Fiat makes another foray into China market

After twice falling out with local partners in China, Fiat SpA faces what might be its last chance to expand into one of the few markets still seeing red-hot growth.

The Italian company is setting up a €400 million ($570 million) joint venture with Guangzhou Automobile Group Co. as it attempts to make inroads in a country that last month saw sales soar by more than 60% from a year ago.

Despite fierce competition, China's market is proving irresistible. General Motors Corp. calls China a key growth driver; PSA Peugeot-Citroën SA has said it is open to the idea of a second joint venture with a local partner; and Nissan Motor Co. plans to build another plant with its partner, Dongfeng Motor Co.

Fiat has so far had a hard time finding the right partner in China, said IHS Global Insight analyst John Zeng. With its first partner, Nanjing Automobile Corp., Fiat couldn't agree on a licensing fee for its technology, Mr. Zeng said. Reaching out to Chery Automobile Co., Fiat found that the companies' models would be in direct competition. As a result of these disappointments, Fiat dropped a target it set three years ago to sell 300,000 cars in China by 2010.

Fiat's reputation among Chinese drivers took a turn for the worse after it pulled out of the dealership network run by former partner Nanjing in late 2007, Mr. Zeng said. "Car owners [in China] were left with no warranties and found it difficult to maintain their cars," he said.

Conscious of the challenges it faces, Fiat is ready to take the time to get it right this time, a person familiar with its strategy said. GM and Volkswagen AG, for example, took two decades to reach a dominant market position. Both have, as one of their partners, SAIC Motor Corp., China's biggest car maker.

Fiat has received explicit government backing for its latest joint venture: The deal was signed in front of Chinese President Hu Jintao and Italian Prime Minister Silvio Berlusconi at a July 6 ceremony in Rome.

 
Sergio Marchionne
"It's a reflection of the type of institutional support to this venture we will receive," Fiat Chief Executive Sergio Marchionne told analysts two weeks later.

The venture will see Fiat and Guangzhou Auto build a plant to make as many as 200,000 engines and 140,000 cars starting in 2011. The number of cars Fiat expects the venture to produce is much smaller than those from Guangzhou Auto's two other partners, Toyota Motor Corp. and Honda Motor Co. In 2008, Honda sold 473,000 vehicles and Toyota 585,000 -- ranking them among China's top five auto makers.

Fiat's deal with Nanjing unraveled in late 2007. The partnership had been unprofitable for years and Mr. Marchionne had openly expressed frustration with Nanjing, saying the company was distracted by the relaunch of the MG sports-car brand it had acquired.