A chery sedan is on display at an auto exhibition in Zhengzhou, Central China's Henan Province April 13, 2007. [newsphoto]

Chrysler Group and China's Chery Automobile Co. signed a deal on Wednesday to develop small and sub-compact cars for sale in North America, Europe and other markets.

The companies will modify existing Chery vehicles to be sold under Chrysler brands and co-develop future models, the two automakers said in a statement handed out before a press conference in Beijing.

Chrysler will begin sales of Chery's A1 hatchback in the U.S. in the first quarter of next year, Chery President Yin Tongyao told reporters. The 1.3-liter A1 costs as little as 53,800 yuan ($7,100) in China.

Tom LaSorda, president and CEO of Chrysler Group, speaks at the signing of a cooperative agreement with Chery Automobile in Beijing July 4, 2007.[Reuters]

Chrysler's least expensive U.S. model is the $13,850 Dodge Caliber, according to Santa Monica, California- based Edmunds.com, which tracks vehicle prices.

More than 70 percent of Chrysler's US sales come from light-trucks like its Jeeps and Ram trucks, a product skew that analysts have cited as a weakness at a time of high gas prices and expected tougher fuel economy regulations.

The Chery partnership is part of a Chrysler strategy to develop more models with less investment, Chrysler Chief Executive Officer Tom LaSorda said in the statement.

Chrysler plans to introduce 32 models from 2006 to 2010, an increase from 21 between 2000 and 2004, as five-year product spending during those spans fell from $41.9 billion to about $30 billion.

"It makes total sense for Chrysler to have a partnership with a Chinese automaker because that is where the growth is in the auto industry," said Rebecca Lindland, a forecaster for Global Insight Inc. in Lexington, Massachusetts. "It can be very unprofitable to develop new small-car platforms on your own. "

More than 90 percent of sales for Chrysler, which holds the Chrysler, Dodge and Jeep brands, are in North America and the No. 4 US automaker has targeted growth in Europe and Asia as a key sales priority.

Chrysler and Chery signed a preliminary deal in December that was seen as a major advance toward China's goal of exporting from its fast-growing auto industry into developed markets, including the United States.

While many industry executives and analysts expect Chinese automakers to eventually compete aggressively in the US market, several early ventures aimed at exporting a Chinese-built vehicle to the United States have faltered or faced setbacks.

Analysts have also cautioned that the first wave of Chinese-built vehicles are likely to face skepticism from American consumers concerned about safety and quality.

Cerberus Capital Management LP is acquiring 80.1 percent of Chrysler from Daimler in a $7.4-billion deal expected to close this quarter.

Chery, China's first vehicle exporter, plans to increase sales 29 percent this year following a 60 percent increase last year, it said in January. The company sold about 305,000 vehicles, including 50,000 exports, in 2006.

In the first five months of this year, the Chinese automaker had 4.8 percent share of its home vehicle market, the world's second-largest behind the U.S.

The automaker has sold vehicles in more than 50 countries and regions, according to the statement. In November, it abandoned plans to export its own-brand vehicles to North America with Visionary Vehicles LLC.

Chinese automakers have begun to target overseas sales as increasing competition at home crimps profit. Carmakers' profit margins in the country averaged 3.1 percent last year, compared with 9 percent in 2003, according to calculations based on figures issued by the country's automakers association.

Chery currently exports vehicles to developing countries and has set a goal of selling 393,000 vehicles in 2007, up 29 percent from 2006.