Italian carmaker Fiat Auto and China's Chery Automobile are in talks to form closer ties following an engine deal last October, according to an industry source familiar with the situation.
One option for the two companies is to form a joint venture in China to assemble Fiat cars, said the source, who did not wish to be named.
"Chery will register a new subsidiary to team up with Fiat in an attempt to remain an independent brand," the source said.
Chery, owned by the government of Wuhu in East China's Anhui Province, signed a memorandum of understanding with Fiat in October to supply the Italian firm with 100,000 engines for cars built both in China and overseas.
Chery executives and government officials from Wuhu confirmed the two parties are discussing further cooperation. But they declined to provide details.
Zhan Xialai, Party secretary of Wuhu, last month told China Daily: "Fiat made overtures to us for additional cooperation."
"However, we will not give up the Chery brand, whoever we collaborate with," Zhan said.
Last month, Chery agreed with US carmaker Chrysler to make cars in China for the North American and European markets. Chery has been one of the flagship Chinese car brands and the nation's top car exporter in recent years with low-cost products and improving design and quality.
The company announced last month it aims to sell at least 393,000 cars this year, up from 305,000 units in 2006. Meanwhile, it expects to boost exports to 70,000 units from 50,000. Chery also aims to sell a total of 1 million cars at home and abroad a year by 2010.
Song Bingshen, an auto industry analyst with CITIC China Securities Co, said Fiat is seeking a tie-up with Chery mainly because of its weak performance in China, the world's No 2 vehicle market.
Fiat now makes the Palio and Siena subcompact cars and Perla compact sedan at a venture with Nanjing Automobile Corp in East China's Jiangsu Province.
However, the venture, set up in 1999, has seen sluggish sales and losses in recent years due to internal wrangles and a lack of competitive products.
It sold 30,700 cars last year, down 7 percent from 2006, according to industry data. In the meantime, sales of China-made vehicles grew by a quarter to 7.22 million units with that of passenger cars surging 35.6 percent to 4.26 million units.
"Fiat seems unsatisfied with its partnership with Nanjing Automobile. So it hopes to find a new partner in China," Song told China Daily.
"It could take advantage of Chery's low costs and improving quality if they team up," he added.
Many global automakers, such as General Motors, Volkswagen, Toyota and Honda, have two car joint ventures in China with different local partners.
And Nanjing Automobile appears to be shifting to its acquired British brand, MG, in the passenger car area.
The company said on Tuesday it would begin making an MG sedan in March at its base of Nanjing, and an MG sports car in May in England.
It plans to assemble a total of 200,000 MG vehicles at the two locations annually within the next five years.
(China Daily February 1, 2007)