Changfeng - which builds SUV style vehicles - currently has manufacturing bases in four cities Hunan Changsha, Yongzhou, Hengyang and Huizhou, which could provide a location for Fiat production.

News has emerged from China this week that the planned joint venture between Fiat and Guangzhou Auto, which is now in the process getting governmental approval, is set to be located in the factories of Chinese carmaker Changfeng which have become available thanks to their recent merger with Guangzhou. Changfeng currently has manufacturing bases in four cities Hunan Changsha, Yongzhou, Hengyang and Huizhou, which could provide a location for Fiat production.

After nearly ten months of talks that initially started when Guangzhou Auto approached Fiat with an interest in buying several redundant production lines and which slowed down earlier this year as a result of the global financial crisis and Fiat's focus on forming an alliance with ailing American carmaker Chrysler, a deal has been hammered out and it is now before the Chinese authorities to get the seal of approval. The two carmakers are targeting production getting underway as early as 2011 with a full capacity target of 140,000 automobiles and 220,000 engines a year. Confirmation came from a posting on the Ministry of Environmental Protection website in late that confirmed that Fiat and Guangzhou Auto would jointly invest 4.27 billion yuan in the project.

Fiat has been desperate to find a new joint venture manufacturing partner in China, the world's second largest car market, to make up the ground it has lost to its rivals. It's failed JV with Nanjing Auto left it with almost a decade of ground to catch up and a recent planned JV with Chery Automobile was put on ice earlier this year. Guangzhou Automobile Industry Group Co., Ltd. meanwhile was founded in June 2000 and it is authorised by Guangzhou Municipal Government to operate state-owned assets. Benefiting from the sustainable and fast development of Chinese automotive industry, in 2007 Guangzhou Auto realised a sales volume of 510,000 vehicles and 890,000 motorcycles. It already has joint ventures with Toyota, Honda and Isuzu and has ambitious plans to launch its own-brand range of cars.

Those ambitions took a real step forward with the confirmation last week that it is to merge with Hunan Changfeng Motor Co. after Guangzhou Auto reached agreement to take a large equity stake in its rival which currently makes a range of SUV category vehicles. The deal will give Guangzhou Auto around a 30 percent stake in Changfeng and would make it clearly the largest shareholder. It plans to invest 10 billion yuan in Changfeng with the aim of producing 500,000 cars a year. The first of these cars will start rolling off the production lines in 2010. Currently Changfeng has a market capitalisation of 5.78 billion yuan and includes Mitsubishi Motors Corporation amongst its minority shareholders. Changfeng's parent company is its the largest - and controlling shareholder - with a 50.98 percent stake and this will now be reduced to just under 22 percent. The merger has been pushed by the Chinese government which is keen to see consolidation amongst the country's more than 130 car makers. The concern for Fiat now must be that in the same way that Nanjing Auto lost interest in its joint venture with the Italian carmaker when it bought the assets of the defunct British MG/Rover company, Guangzhou Auto's ambitions to become an own brand carmaker in its own right could draw attention away from a deal with Fiat.