Nanjing Automobile Corp. (NAC) accepted the olive branch extended by Shanghai Automotive Industry Corp. (SAIC), its bidding rival for the MG Rover project three years ago, in a move to create a Chinese car colossus that will eventually compete head-on with global giants.

SAIC, China's largest automaker, and Jiangsu Yuejin Automotive Group, the parent company of NAC, finalized a merger agreement after five months of delicate planning on December 26, 2007.

Under the agreement, Shanghai Automotive Co. Ltd., a subsidiary of SAIC, will spend 2.09 billion yuan ($286 million) to buy auto manufacturing and parts assets from NAC. In return, Yuejin group will hold 320 million shares, or a 4.9-percent stake, in Shanghai Automotive.

Other vehicle-related assets of NAC will be spun off into a joint venture named Donghua Corp. formed by SAIC and Yuejin Group, which will hold 75 percent and 25 percent stakes, respectively.

The deal would create the biggest Chinese automotive maker, with a combined annual output of more than 1.76 million vehicles. The long expected move follows government calls for restructuring the Chinese auto industry to build representative world-class auto giants to challenge foreign automakers.

"This partnership is in line with the country's industrial policy for the auto sector and it is conducive to enhancing resource utilization and efficiency and to building major domestic auto brands," said SAIC Chairman Hu Maoyuan at the signing ceremony.

In China, the SAIC-NAC merger is the first step toward consolidation among the many vehicle producers controlled by local governments.

Benefits all around

Chinese auto brands have struggled to break into the international market, particularly in Europe and the United States. Technology and brand awareness are two main barriers.

NAC and SAIC vied for Britain's automaker MG Rover in 2005, in an attempt to tackle the global market. While NAC won MG Rover's fixed assets such as production lines and technology, SAIC got the design blueprints for two Rover models as well as the intellectual property rights for all Rover auto engines.

While the merger will make both automakers more efficient, it will help NAC ease financial strains in the expansion of MG production and help SAIC better tackle the global market with the MG brand.

With Rover technology, SAIC launched its Roewe model in 2006 and started marketing the sedan early last year. NAC also started selling its Mingjue sedans, a sports model based on MG technology, last October.

NAC, however, with most of its ailing assets losing money, had to face its ill-fated partnership with Fiat on the brink of breakup. Already pouring 4 billion yuan ($548 million) into the Mingjue project, NAC still needs another 6-8 billion yuan ($822 million-$1.1 billion) to get the project running, according estimates by NAC Chairman Wang Haoliang.

The merger gives not only a helping hand to NAC-from turning the MG Rover legacy into piles of scrap metal merely because of no follow-up investment-but also easier international market access to SAIC.

SAIC has successfully launched its Roewe model in China, but it's difficult for the automaker to market a completely new branded sedan globally. The MG, however, is a traditional British brand and will help SAIC easily pass technology barriers in the international market.

"The Longbridge plant in Birmingham, NAC's R&D employees there as well as their advanced equipment will give impetus to SAIC's rapid growth," said Jia Ke, Editor in Chief of Auto Business Review. "Beside this, Rover's sales networks in developed countries will facilitate SAIC's entrance into high-end markets."

SAIC, a partner of Volkswagen AG and General Motors, has made them the biggest sellers in the country with combined sales of 441,584 cars in the first half of 2007, or 14 percent of the market.

Before the full-scale cooperation, SAIC enjoyed advantages mainly in sedan production and sought to team up with market leaders such as Iveco to expand its presence in the commercial vehicle market. Nanjing Auto's MG cars, Yuejin light trucks and Iveco light buses could be valuable additions to SAIC's portfolio.

Rover legacy integration

"The ultimate significance of the SAIC-NAC merger lies with whether it will enable both to deliver a better performance in the international market," said Jia. "For Roewe and MG Mingjue already in competition, the cooperation might be a good opportunity to better integrate the remaining technology, brand and talent assets of MG Rover."

After the merger, all current SAIC-owned manufacturing bases will be classified according to product platforms instead of brands to lower costs and avoid redundant construction, said Chen Hong, President of SAIC.

Under the merger plan, SAIC is committed to develop both Roewe and MG Mingjue models in the long run, targeting, respectively, buyers of luxury cars and those keen on sports cars.

"Following the integration there will be a further input of resources to improve MG Mingjue production lines and enhance the production capacity of Mingjue to reach 200,000 units by 2010," said Chen.

SAIC also plans R&D personnel integration in the UK and at home. In Britain, SAIC's R&D center will be consolidated with Nanjing Auto's operations at Longbridge. SAIC plans to establish R&D, production and sales operations for Europe based at the existing capabilities at the Longbridge plant.

"The British business is vital for SAIC to enhance its multinational operations competence," said Chen. "It will become SAIC's new platform for overseas markets and a window for SAIC in Europe."

NAC has spent an additional $50 million to get the Longbridge plant ready for launching the MG TF roadster assembly later last year.

Production of MG models in Longbridge will resume soon, and SAIC plans new MG models for Europe, said Chen.

"We will thoroughly consider the requirements of European customers and EU regulations when we develop our new products and continue to improve MG brand's image in Europe," he added.

SAIC bought a 48.9-percent stake in South Korea's Ssangyong Motor Co. Ltd. for $522 million in October 2004.

NAC-Fiat breakup

The day after NAC merged with SAIC, Fiat announced it would pull out of the Fiat-Nanjing joint venture established in 1999, which had been losing money for several years. This is a second foreign-Chinese joint venture breakup in the automobile industry after the Guangzhou Peugeot partnership ended in 1997.

Fiat was said to be unhappy with Nanjing Auto's level of commitment to the venture, especially when Nanjing began working on the relaunch of the MG sports car brand after buying it from Britain's failed MG Rover.

In 2006, Nanjing Fiat sold 31,300 cars, short of Fiat's target of 40,000 for the year and far fewer than its competitors such as SAIC and its U.S. and German partners.

Fiat said it would sell its 50-percent stake in the venture to Nanjing for an undisclosed amount. Although Fiat's sub-brand, Iveco, will continue to work with NAC making the Iveco range of vans and small buses, the Nanjing Fiat passenger car business is formally over.

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

SAIC will take over the 50-percent stake and plans to transfer the production for Santana models to Nanjing in order to give full play to NAC's existing production capacity.

"NAC will continue to provide technological support to its sales networks to the high quality and continuity of after-sale services for a certain period," said Yu Jianwei, President of NAC.

Fiat has tried to find another partner to make passenger cars in China, the world's second biggest market, and the likely successor finally appeared last August when Fiat and Chery Automobiles agreed to set up a joint venture.

With production to start in 2009, the joint venture will make and distribute 175,000 cars under the Fiat and Chery brands and will introduce Fiat's Alfa Romeo premium sports car brand to China.

Fiat and Chery also signed a contract last August for Chery to supply more than 100,000 engines annually to Fiat. The 1.6 L and 1.8 L gas engines will be installed in Fiat automobiles manufactured globally.