Italy's Fiat SpA and Russian automobile conmpany Sollers announced a 2.4 billion euro ($3.3 billion) joint venture on Thursday to produce up to 500,000 vehicles per year in Russia in a bid to become the country's second-largest car maker.
The plant — located in the Tatarstan region 1,000 kilometers (600 miles) east of Moscow — will assemble the Linea, a car developed for emerging countries, and will develop and produce new models from Fiat's alliance with Chrysler.
An existing plant will be expanded with new production facilities and a technology park for producing components.
Fiat chief executive Sergio Marchionne and Sollers director general Vadim Shvetsov signed the deal to set up the joint venture in Naberezhnye Chelny, with Russian Prime Minister Vladimir Putin overseeing the ceremony, a statement said.
The plant will be capable of producing up to 500,000 passenger cars and SUVs annually by 2016, with at least 10 percent of production intended for export, the statement said.
The joint venture counts on support from the Russian government in getting long-term loans at a favorable subsidized interest rate for the entire amount of the investment, according to the statement.
Putin pledged to consider allocating 2.1 billion euros in loans, saying that the state is willing to help the new venture as long as it produces at least 50 percent of the components locally as promised, Russian news agencies reported.
The project is another step in Fiat's strategy to create a global automaker integrating Fiat and Chrysler technlogy with partners around the world.
Fiat and Sollers have been partners since 2005. Sollers first imported and distributed Fiat cars in Russia, then started to assemble several models.
Marchionne described today's agreement as a "turning point for our presence on the Russian market."
Russia was on track to become Europe's largest car market in 2008 before the global economic downturn hit the country, freezing credit markets and destroying thousands of jobs.
Car sales in Russia are now back to 2005 levels.
Analysts largely expect sales to remain flat in 2010 or improve slightly.
In a bid to spur sales, the Russian government is starting a highly anticipated scrappage scheme in March — similar to the cash-for-clunkers programs that boosted sales across Europe and the United States in 2009.
VTB Capital said in a research note that Sollers will benefit from cooperation with Fiat and be in position to take advantage of the future recovery of the Russian car market.
The investment bank noted that Sollers' current net debt of $750 million would have made it hard for the company to attract new borrowing on its own.
The Naberezhnye Chelny project will draw expertise from other Russian regions, Putin said, including Togliatti, home to the struggling auto maker AvtoVAZ, Russia's largest, which has recently seen massive lay-offs and numerous state bailouts.
AvtoVAZ recently announced plans for a new platform in partnership with Renault.
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