BEIJING, May 24 (Reuters) - Fuji Heavy Industries has agreed in principle to make Subaru vehicles in northeastern China with Chery Automobile, the country's largest independent automaker, two people with knowledge of deal said on Tuesday, marking the latest foreign manufacturing tie-up in the world's biggest auto market.
The Chery deal, if it goes ahead, would give the Japanese automaker a foothold in China, joining the ranks of General Motors and Volkswagen , which had already carved up a major chunk of market where vehicle sales had topped 18 million in 2010. "Chery and Fuji have agreed on the major terms and conditions of making Subarus in the city of Dalian and are now communicating with Chinese regulators to seek their endorsement," one person briefed on the matter told Reuters.
The terms and conditions were similar with what had been previously reported, the person said, declining to elaborate.
The Nikkei business daily reported in late 2010 that the two companies were in advanced talks to build a 30 billion yen ($366 million) China plant, with initial annual capacity of 50,000 units, rising to 150,000 eventually.
New auto manufacturing ventures in China need to be approved by government bodies, including the top economic planner, the National Development and Reform Commission, and the Ministry of Industry and Information Technology, which oversees major industry policies.
Another person close to the companies told Reuters that Fuji Heavy was still occupied with recovery efforts after the devastating March 11 earthquake and tsunami, contributing to a postponement of the announcement of its China tie.
Like all the other Japanese automakers, Fuji Heavy suffered from the disaster. Disruption to the supply chain had snapped its sales momentum, causing a loss of some 15,000 units in car sales in the few weeks remaining in the business year that ended on March 31. A Fuji Heavy spokesman said the company had no further comment after admitting late last year that Chery was among its potential partners in China.
Chery spokesman Jin Yibo said he had no information on the deal.
A formal announcement of the deal is expected in the coming months. It will make Chery the latest Chinese car maker to have a foreign partner, joining bigger auto groups SAIC Motor Corp , Dongfeng Motor Group , Chongqing Changan Automobile among others.
CHINA TIES
China, which eclipsed the United States as the world's top auto seller in 2009, is too important to miss for most industry players, including top Japanese brands Toyota Motor , Nissan Motor and Honda Motor which formed their local alliances years ago.
Fuji Heavy, has been seeking a tie in China, where only imported Subaru models, such as Legacy, Forester, Impreza and Tribeca are offered via select agents, including Pangda Automobile Trade Co , China's largest publicly traded auto dealer.
The smallest Japanese automaker had previously approached a number of Chinese automakers for a possible tie, including SAIC, a long-time partner of GM and Volkswagen, industry sources said.
Chery Auto, best known for its hot-selling compact car QQ, had explored opportunities to export Chinese-made small cars to developed markets under the Chrysler badge.
But the deal was called off after Chrysler, now controlled by Fiat , reached a similar pact with Nissan Motor . Chrysler's bankruptcy amid of a steep industry downturn in North America was also cited as a reason.
In 2010, Chery sold 682,058 vehicles, up 36.3 percent year-on-year, outpacing a 33.2 percent gain in China's car market as well as Warren Buffett-backed BYD , which sold 519,806 cars, up 15.5 percent.
Geely Automobile , whose parent owns Volvo Cars, sold 415,286 cars last year, up 27.1 percent.
Chery, which started selling cars overseas in 2002, is now China's biggest auto exporter with year-to-date shipments exceeding 500,000 units. It operates 16 assembly plants overseas, including a $400 million facility in Brazil that will eventually be capable of making 150,000 cars per year.
In 2011, Chery aims to ship 120,000 cars overseas, mostly to developing markets in Southeast Asia, the Middle East and South America, up over 30 percent from 2010.
By Fang Yan and Ken Wills
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