Caterpillar and Navistar International Corp are in talks with China's Jianghuai Automobile <600418.SS> to set up a truck venture, a source said, as the firms become the latest foreign players to tap the market dominated by Chinese state auto groups.

The two U.S. companies hope to gain a foothold in China's 150 billion yuan ($22 billion) heavy truck market, joining Daimler AG , MAN and others which recently tied-up with local partners.

The Chinese government's stimulus measures aimed at supporting a recovery in the world's third-largest economy is already fuelling a boom in the retail automobile industry.

The parties have basically agreed on the framework for a 50-50 venture to make heavy trucks and engines, but have yet to iron out the details, a source with direct knowledge of the matter told Reuters.

Caterpillar and Navistar would hold a 50 percent stake in the venture, with Jianghuai owning the remainder, said the source who did not wish to be identified as he was not authorized to speak to the media.

A spokesman with Anhui Jianghuai Automobile Co, a mid-size automaker, based in east China, declined comment, while Caterpillar and Navistar executives could not be reached.

Analysts said the JV, expected to be finalized before the end of the year, offers Caterpillar and Navistar a chance to tap China's heavy truck segment.

Heavy truck sales in China rose 11.75 percent to 541,256 units in 2008, more than double the level in 2003, according to Nomura Securities.

Sales are set to rise in the coming years, bolstered by Beijing's continuous efforts to improve the country's infrastructure, analysts said.

Unlike General Motors and Volkswagen which have long become household names in China, foreign truck giants have made little headway over the years as their upscale models are too expensive for local trucking service operators.

Foreign truck makers face a much bigger challenge in China comparatively because an Audi is a status symbol, while a Volvo truck can only push up trucking firms operating cost, said Chen Qiaoning, an industry analyst with ABN AMRO TEDA Fund Management.

The availability of indigenous trucks, priced at one-third or less than imported models and considered more suitable for bumpy roads in land-locked inland China, were also cited as major hurdles.


But there have been some early signs foreign truck makers are staging a comeback with some landmark deals unveiled this year, including MAN's $787 million deal to take 25 percent of Sinotruk and Daimler's tie-up with Beiqi Foton Motor Co <600166.SS>.

Though local brands made by Dongfeng Motor Group <0489.HK>, FAW Group may still dominate China's truck market, demand for upscale foreign trucks is expected to pick up as Beijing raises vehicle emission standards further, forcing trucking firms to retire their gas-guzzlers, analysts said.

The three-party tie-up with Caterpillar and Navistar will help diversify the portfolio of Jianghuai which currently makes multi-purpose vehicle and light trucks and cars.

It could open a window of opportunity for Jianghuai Auto, eager to boost its international exposure. Trucks made at the venture will be sold in China and also in select markets overseas, the source said, adding detailed market plans had yet to be finalized.

In the first half, Jianghuai, based in Anhui province, reported 114 million yuan ($16.7 million) net profit, down 31.84 percent from a year earlier. Sales climbed 1.89 percent to 9.3 billion yuan.

($1=6.831 Yuan)

(Editing by Anshuman Daga)