Fuji Heavy Industries Ltd. (7270), in which Toyota owns a 16.5 percent stake, has applied to make cars with Chery Automobile Co. in the world’s biggest auto market. The government considers Fuji Heavy, maker of Subaru-brand cars, a part of Toyota, said the people who declined to be identified as the matter is confidential.

Fuji Heavy has heard the argument that the government could reject a venture in which the partner is controlled by Toyota, according to a Fuji Heavy executive familiar with the situation. Under Chinese regulations an overseas company is limited to two joint ventures manufacturing passenger cars.

“The government is concerned about overcapacity of the auto industry and has been focused on slowing down automakers’ expansion pace,” Han Weiqi, an analyst with CSC International Holdings Ltd. in Shanghai said yesterday. “A venture between Subaru and Chery wouldn’t likely contribute much in terms of volume or improvements to the industry.”

China’s National Development and Reform Commission, which oversees approval of foreign joint ventures in the country, didn’t immediately respond to faxed requests for comment. Jin Yibo, an assistant general manager for Wuhu, China-based Chery, said yesterday he doesn’t have any information regarding the deal to release.

‘Not Aware’
The venture should not be rejected because Toyota’s stake is only 16.5 percent, said the Fuji Heavy executive, who declined to be identified.

“We are not aware of this,” Fuji Heavy spokesman Kenta Matsumoto said by e-mail yesterday. “Our plan to realize local production in China remains unchanged.” Toyota spokesman Masami Doi in Japan said yesterday he was unable to confirm whether the government would reject the application.

Fuji Heavy shares fell 1 percent to 453 yen as of 9:06 a.m. in Tokyo, while shares of Toyota fell 0.5 percent to 2,687 yen.

Toyota has passenger-car making ventures with China FAW Group Corp. and Guangzhou Automobile Group Co. in China.

Manufacturing with Chery, China’s seventh-largest automaker, is key to Fuji Heavy’s goal of boosting sales to 180,000 units in the country and increasing global deliveries by 42 percent to 900,000 by 2015. Local production would also help reduce the Tokyo-based company’s sensitivity to the rising yen against the dollar because its exports to China are dollar-based.

China Market
China, the world’s biggest vehicle producer, has the widest selection of choices for consumers, with 379 models on sale, 1.5 times the number available in the U.S., the world’s second- largest auto market after China, according to J.D. Power & Associates.

The combined production capacity of China’s largest automakers could exceed total demand by about 32 percent by 2015, according to calculations based on company and government projections.

Fuji Heavy, which currently exports to China, previously expected to announce details on local production in July.

President Yasuyuki Yoshinaga said last month in an interview that the company’s “perseverance is being tested” with the delay in government approval.

Forester SUV
The Forester sport-utility vehicle is Fuji Heavy’s top- selling model in China, where the company’s overall sales rose 28 percent to 62,000 units in the year ended March 31, according to the manufacturer.

China requires overseas carmakers to work with local partners, who must own at least 50 percent of joint ventures.

Fuji Heavy and Daihatsu Motor Co. are the only Japanese carmakers without a vehicle-making venture in China.

A 25 percent import duty makes Subaru cars more expensive than locally built cars. The Subaru Forester starts at 220,980 yuan ($34,500), compared with 189,800 yuan for the locally built Toyota RAV4, according to pricing data compiled by Sina.com.