Auto Merger to Reshape the Domestic Industry

Models stand next to a Roewe, SAIC Motor Corp's own design, at the China International Industry Fair in this 2006 file photo taken in Shanghai. [Photo: Shanghai Daily]



Shanghai Automotive Industry Corp and Yuejin Motor Group yesterday created the biggest merger in the history of China's automobile industry.



The signing ceremony was held in Beijing for the merger between SAIC and Yuejin's Nanjing Automobile (Group) Corp.



Analysts were quick to say that more mergers are likely in the auto industry.



"Compared with the cooperation agreement, the integration of human resources, products and planning should be more important to the merger of Chinese auto giants," said Jia Xinguang, former analyst at the China Association of Automobile Manufacturers.



Guotai Junan Securities' Zhang Xin also agreed. "This is just a start, not the end of mergers in the industry," Zhang said.



With government encouragement, it didn't take long for the former competitors to reach common ground and sign a deal.



The merger will lead to a series of changes in business strategy for the auto maker.



For starters, it cleared the way for SAIC and Nanjing Auto to co-develop self-branded models.



SAIC's Roewe and Nanjing Auto's MG models were both produced on MG Rover models before the iconic British car maker went bankrupt. The models competed against one another and created concerns over intellectual property rights.



Chen Hong, vice president of SAIC said the MG will be kept after the merger and the two brands will be marketed differently. The MG will also be sold overseas, he said.



"In the future, MG vehicles will be more sporty and Roewe will emphasize elegance," Chen said, adding that the brands share similarities in technology and parts.



SAIC also plans to build a stronger presence overseas by integrating its engineering institution with Nanjing Auto's manufacturing plant in Britain.



Nanjing Auto's plant in Britain will soon start production and new MG models will be added to improve its brand image on its home market.



"The deal could be finalized because the assets of the two car makers do not compete with each other and provide a well-developed product portfolio," said Guotai Junan's Zhang.



"But the success of the self-branded models still depends on market response," he added.



Hu Maoyuan, chairman of SAIC, also admitted the merger will initially dent the profitability of its listed unit SAIC Motor Co Ltd.



"After the merger, development of self-branded cars will benefit from coordination. The merger will help both of us lower costs and provide a more dynamic business performance," Hu said.



SAIC is expected to strengthen its commercial vehicles with Nanjing Auto's medium-duty trucks as well as light buses amid cooperation with Fiat and Iveco.



Profitability could also be boosted as Hu said Nanjing Auto's production facility in Nanjing will triple sales within three years.



The merger was encouraged by both the central and regional governments to enhance competitiveness against international rivals. The nation's senior leaders in the central government and State Council, as well as leaders in Shanghai and Jiangsu Province support the partnership.



Due to the dominating market position of SAIC, the merger will have a big impact on the consolidation of the industry in the next few years.



According to China's 11th Five-Year Plan for the automotive industry, the country will step up efforts to form one to two auto giants with an annual output of two million units by 2010.



Meanwhile, Nanjing Auto also said yesterday it reached an agreement with Fiat S.p.A that will end the Italian car maker's money-losing joint venture Nanjing Fiat after eight years. The two car makers will continue to work on commercial vehicles and spare parts.