Fiat Group and Guangzhou Automobile Group (GAC) on Monday signed a framework agreement for a 50/50 joint venture to make cars and engines for China.

The agreement was signed in Rome by GAC chairman Zhang Fangyou and Fiat Group CEO Sergio Marchionne.

The two companies will build a 700,000 sq m production area as part of a total investment of over EUR400m.

First phase production capacity will be 140,000 cars and 220,000 engines per year. Plant capacity could subsequently be increased to a maximum of 250,000 cars and 300,000 engines per year, the two firms said in a statement.

Production is scheduled to commence in the second half of 2011.

The models produced will be equipped with the latest in engine and transmission technology in response to the Chinese government's requirement to develop fuel-efficient, low emission vehicles.

The first model to be launched will be the C-segment Linea sedan and the first engines will be the 1.4-litre 120hp Fire and 150hp T-Jet units.

The plant will be located in Changsha, the capital of Hunan province, a major road and rail hub in south central China, approximately 600km (350 miles) north of Guangzhou to which it will be connected within a couple of years by high-speed rail link.

This project is also eligible to receive support from the development plan recently established by the Chinese government to promote new investment in six provinces in central China.

Guangzhou also has auto JVs with Honda, Toyota and Hino. These delivered over 530,000 cars in 2008.

GAC last year began a collaboration with Fiat Group Automobiles and Fiat Powertrain Technologies to provide technology and support for development of the first vehicle to be produced and sold under the GAC brand.

Fiat pulled out of a joint venture with Nanjing Automotive in 2007 and, last March, a planned venture with Chery Automobile was postponed by the Chinese company.