Merger talks between China’s two auto groups heat up

Shanghai Automobile Industrial Corporation Group (SAIC) and Nanjing Automobile Corporation (NAC) have signed a letter of intent last week. The two groups have entered due diligence process, which will take two months starting from August.

SAIC, the larger and more profitable of the two, has sent a team of legal and financial advisers to visit NAC to find out how much it can benefit from the cooperation.

SAIC, which has formed partnership with General Motors and VW, bought the Rover platform on which SAIC launched its own brand Roewe.

As Chinese auto industry is booming, it still lacks competitiveness in international marketplaces. Analysts say mergers between major automakers help pool resources. Clearly Chinese government encourages mergers between Chinese auto-makers in order to increase their capability to compete in the international auto markets.

There are roughly 150 auto companies in China but the market is dominated by joint ventures with foreign giants like Toyota and VW.

The hot topic in negotiations between the two groups is the mode of cooperation. It could be in the form of merger, setting up a new joint venture, or cross-holding of stakes in which the two will share the technology and market resources.

Neither SAIC nor NAC is available for comments. The two has to ask for government approval after the due diligence and the final result could come out in mid 2008.