ignore the small-car market this time around, even if it means buying cars in Japan rather than building them in the U.S. ''We got caught after the 1973 oil embargo created the small-car market overnight, and we're not going to let it happen again,'' says Thomas Mason, marketing manager for Chevrolet passenger cars. Still, the company prefers to put its weight behind bigger, more profitable U.S.-made cars. ''The Sprint fills a hole in our lineup,'' Mason says. ''But as successful as it has been, we feel it won't appeal to a lot of people because it doesn't have the room a larger car enjoys.'' The Yugo, launched in August, has fired public enthusiasm, if not sales -- customers bought only 3,000 in 1985. Limited by the gradual start-up of production of the American version of Yugoslavia's best-selling car, Yugo projects shipments will reach 40,000 this summer and rise to 150,000 cars annually by 1989. The initial appeal is the hard-to-believe price. But Yugo President Prior says that the car's staying power depends on reliability and service. He cites one participant in a focus group study in Florida who said, ''If my car is sitting on the side of the highway in the middle of rush hour and the engine won't start, I won't be any less angry because I paid only $4,000 rather than $6,000.'' Yugo America insisted that Zastava make a host of product changes to improve the car's reliability, including a new wiring system. In an unusual arrangement between importer and manufacturer, Yugo America employs seven quality-control people on the Zastava factory floor. They have rejected 700 cars so far. To assure customers that parts and service would always be available, Yugo selected mainly big, established dealers that handle other makes. The company also formed a brigade of technicians and mechanics, dubbed Yellow Berets after the company colors, who are dispatched around the country to trouble-shoot unusual problems. ''We want to become the generic car,'' says Prior. ''If we do our job right, we will get our piece of the market, no matter how many other entries there are.'' The most widely feared entry is Hyundai Motor America, the U.S. arm of a huge South Korean conglomerate (1984 sales: $10.3 billion) that makes most of its money building ships, oil rigs, and other heavy industrial equipment. Hyundai (rhymes with Sunday) is a relative newcomer to the auto business. It manufactured the first car of its own design in 1975, but it dominates the highly protected South Korean market. Mitsubishi Group of Japan owns 15% of Hyundai, and Chrysler owns 24% of Mitsubishi. ''Hyundai wants to be a major factor in the automobile world by 1990,'' says Greg Warner, a former Toyota marketing manager who is Hyundai America's group vice president of operations. That means selling over one million cars, he says. Currently the company can produce some 450,000 cars a year in South Korea. It expects to do most of its growing in North America and is planning a factory in Quebec. In 1984 Hyundai entered the Canadian market with the Pony, priced at $4,800. By the end of 1985 it was Canada's most popular import, with over 80,000 sold. In February the company will race into the U.S. with the Excel, priced around $5,000. Since the Pony did not meet U.S. emission-control standards, Hyundai bought the rights to a Mitsubishi power train, which met the standards, and built the cars around it.

Unlike the Yugo and the Sprint, which have one-liter engines, Hyundai cars have 1.5-liter engines. And Hyundai marketers are likely to make much of this difference. The Korean company is positioning its cars in the same class as the 1.5-liter-engine Japanese subcompacts. Because labor costs for autoworkers in South Korea are one-fifth those in Japan -- and one-twelfth those in the U.S. -- Hyundai cars will sell for $1,000 to $2,000 less than the popular Tercels, Civics, and Sentras. ''Our research shows that our cars are perceived as mainstream Japanese cars,'' says Warner. ''Even the Japanese regard these cars as Japanese cars that happen to be made in Korea.'' HYUNDAI HOPES to woo customers away from Japanese cars and the used-car market. And it will make a special pitch to women. One reason customers who usually buy used cars may swing to minis is that banks generally offer better rates and payback terms for new cars than for used ones. ''There is a high ratio of installment buyers in this category,'' says Warner, ''and the opportunity to make savings in monthly payments is very important to them.'' Hyundai hopes that women will buy Korean because industry surveys show they are more likely than men to be impressed by practical considerations such as price, reliability, and durability, and less likely to be taken with a car's power image. The Korean automaker's slogan: ''Hyundai: cars that make sense.'' Before it starts advertising the car, the Korean company will launch TV commercials to introduce itself as a solid industrial power. It has set out to build a network of independent dealers, 100 in 31 states so far. Although they sell other makes at other locations, each dealer agreed to invest an average of $2.5 million building or refurbishing facilities exclusively for Hyundai Motor, complete with computer terminals linked to the company's Southern California headquarters. ''Our aim is for a typical dealer to sell 100 cars a month,'' says Warner. ''If we can establish that, we'll get good support. Successful dealers are willing to invest in service.'' So where is VW, the company that started it all? The Bug is alive and well in Brazil, Mexico, and Nigeria, and has just observed its 50th anniversary. But the company has no plans to bring it back into the U.S. ''The Beetle nostalgia is nice,'' says James Fuller, president of the VW division of Volkswagen in the U.S. ''But when you look at it side by side with a contemporary new car, it is in the Stone Age.'' Like other companies, VW realizes that it needs an entry-level vehicle to help sell its more expensive cars, ranging from the Golf at $7,000 to the Vanagon at $13,000. When sales of the low-priced Rabbit, the Beetle's successor, died as consumers lost interest in diesel engines, VW's fortunes plummeted in the U.S. and the company went through an identity crisis. ''Since 1974 our dealers have not been in the first-time buyers' market,'' says Fuller. ''Over 60% of our sales in Golfs and Jettas were to people trading up, mostly from Japanese cars.'' In 1982 VW decided to adapt the Voyage, a low-end runabout made by its Brazilian subsidiary, for the North American market. The company is still working on styling and engineering modifications. It plans to introduce the car, code-named Project 99, in the U.S. late this year, and to sell 100,000 in the first 12 months. Volkswagen will price the car just under $6,000, but will aim at the higher end of the mini market by promoting the German engineering mystique. VW intends to mine the reservoir of good feeling associated with the Beetle -- at least what's left after Yugo, Hyundai, and other faster starters finish making their claims. But it will stop short of trying to play the sporty Brazilian as Beetle II. ''This car will be to the Nineties what the Beetle was to the Sixties and Seventies: a high-value car that lasts a long time and is a lot of fun to drive,'' says Fuller. ''But it can't be Son of Beetle. We don't kid ourselves: the Beetle was unique.'' The under-$6,000 cars aren't trying to be unique: they look pretty much alike. Rather than playing for a place in America's heart with unconventional styling, the automakers are competing to produce the ultimate commodity car.