Global Insight Perspective | |
Significance | Following on from Monday's (6 August) confirmation that Chery will supply Fiat with passenger car gasoline engines, the two companies have signed a memorandum of understanding for a full-blown joint-venture agreement that will see them work together in producing 175,000 passenger cars a year for the Chinese market. |
Implications | This is the first time that the previously independent Chery has signed a formal JV agreement with an overseas carmaker. Conversely, it also puts the future of Fiat's existing, underperforming Chinese JV with Nanjing in doubt. |
Outlook | The tie-up between China's most progressive car company and a revitalised Fiat could prove a highly competitive new force in the Chinese passenger car market. It offers Fiat a chance to make significant headway in the world's fastest-growing automotive market, where it has lagged behind as a result of its unsuccessful alliance with Nanjing. |
Fiat and Chery Sign MoU to Build Alfa Romeo and Fiat Passenger Cars
Italy's number-one carmaker, Fiat SpA, and Chery Automobiles have signed a memorandum of understanding (MoU) to establish a 50/50 manufacturing joint venture (JV) to produce cars for the Chinese passenger car market. It is planned that the new alliance will initially produce up to 175,000 units per annum (upa), and the deal follows on from Monday's (6 August) confirmation that the two companies had signed a contract that will see Chery supply Fiat with its 1.6- and 1.8-litre gasoline (petrol) engines (see China: 7 August 2007: Fiat Confirms Contract for China's Chery to Supply Engines). The tie-up is highly significant as Chery has long held a position as China's largest independent carmaker with no JV alliance with a foreign carmaker. This has seen Chery develop a comprehensive passenger car range with no official outside assistance. However, there have been controversies in the past over the originality of some of Chery's designs, most notably the QQ A-segment car, over which the company settled out of court with General Motors (GM) in light of its similarities to the GM Daewoo Matiz. Chery's domestic sales growth has been impressive in recent years and the company has a ready-made dealership, service and distribution structure that Fiat may tap into with the models resulting from the JV. It is also a highly significant development for Fiat, which has been hamstrung in the Chinese market by its underperforming JV with Nanjing Automotive, which manufactures a number variants of the 187 “world car”, including the Palio, the Siena, and the Perla (see China: 25 July 2006: Nanjing Fiat Unveils Perla Model in China).In 2006, the JV sold a total of 31,300 units, giving Fiat around 0.7% of the Chinese passenger car market. Fiat has a publicly stated target of selling 300,000 passenger cars in China by 2010, and the deal with Chery now makes this a potentially realistic target.
First Model to be Produced Likely to be Alfa Romeo 159
If the deal is completed, Fiat and Chery will start to build cars from 2009 according to reports, and the two companies will operate a new facility with an initial built capacity of 175,000 units per annum (upa), which will eventually manufacture Fiat- and Alfa Romeo-branded cars, as well as an unspecified number of Chery passenger cars. Chery and Fiat were initially linked with an alliance to build Alfa Romeo passenger cars in China, and it appears that the first fruits of the relationship will be a Chinese-assembled version of the 159 D-segment passenger car (see China: 30 April 2007: Fiat to Produce Alfa Romeo in China).Fiat Chief Executive Officer (CEO) Sergio Marchionne confirmed in a statement that the plan is to manufacture Alfa Romeos in China under the deal resulting from the MoU. Marchionne said, "The introduction of Alfa Romeo in China represents an historical step, which launches one of the most attractive brands of [the] European car industry into the world’s fastest growing automotive market of these years. Entering the Chinese market at this stage is a key milestone of our plan to revamp and expand Alfa Romeo business world-wide. At the same time, the cooperation with Chery will also materially benefit Fiat brand’s further development in China”.
Outlook and Implications
Although the introduction of Alfa Romeo in China is undoubtedly a significant step for the brand's global strategy and the development of the Chinese premium car market, it will be the Fiat brand that is the main sales driver for the group in the market. Fiat has criticised Nanjing Automotive for a lack of commitment to their JV project, but the fact remains that the model line-up is unloved and uncompetitive and Fiat must acknowledge its role in this failure. However, the positive news is that Fiat is currently undergoing a resurgence as a result of an impressive model renewal programme that has resulted in the company returning to its core values of making excellent small cars. This has resulted in the launch of the A-segment Panda, B-segment Grand Punto, and the new Mini-rivalling 500, which have all made their debuts in the last four years. The company has also launched the new C-segment Bravo in 2007, as well as unveiling the Linea model in 2006, which is aimed at developing markets such as Eastern Europe and Turkey. This model could also be built in China and is likely to be the beneficiary of the earlier deal for Chery to supply Fiat with 1.6- and 1.8-litre gasoline passenger car engines. There are signs that Chinese consumers are ready to accept smaller, more fuel-efficient passenger cars, and Fiat is extremely well placed to meet rising demand in the market. However, it has missed the mark in this respect with the Nanjing-Fiat range of vehicles, and this JV's days may be numbered as a result, despite both parties having pledged additional investment earlier this year.