Shanghai Auto tie-up may create Chinese car champion

SHANGHAI (Reuters) - A tie-up between Shanghai Auto, China's biggest car maker, and smaller rival Nanjing Auto could lead to the creation of a Chinese national car champion to rival the big multinationals.

Shanghai Automotive Co. (600104.SS) said on Friday that parent groups of the two companies had signed a letter of intent to discuss ways of achieving a "complete union" between the firms through business cooperation and restructuring.

China's central government and local authorities are pushing the tie-up as a way to build Shanghai Auto into a comprehensive auto maker that can compete with European, Japanese and U.S. giants at home and eventually overseas, industry sources and analysts said.

"Shanghai Auto is number one in the domestic passenger car market. A tie-up would shore up its commercial vehicle segment and boost its overall competitiveness," said Zhang Xin, senior industry analyst with Guotai Junan Securities.

The announcement may also indicate the government, after years of policy declarations but little success, is stepping up efforts to force consolidation of China's fragmented auto industry, which is crowded with more than 100 players.

Officials in Beijing have said they want to see an industry which centers around three or four auto groups that have the resources and technology to succeed globally.

Shanghai Auto gave no details of what form a tie-up might take, and stressed there was much uncertainty about the plan because any transfers of assets or equity stakes would need approval by the government, company boards and shareholders.

"We have just expressed our willingness to cooperate with Nanjing Auto," a Shanghai Auto executive said on condition of anonymity.

"What kind of agreement we would reach and whether it involves any equity transaction remain to be seen."

STILL FAR APART

Industry sources said the two companies remained far apart on terms of any tie-up. Shanghai Auto has been insisting on final control of any alliance, while Nanjing Auto wants an equal voice, the sources said.

"The two might have to come up with a deal of some kind eventually, but the talks could go on for months," said a source close to Nanjing Automobile (Group) Corp.

Because of the uncertainty, Shanghai Auto's shares, which have nearly tripled this year to 23.84 yuan on Friday, may not rise significantly in response to the announcement, analysts said.

But government backing for a deal, as well as commercial logic, is likely to produce some form of tie-up eventually that could include joint operation of the companies' major assets, if not an outright merger, several analysts said.

Shanghai Auto's ventures with General Motors GM.N and Volkswagen AG (VOWG.DE) are the top national car sellers, with combined sales of 441,584 cars in the first half of 2007 or 14 percent of China's market.

But Shanghai Auto faces tough competition in the commercial vehicle segment against local rivals FAW Group and Dongfeng Motor (0489.HK), whose Jiefang and Dongfeng brands are strong.

Nanjing Auto's self-developed Yuejin light trucks, as well as Iveco light buses made in a tie-up Fiat (FIA.MI), could be a welcome addition to Shanghai Auto's portfolio.

HEAVY FINANCIAL BURDEN

Shanghai Auto embarked this year on an ambitious program to sell its own brand of cars in addition to those made with General Motors and Volkswagen. It rolled out the Roewe 750, and wants to build the Roewe name as a middle- to high-end brand.

Nanjing Auto, based in the nearby city of Nanjing, stunned the industry in 2005 when it took control of Britain's collapsed MG Rover and won the rights to the iconic MG brand. It rolled out its first China-made MG sports cars and saloons in March.

Nanjing Auto has found reviving the MG brand -- for which the Shanghai Auto group bid before losing out to Nanjing Auto -- a heavy financial burden, which an alliance with a much bigger company could alleviate.

A senior Nanjing Auto executive told Reuters in March that the subsidiary making MG cars might sell as much as a 50 percent stake to outside investors to help fund its expansion.

Nanjing Auto has an annual vehicle production capacity of 200,000 units, or 15 percent of Shanghai Auto's 2006 sales of 13.4 million vehicles.