Three Chinese-made Fiat Palio cars are on test in Central America countries in what some industry observers regard as a strange and threatening operation at a time when the Brazilian unit of Fiat has lost export competitiveness due to currency values.

Fiat do Brasil said, however, that the programme is simplly normal testing in support of the automaker's joint venture Nanjing Fiat. Market commentators and some suppliers, though, see it as pressure from the Chinese in internal Fiat unit competition.

Fiat do Brasil is currently responsible for supplying Latin American markets with the Palio range and said it would continue exporting the models to all countries in the region.

But in interviews in recent months, Fiat do Brasil and Fiat Latin America president, Cledorvino Belini, said that the Brazilian unit may lose export contracts mainly to China, and also to Turkey, as a result of the Brazilian currency's strength against the dollar.

At the beginning of March, Belini admitted that the Chinese-made Palio now has lower production costs than the Brazilian-made version.

Counting against the Brazilian unit, the real (Brazilian currency) is trading at its strongest levels since 2001.

According to Fiat, this exchange rate affect the costs of local components and consequently the cars' production costs.

Because of this the company expects an export volume reduction of 30% from 100,000 vehicles in 2005 to 70,000 units this year.

Last year, General Motors do Brasil lost export contracts for CKD vehicle assembly kits to GM's Korean unit as a result of the Brazilian currency's strength.

According to Belini, for Brazilian exports to be competitive, $US1 needs to be worth R$2.80, not the current R$2.20.

Rogério Louro