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Reuters Edge

Fiat trails in China, Russia race

MILAN (Reuters) - In the race to expand in two of the world's biggest and fastest growing car markets, Italy's Fiat SpA FIA.MI is sputtering far behind its competitors.

Fiat sells tens of thousands of vehicles in China and Russia but this is way behind those of General Motors Corp. GM.N or Volkswagen AG VOWG.DE.

Closing the gap is important for Fiat because its car business is the single biggest contributor to its bottom line even though it has other divisions like Iveco trucks and CNH CNH.N tractors.

Whether it can do it or not will depend in China on the strength of the partnerships it develops with local producers.

As for Russia, it could be the opposite. Fiat has yet to follow the example of other car makers like PSA Peugeot-Citroen PEUP.PA that have been going it alone in order to have greater control over their operations, according to Ivan Bonchev of Ernst & Young in Moscow.

Fiat is working hard in both markets, but its chances appear slimmer in China than they are in Russia, according to analysts.

“Even if they have a good joint venture up and running for the next two to three years (in China), it could be too late,” said Gregor Claussen at Commerzbank.

Fiat Chief Executive Sergio Marchionne recognized the problem at an event in New Delhi last week, saying the car maker might miss its 300,000-unit sales target for 2010 in China as a result. “We have to firm up other partners,” he told Reuters.

In Russia, Fiat could still benefit from an eventual shift in the market. The segment in which it has a specialty -- small, fuel-efficient cars -- has yet to develop because drivers there still prefer big cars like sports utility vehicles.

But it was only a matter of time before they became as concerned as drivers in other countries about pollution and the high price of fuel, said Bonchev at Ernst & Young.

“In the long run, they (Fiat) have a competitive advantage.”

TOO BIG TO IGNORE

China and Russia are too big to ignore because their car sales are growing at rates that most car makers can only dream of in their stagnant home markets.

In the latest downturn, Fiat has been able to mitigate its effect with its success in Brazil, which is set to provide a third of its car sales and nearly all of its profit this year, according to Citigroup.

This reliance on a single emerging market puts Fiat in a precarious position. When the latest car sales figures from Brazil showed a monthly decline, its stock tumbled.

“As long as Brazil keeps going the way it is, it (Fiat’s presence in China and Russia) won’t really matter,” a Milan analyst said. “But if they start to have problems, it’s clear it’ll have an effect.”

TOO LATE IN CHINA

With sales growth slowing in China, an analyst for ABN AMRO TEDA Management in Beijing said Fiat was too late to benefit from the rampant demand for cars seen in recent years.

“It did not do well when the China market was growing 20 or 30 percent per year, (so I) can’t imagine it will go very far now that car sales growth is slowing,” said Chen Qiaoning.

The trend towards smaller cars also made it more difficult to make a decent profit because of the competition from Chinese manufacturers, said Claussen at Commerzbank.

In any case, Fiat has yet to sign up a local partner with which to make cars.

Both GM and Volkswagen -- the biggest foreign car makers in China -- work with the country's biggest manufacturers such as Shanghai Automotive Industry Corp. (SAIC) 600104.SS, rolling out more than a million cars a year.

Fiat, meanwhile, is still talking with Chery Automobile Co. of Denway Motors Ltd. 0203.HK about making an annual 175,000 cars a year after signing a memorandum of understanding.

In addition to Chery, Fiat is also talking with Guangzhou Automobile Industry Group, according to Marchionne.

It is also pursuing other initiatives, such as importing cars and building an engine plant in the city of Chongqing.

BETTER POSITION

In Russia, where it showed off the Linea sedan and other new models at the recent auto show in Moscow, Fiat is in a better position to take advantage of the market’s future growth in the small-car segment, said Natixis analyst Georges Dieng.

It assembles cars, vans and engines with the help of Russian manufacturers, such as Sollers and AvtoVAZ OAO AVAZ.MM. It also imports cars.

Its sales forecast for 2008 is more than double the previous year at 40,000 units.

However, as in China, the number is tiny compared with those from the likes of GM, the leading foreign car maker in Russia which aims for sales of more than 400,000 units this year.

Efforts to boost its presence suffered a setback last December when Fiat lost out to France's Renault SA RENA.PA in a bid for a quarter of AvtoVAZ, Russia's biggest auto maker.

More partnerships might not be what Fiat needs, however.

Its reliance on local manufacturers prevented it from having complete control over everything from the cost of manufacturing to the way its cars are sold, said Ernst & Young’s Bonchev.

“You depend on a partner for profitability and cost efficiencies,” he said.

It also had some way to improving its reputation.

“They are not regarded as the best cars in terms of overall quality and performance,” Bonchev said.

Additional reporting by Fang Yan in Shanghai, Simon Shuster in Moscow and Rina Chandran in New Delhi; Editing by Chris Wickham

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