Iveco SpA, the commercial vehicle unit of Italian industrial group Fiat SpA, is suing a Chinese partner for alleged fund misappropriation.

In a lawsuit accepted by the High People's Court of East China's Jiangsu Province, Iveco accused Changzhou Changjiang Bus Group Co Ltd (CBC) in Jiangsu of embezzling at least 122.58 million yuan (US$15.11 million) from their bus joint venture, the Italian firm said in a statement to China Daily.

Sun Yuanlin, CBC's chairman, was named a co-defendant as he was chairman of the joint venture then and had approved the unauthorized payments, Iveco said.

"CBC's misappropriation of the joint venture's funds has left the venture in financial difficulty and has greatly affected its cash flow," Iveco said.

"The venture is presently unable to pay its suppliers or workers and, consequently, production has stopped. The position is unlikely to improve unless the funds misappropriated by CBC are repaid to the venture."

Iveco said it would pursue all legal avenues to recover the funds and does not rule out further legal action.

CBC and Sun were not immediately available for comment.

Iveco and CBC each hold a 50 per cent stake in the joint venture which was launched in 2001 with an investment of almost US$100 million the largest Sino-foreign bus operation then.

However, the joint venture has suffered sluggish sales and losses over the past two years.

Analysts said Iveco's move is a strong signal that it is determined to pull out of the ailing joint venture.

"If CBC's alleged fund misappropriation is true, it would be an extremely serious problem at a Sino-foreign joint venture which no foreign side would tolerate," said Jia Xinguang with China Automotive Industry Consulting and Development Corp.

"It can be interpreted that Iveco wants to bid good-bye to CBC and withdraw from the joint venture," Jia told China Daily.

Song Bingsheng, from China Securities Co Ltd, said Iveco's legal action indicates that its relations with CBC are on the verge of a breakdown and their expected divorce would give the Italian firm a ticket to team up with Shanghai Automotive Industry Corp (SAIC) - China's biggest car maker.

At the end of last year, Iveco and SAIC signed a framework agreement to develop a long-term partnership in the commercial vehicle segment.

Sources familiar with the situation said SAIC and Iveco intend to form a joint venture based on a truck plant in Southwest China's Chongqing Municipality which was acquired by SAIC last year.

However, no substantial step has been taken so far mainly due to China's auto industry policy which allows foreign automakers to set up a maximum of two joint ventures with different Chinese partners to produce the same types of vehicles passenger or commercial.

Both trucks and buses are treated as commercial vehicles according to the policy.

Besides the bus venture with CBC, Iveco runs a light truck venture with Jiangsu-based Nanjing Automobile Corp which beat back SAIC's bid to acquire collapsed British automaker MG Rover last month.

An SAIC official said yesterday that no specifics on its partnership with Iveco would be unveiled now.

(China Daily August 26, 2005)