Chery Automobile, the No 7 local auto group by first-half sales, said yesterday it had signed a memorandum of understanding with Italy's Fiat to form a joint venture to make cars under both badges for the local market.

The 50-50 venture, to be located in the eastern city of Wuhu, Chery's home base, will start building and marketing cars under the Fiat, Alfa Romeo and Chery badges in 2009, with an annual production of 175,000 units, the Chinese carmaker said.

But it hasn't revealed how much the two parties will spend on the venture and what specific models will be introduced, saying the project still needs government approval.

The move came after the Chinese firm and Fiat announced on Monday that they had finalized an engine purchase deal, enabling the Chinese carmaker to supply more than 100,000 1.6- and 1.8-liter petrol engines per year for Fiat cars assembled in China and abroad.

In July, Chery also struck a deal with Chrysler to assemble cars in China bearing marques from the US carmaker for the North American and European markets.

Li Chunbo, an auto analyst with CITIC Securities Co in Beijing, said Chery, which has remained staunchly independent in the past, will benefit a lot from the collaborations.

"These tie-ups will greatly help Chery boost its development, sales and profits," Li said.

Chery plans to raise its annual sales to 1 million cars by 2010 from more than 400,000 units expected this year.

Its sales in the first six months of this year jumped by 43.6 percent to 207,100 units.

Teaming up with Chery will give Fiat, which has seen sluggish China sales in recent years, a boost in the world's second-biggest and fast-growing vehicle market.

Sergio Marchionne, the Italian carmaker's chief executive officer, said in a statement that the deal with Chery represents a "milestone" for Alfa Romeo's global expansion and will facilitate development of Fiat's brand in China.

Fiat said last month that it aims to boost China sales to 263,000 cars a year by 2010 from 32,000 units in 2006, and will introduce a slew of new models into the country in coming years, such as the Linea, Grande Punto and Alfa Romeo 159.

But analysts said the tie-up with Chery will be a blow to Fiat's already fragile partnership with another Chinese automaker, Nanjing Automobile Corp.

Fiat started making its cars at the venture with Nanjing Automobile in 2001. But the venture has been in the red for years due to poor sales.

Sources familiar with the situation said Fiat might pull out of the venture after its sales tumbled by one-third to 10,817 cars in the first six months of this year.

Sales of all China-made vehicles surged by 23.3 percent to 4.37 million units, according to industry data.

Full-year sales are forecast to hit 8.5 million units, up from 7.22 million in 2006.