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Government policy and Fiat’s retur

After two years of searching for a new partner so as not to be left out of the express bandwagon of China’s automobile market, Fiat Automobiles S.p.A. finally secured a 50:50 JV deal with Guangzhou Automobile Group Co., Ltd. (GAC). And it was also significant that a base agreement was signed in Rome in the presence of Premier Silvio Berlusconi and visiting Chinese President Hu Jintao.

The JV will have a total investment of 400 million Euros ($556 million) for building an assembly plant, an engine plant and an R&D center, with initial output of 140,000 cars and 220,000 engines annually. It will take up a space of 700,000 square meters in Changsha of central China’s Hunan Province, close to the production facilities of Changfeng Motor, which was recently acquired by GAC.

The first vehicle to be produced in 2011 will be the C-Class Linea, powered by a Fire 1.4-liter turbo-charged gasoline engine developed by Fiat Powertrain Technologies. “In line with the Chinese government’s requirement for developing fuel-efficient and low energy consumption products,” the base agreement reads, “the vehicles to be produced by the JV will utilize the newest engine and transmission technologies.”

The base agreement also states that “the project will be supported by the development plan of the Chinese government in the promotion of investment in central China’s six provinces and is in compliance with the newly published Automotive Industry Readjustment and Revitalization Plan (the Plan).”

Three key national development strategies have been announced in the Plan released by the State Council earlier this year: independent innovation and branding, fuel-efficient and new energy vehicles and industry consolidation.

The proposed JV seems to be in compliance with the first two development strategies: Fiat was already GAC’s partner in an engine technology transfer in support of GAC’s 220,000 engine plant to be operating early next year for use on GAC’s independent vehicle brands. And Fiat also promises to introduce the “newest engine and transmission technologies” for fuel-efficient vehicles to be produced by the JV.

Until most recently the biggest policy hurdle for the JV originally planned to be built in Panyu near Guangzhou was the Plan‘s specific regulation that “newly built vehicle manufacturing projects or a new subsidiary assembly plant to be built in a different geographical location must be based on the acquisition of an existing vehicle manufacturing enterprise.” In order to control capacity building, the government wants to consolidate the industry in the next three years and reduce the current 14 automobile groups to within 10.  

Placing the GAC-Fiat JV at GAC’s new subsidiary Changfeng Motor in Changsha has helped the two partners meet the new government policy requirement. But strictly speaking, the new venture is in effect adding capacity to the crowded China market.

Fiat has played the government relations and political card smartly to have won the auspice of President Hu Jintao.

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