China's SAIC, Nanjing Auto combine assets to create 'world-class' automaker

Two of China's biggest automakers announced a deal Wednesday to combine their production assets in hopes of creating a company able to compete in global markets.

The tie-up between Shanghai Automotive Industry Corp. and Nanjing Automobile (Group) Corp. - both state-owned companies - adds to a flurry of recent alliances in China's fast-growing vehicle market, the world's second-largest.

SAIC is the local partner of General Motors Corp. and Volkswagen AG and has launched its own Roewe brand. Nanjing Auto is known for reviving the MG sports car, bought from defunct automaker MG Rover Group.

The two hope to create a "world-class auto company of an unprecedented scale in China," they said in a joint statement.

The communist Beijing government has been encouraging such tie-ups in its fragmented auto industry, hoping Chinese producers will pool resources to compete with bigger, richer foreign rivals. China's domestic market is dominated by GM, Volkswagen and other foreign producers. The country has about 150 automakers, most of them small and financially weak.

SAIC will dominate the new venture but Nanjing Auto's parent, Yuejin Motor Group, will retain a minority stake, giving the deal elements of both a merger and an outright takeover by SAIC.

SAIC will pay Yuejin 2.1 billion yuan (US$285 million; EUR 198 million) for Nanjing Auto's auto and core components businesses and combine them with its automaking subsidiary, SAIC Motor Corp., the companies said.

Yuejin will get a 4.9 percent stake in SAIC Motor, while the two companies form a new joint venture, Dong Hua Co., to operate Yuejin's remaining components, services and trade assets. SAIC will control a 75 percent stake in this venture while Yuejin will have a 25 percent stake.

Such deals are common in China, where government companies often spin off their productive assets as freestanding companies. The parent companies then sell minority stakes in subsidiaries to private investors or combine their assets with those of foreign partners or other state companies.

The statement gave no indication of where SAIC Motor Corp. would be headquartered.

The SAIC-Nanjing Auto deal follows an announcement in July that the two companies would cooperate in design, production and sales.

Also Wednesday, Italian automaker Fiat SpA said it will end its production joint venture with Nanjing Auto by selling its stake to its Chinese partner. Fiat said they will continue to cooperate in commercial vehicle and parts manufacturing.

"This decision gives us total freedom of action to concentrate on the restructuring of our automotive business in China," CEO Sergio Marchionne said in a statement.

"The Chinese market is a key element of the Fiat Group project for worldwide expansion of its automotive activities. In 2008 we will initiate large-scale importation of new models to be sold by our commercial network," he said.

Passenger vehicle sales in China grew by 20 percent in November to a record monthly high of 490,751 units, according to research firm J.D. Power & Associates.

Last year, passenger car sales rose 37 percent to 3.8 million units, according to the country's auto industry association. Total vehicle sales, including trucks and buses, rose 25.1 percent to 7.2 million units.

Among other alliances, Chrysler Group and China's biggest domestic automaker, Chery Automobile Co., have a deal to produce cars for export. Chery had 8.3 percent of China's auto market last year, but most Chinese producers have less than 1 percent, according to J.D. Power.