Global Insight Perspective | |
Significance | Reports have emerged over the past 24 hours that the terms of the tie-up between SAIC and Nanjing Auto have now been agreed. |
Implications | A tie-up between the pair will allow the firms to share development of the architectures and intellectual property rights they both acquired from bankrupt U.K. automaker MG Rover. It may also lead to the dissolution of the ill-fated joint venture between Nanjing and Fiat. |
Outlook | The merger could help protect both companies from the fierce competition in the Chinese market and hasten their entrance onto the world stage. It could also give the Chinese government the national automotive champion it has been seeking for some time. |
Shanghai Automotive Industry Corporation (SAIC) Motor Corporation and Nanjing Auto have agreed the terms of a proposed tie-up, according to reports by both Reuters and the U.K. Birmingham Post newspaper.
Two unnamed sources close to the talks told Reuters that a deal had been agreed in principle, and that Nanjing would merge its vehicle and component operations with those of SAIC in exchange for around 10% of SAIC, currently worth around 16.9 billion (US$2.29 billion), with one source adding, "Nanjing Auto is likely to get between 5 and 8 percent of SAIC Motor…The stake will not exceed 10 percent." Ownership of the stake would to be transferred from SAIC's parent company.
The Birmingham Post was told by another source that the deal is expected to be announced on 26 December. It also said that under the terms of the deal Nanjing Auto's plans to restore vehicle production to the Longbridge facility in the United Kingdom would not be altered, and could in fact be brought forward, with SAIC taking the opportunity to build vehicles there itself. Among the ideas mooted is a new design centre to house the 250 engineers who have been working at the Ricardo site in Leamington (United Kingdom). The new deal will also see the pair operate under a new banner, according to the source, with one of the names considered being East Ocean Company.
Outlook and Implications
Talks are thought to have been taking place between SAIC and Nanjing Auto since late July when a letter of intent (LoI) was signed by the pair to look at ways of forging a "complete union". It had initially been thought that confirmation of a deal would occur in early October, but thanks to the sheer complexity of Nanjing's assets the due diligence process took far longer than anticipated. Among the wide-ranging businesses underneath the Nanjing umbrella are its self-developed Yuejin light-truck operations, its Iveco light-bus joint venture (JV), and its failing JV with Fiat. The latter is thought to be close to being dissolved, despite statements from both sides saying that they will carry on together. This tie-up with SAIC could be the tipping point for a resolution to the Fiat JV one way or another, although it seems most likely that the pair will split, with SAIC's JV with Volkswagen (VW) already said to be eyeing the currently under-utilised operations for its own ends (see China: 22 October 2007: Shanghai VW May Produce Cars at Nanjing Fiat Plant—Report). However, the SAIC-VW JV may have to wait some time before it can use this facility as Fiat is believed to want to maintain a token operation in China to support the current owners, its dealers, and the brand's presence in the country until it can restart with a new partner.
The most important component of the proposed deal between SAIC and Nanjing is the reuniting of the assets and intellectual property rights they acquired from the bankrupt U.K. automaker MG Rover. Nanjing and SAIC both build vehicles underpinned by the architecture of the Rover 75/MG ZT, built under the guise of the Roewe 750 and MG7. A merger would enable them to combine forces, rather than compete in the same marketplace as they do currently, and it would also allow them to combine research and development (R&D) on the platform to progress with an eventual replacement for the two models. This would no doubt be expanded further to encompass rumoured new models for each brand, including a sports-utility vehicle (SUV) from Roewe, likely to be spun off a SsangYong platform, and a coupé from Nanjing Auto built up from the TF that it acquired from the remnants of the British company, and which it is eventually hoping to build at Longbridge.
The tie-up would be an extremely positive step for both sides and would create a national automotive champion for China, something the government has long wanted. As the country's market is becoming even more competitive as both home-grown and global automakers seek further market share, price wars have started that have reduced profitability, while ever-increasing amounts of investment are required to establish a line-up that appeals to the developing tastes of Chinese consumers. In order to cope with this, and to break out onto the world stage, size is likely to be of huge importance. By sharing the risks, Nanjing and SAIC will attain greater security than its rivals that are going it alone, and may well be able to reduce their dependency on JVs with other automakers far quicker than others in the same position. In this event, the country truly would have an industry champion to take on the world.