Fiat Focuses on China

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But in March Fiat and Chery canceled the deal, blaming the global downturn.

That excuse rings a little hollow now, although the Chinese auto market has recovered beyond most expectations this year. At the start of the year, many automakers were projecting a flat year at best, but the market, buoyed by tax breaks and other incentives, is up 20% over 2008. Further into the future, China's high economic growth rates and huge population suggest demand for autos will continue to outstrip the developed markets of Europe, Japan, and the U.S.

For all the opportunities, though, Fiat must overcome some serious hurdles if it is to succeed in China. For one thing, Fiat can't afford another misstep. "The Guangzhou relationship appears to be Fiat's last chance to create a meaningful presence in China," says Ashvin Chotai, managing director of London consultants Automotive Intelligence Asia. He warns, though, that Fiat's brand image in China is poor and that, with production still over two years away, it's unlikely the business will add to the company's bottom line inside five years.

Fierce Rivals

Meanwhile, catching up with foreign rivals, many of which are also investing heavily in China, won't be easy. At Volkswagen, the biggest foreign automaker in China, sales rose 12.5% in 2008, to 1 million. Automotive Intelligence Asia reckons VW will grow by a further 30% by 2015. Meanwhile, Toyota, Honda, GM (GM), and Hyundai all recorded annual sales in excess of 400,000 vehicles in 2008. (In GM's case, the figure rises to over 1 million if its roughly one-third stake in a commercial minivan joint venture with Wuling and Shanghai Auto is included.)

Just as daunting for Fiat, its strengths are in producing small and midsize cars. This low-cost segment, while experiencing high demand, is perhaps the most competitive area of the market. Indeed, while foreign automakers have much of the higher end to themselves, low-cost Chinese automakers are much tougher rivals for smaller vehicles.

The segment also offers the thinnest margins. Speaking at the Shanghai show in April, Jae Man Noh, president of Hyundai Motor's Chinese operation, estimated that while operating margins are down from double-digit levels in 2002-03, to between 5% and 6% overall, for vehicles below $15,000 the profitability is wafer-thin. To make a success of its business in China, Fiat will have to strike a difficult balance. "They key will be to offer products that, at once, carry European appeal while remaining attractive to Chinese consumers on price," says J.D Power's Dunne. "Chinese do not mind paying a premium for brands, [but] Fiat must establish itself as a cut above other large-scale manufacturers."

Rowley is a correspondent in BusinessWeek's Tokyo bureau.

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