Close on the heels of the Beiqi Foton Motors deal to source engines from Cummins India to manufacture its commercial vehicles in India, Fiat India Automobiles Ltd, an equal joint venture between Italy’s Fiat Group Automobiles SpA and Tata Motors Ltd, announced it will use unutilized capacity at its factory near Pune (Western India’s automobile belt) to supply engine parts to Fiat China beginning March next year. The Ranjangaon factory has been saddled with excess capacity, owing to poor demand for Tata and Fiat models and engine export orders from Fiat Italy drying up

Besides supplying engine parts to China, Fiat India is also in talks with several local auto makers to supply engines that can power their cars and sports utility vehicles (SUVs), Rajeev Kapoor, president and chief executive at Fiat India said. “We are in the process of signing the agreement.” Fiat India makes Tata and Fiat passenger cars, engines, components and aggregates. A Fiat spokesman said the factory, which supplied engines to Fiat in Italy till last year, hasn’t received any export orders this year.

Exports to China, Kapoor said, will lead to better capacity utilization. It will also help Fiat China meet its requirement without making additional investments in a line that makes such parts, he said. Fiat India’s Ranjangaon factory has a capacity to make 250,000 engines a year. With car sales at both Fiat and Tata Motors dropping month-on-month, the factory has been operating at one-third of its capacity.

The announcement comes admist growing consolidation between India and Chinas automobile sectors. The consolidation began in small ways many years ago when Indian auto major began sourcing cheaper auto components from China. Then in 2009, the Chinese sitting on General Motor’s board, decided to bring cars to India’s highways. The news gave domestic Chinese companies the impetus to cruise into India too, paving the way for FAW, SAIC, Foton and Chery, China’s largest automakers to bring passenger cars and  light trucks to India, through various joint ventures. More recently, Tata Motors acquired Land Rover and Jaguar said they were in talks with potential Chinese partners to set up an assembly plant in the world’s largest auto market.

In general, India’s car sales fell in July from a year earlier, the first monthly decline since January 2009, after higher interest rates and fuel prices damped deliveries. Automakers sold 133,747 cars in the country last month, a 16 percent drop from a year earlier, according to data released by the Society of Indian Automobile Manufacturers in New Delhi today. The decline in July was the biggest since November 2008. Meanwhile, industry wide sales of trucks and buses increased 24 percent to 64,241 in July, according to the group. Two-wheeler sales climbed 13 percent to 1.06 million.