It makes far more sense for Chinese automobile makers to concentrate their financial and industrial firepower on domestic joint ventures than outright acquisitions of ailing U.S. and European vehicle brands. Growth in the Chinese auto market and European expertise in manufacturing small and mid-sized vehicles explain why.

Chinese auto manufacturers have been busy attempting to acquire U.S. automobile brands such as Hummer and, reportedly, Ford Motor Co.'s (F) Volvo. Likely more fruitful, however, is Fiat SpA's (F.MI) 50-50 joint venture announced last week with private Chinese auto parts manufacturer Guangzhou Automobile Group Co. Ltd to produce cars and engines beginning in the second half of 2011.

China recently outpaced the U.S. in auto sales for the first half of this year, establishing itself as the world's largest auto market. Last month, auto sales there topped 4.96 million units, up 14.3% from a year ago, according to the China Association of Automobile Manufacturers, or CAAM.

Set against this, the latest Fiat joint venture makes strategic sense, for Guangzhou will benefit from Fiat's expertise in building fuel-efficient small cars.

The JV is ambitious and must contend with Japanese automakers, such as Nissan Motor Co. Ltd. (7201.TO) and Honda Motor Co. Ltd. (7267.TO), which have had joint ventures in China for some time. Both recently announced plans to increase capacity there to keep up with the rise in Chinese demand. Honda's Accord and Toyota Motor Corp.'s (7203.TO) Camry are among the top 10 selling cars in China for the first six months of this year, according to CAAM.

Also, GM plans to invest $1 billion annually in China over the next three to five years.

Fiat's ventures in China are relatively new and it has become increasingly important to its growth. The share of Fiat's revenue from the "other" geographic segment that includes China, Japan and Russia, among others, has risen from 8.5% to 25% over the last five years. Its Maserati division reported a year-on-year rise in sales there of 80% and Ferrari by 20% to a sales volume of 212 cars.

Fiat has been increasing its global presence with a multitude of deals recently. Fiat recently committed to a 20% stake in a post bankruptcy Chrysler and is bidding on General Motors' European and Latin American Opel unit.

Fiat has joint ventures with companies in Turkey, India and Russia, though this experience hasn't translated well in China to date. Fiat quit a JV with Nanjing Automobile in 2007, after it lost money for years and sales dwindled. It also saw a stalled attempt to team up with China's biggest independent car company, Chery Automobile, in part due to the recession.

Still, the Fiat-Guangzhou tie up boasts better business logic than Middle Kingdom companies buying a Volvo or Hummer.

(Kevin M. Nichols is a columnist for Dow Jones Newswires on the energy, industrial and auto sectors. He has more than seven years experience as an analyst and trader on Wall Street and was formerly an executive in the proprietary trading unit at an investment bank. He can be reached at +1 (212) 416-2104 or by email: kevin.nichols@dowjones.com. Dow Jones Newswires is enhancing its news, commentary and analysis for the investment banking community, and is providing it on this service temporarily. To ensure continued access to the best of Dow Jones news and opinion on companies, sectors and deals for bankers and research analysts, please contact investmentbanker@dowjones.com.)