SAIC and Nanjing Auto to reach cooperative agreement, favor Daimler-Chrysler merger

Sources from Shanghai Automotive Industry Corporation Group (SAIC) and Nanjing Automobile (Group) Corporation (NAC) say the negotiations between the two parts are well underway and initial framework agreement is expected to come within the coming two weeks.

"The negotiations are concentrating on cooperation instead of acquisition," said one NAC official.

Acquisition excluded

A source from Nanjing Auto revealed that the two parts has just made some basic understandings with each other but the specific terms regarding the cooperation will not be unveiled very soon. In addition, the cooperation also relies heavily on the approval from the government, but according to analysts, the Chinese government has long encouraged consolidation in the auto sector to nurture a handful of manufacturers able to compete in global markets. A tie-up between SAIC and Nanjing Auto would suit that policy very well.

"We have been looking forward to cooperation with SAIC and we are even willing to make concessions on the part of shareholdings if necessary," said Wang Haoliang, chairman of Nanjing Auto, “but we will insist on keeping certain rights, like our revenue will remain at Nanjing."

Merger like Daimler-Chrysler is favorable

Nanjing Auto hopes the cooperation will yield to a win-win result. The Nanjing-based automaker is expecting to imitate the 1998 DaimlerChrysler buyout case. DaimlerChrysler paid almost $40 billion for Chrysler in 1998, but after the merger the two parts has maintained their independency and kept their separate brands, while only share some technologies for mutual development.

But there's some risks in doing so, as DaimlerChrysler moved to undo the most expensive and one of the least successful mergers in auto industry history this year due to the money-losing Chrysler division has influenced its overall financial performance.

But corporation between Nanjing Auto and SAIC is different from the DC merger in that the first couple are supported by the government while the second one just subject itself to market fluctuations.

MG and Rover maybe re-allied

SAIC lost out to Nanjing Automobile in bidding for the bankrupt MG Rover in 2005. Instead, SAIC bought the technology for two Rover models, the 25 and the 75. SAIC has since launched its own version of the Rover 75, called the Roewe. Nanjing Auto recently rolled out its version of the MG sports car, seeking to revive the historic brand.

But the state-run media has reported recently that Nanjing Auto is facing difficulties in financing the overseas expansion based on its acquisition of MG, which included a factory in Longbridge, in central England. Thus the merger is expected to bring SAIC more fund support while SAIC can also enrich its production lineup, including the introduction of the Nanjing Iveco, Nanjing Fiat brand, and help it to realize scale economy.

According to insiders, the auto industry still remains divided by regional rivalries, with new manufacturers still joining the fray. And this also has created a scenario in which one company has what the other wants. So for instance, the more powerful and larger corporation in SAIC arguably has the means to launch its own vehicles on the world-scene, but no true viable brand in which to use for such an expansion. Meanwhile, Nanjing is the smaller and more nimbler company with a group of viable western brands, but not the means in which to begin a true world-wide export campaign.

So with this in mind, it seems that Nanjing and SAIC are putting their arguing aside -- and may look at a merger between the two companies that will essentially put MG and "Rover" (Roewe) back under the same corporate umbrella.