A memorandum of understanding announced in May by the companies called for a Magna Steyr plant in Austria to build the vehicle on a contract basis.
But, Magna, based in Aurora, Ont. confirmed Friday that Nissan now plans to build the future compact Infiniti vehicle in-house.
"Although we would have liked to see the assembly of Infiniti's new compact vehicle realized at Magna Steyr, we are pleased that Magna remains an important supplier for Nissan Motor," said Gunther Apfalter, president of Magna Steyr and Magna International Europe.
"Nissan's project team has affirmed their willingness to work with Magna Steyr if future contract assembly opportunities arise, and we look forward to supporting them as needed."
The announcement marks the latest setback for Magna's goal of growing its assembly business, which comprises only a small portion of its overall sales.
In 2011, Magna's total sales amounted to $28.7 billion, while complete vehicle assembly sales were a fraction of that amount, at about $2.7 billion.
Magna disclosed the planned deal for building the entry-level Infiniti model in its first-quarter earnings report May 10, describing it at the time as "an important milestone to further diversify Magna Steyr's customer portfolio." It did not put a dollar value on the deal.
But the agreement was only in its feasibility study stages as Nissan weighed the option of a third-party partner.
"Infiniti ended the feasibility study this week and has decided to produce the vehicle in-house in a European production facility as part of the brand’s overall expansion production plans," Nissan said in a statement.
Earlier this month, similar questions were raised over a contract between Magna's Austrian plant and BMW when the automaker began to explore whether it would be more feasible to produce its Minis in Britain and the Netherlands.
BMW has told Magna that it intends to follow through with its existing contract which lasts until "coming years," said Magna spokeswoman Tracy Fuerst. After that, the company can explore manufacturing elsewhere.
Canaccord Genuity analyst David Tyerman said it has been a fairly difficult business to grow for Magna.
"In fact, the business as a whole in Europe — which is where this is basically done — has shrunk quite a lot as an industry. There were a number of players who have gone out of business all together," he said.
Tyerman suggests the assembly business will likely be a persistent challenge for the Magna division.
"The automakers at the end of the day are in the business of making cars, so they largely do their own assembly," he said. "The projects tend to be very niche in orientation, so sometimes there's a good amount of them and sometimes there isn't."
"I think it'll probably be a business that waxes and wanes," Tyerman added.
Magna is a leading global automotive supplier with 296 manufacturing operations and 88 product development, engineering and sales centres in 26 countries employing about 115,000 people.