Fiat Focuses on China

After two failures in China, the Italian automaker has struck a deal with Guangzhou Auto to make cars for the Chinese market

By Ian Rowley

Is there a harder-working CEO in the auto business than Fiat's Sergio Marchionne? Fresh from acquiring Chrysler and bidding—amid competition from Canada's Magna International and China's Beijing Auto—for General Motors' Opel unit, the Italian automaker has inked a deal to form a joint venture with Guangzhou Automobile Group.

The agreement, signed in Rome on July 6 in the presence of Chinese President Hu Jintao and Italy Prime Minister Silvio Berlusconi, is another step toward turning Fiat into a global automotive giant. Targeting the growing China auto industry, Fiat will invest $559 million in the venture, which plans to begin production in China's Hunan Province in the second half of 2011. The facility will initially have the capacity to make 140,000 cars and 220,000 engines per year, and may later increase to maximum of 250,000 cars and 300,000 engines per year. The first model to roll off the production line will be the Linea sedan.

Industry watchers welcomed the deal, calling it vital if Fiat is to match with Marchionne's ambition. The Fiat chief reckons that the Turin automaker needs to increase its global production capacity from 2 million today to more than 5.5 million—a size that surely necessitates a large presence in what will soon become the world's biggest car market. Guangzhou Auto operates successful—and profitable—partnerships with Toyota (TM) and Honda (HMC), both of which have factories in Guangdong, which neighbors Hunan. Sales of Honda Accords and Toyota Camrys made at the plants are both hot sellers, especially in southern China. "[It is a] good move by Fiat," says Michael Dunne, managing director at J.D. Power (MHP) in Shanghai.

Long a Laggard

Whether it will be enough to go beyond kick-starting Fiat's Chinese operations, though, is harder to say. Fiat is a laggard in China after previous attempts to manufacture in the Middle Kingdom didn't work out. In 2007, Nanjing Automobile pulled out of another joint venture agreement (JVs are a requirement for foreign automakers to make cars in China) amid weak sales. In the final year of the partnership, Fiat sold fewer than 20,000 cars, and the factory was eventually sold off to Volkswagen. That left Fiat with a tiny foothold in the market, exporting barely 4,000 cars a year from Europe.

A route back via a partnership with Chery Automobile, China's biggest independent carmaker, didn't get off the ground. The two automakers planned to make and sell 175,000 Alfa Romeo, Fiat, and Chery branded cars in China with production due to start this year. In addition, Chery was to supply Fiat with engines for sale outside of China. "This is also a good basis for studying further cooperation with Chery in the automotive industry," Marchionne said when the deal was announced in 2007.

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