Chinese automaker's plan with MG Rover raising eyebrows at home

SHANGHAI Dec 2, 2004; The AFP reported that Shanghai Automotive Industry Corporation (SAIC), which has stated ambitions to become the world's sixth largest carmaker by 2010, has expansionist dreams that some say are far too big.

SAIC, China's largest state-run automaker, is in the midst of negotiating the purchase of troubled British car giant MG Rover, and analysts believe it has bitten off more than it can chew.

"What's the point of this kind of expansion?" said Jia Xingguang, chief analyst at China National Automobile Industry Consulting and Development.

"It won't bring it (SAIC) its own design skills and technology, its own brands or the capital they need for further expansion."

Under the deal, which Rover hopes to confirm in January, SAIC would invest one billion pounds (1.85 billion dollars) in the ailing automaker, a tie-up that could potentially rescue the failing fortunes of the Birmingham-based factory and its 6,100 workers.

SAIC sold 700,000 vehicles last year but most of the unit sales come from its two joint ventures with German giant Volkswagen and US-based General Motors.

Out of those, 50 percent are government ordered purchases, which while likely to help buoy sales will not help mounting cash flow issues, analysts said.

SAIC is facing a capital shortage of around 60 billion yuan (7.2 billion dollars) if it is to keep up with its investment obligations to foreign partners General Motors and Volkswagen, said Jia.

"The purchase is just not rational," he said.

Nonetheless, if the Chinese government approves the deal it would give SAIC a 70-percent stake in loss-making MG Rover and a foothold in the European market.

"We have exportation of car parts, but we have very few cars being exported," said Xue Hao, spokesman at Shanghai Automotive.

Jia called it strategic "posturing" and said SAIC was dolling itself up, attempting to make itself financially sexier to outside investors ahead of an aimed-for listing.

"It will merely add another brand (MG Rover) which will make them look better and attract more attention in the stock market and raise a little bit more money," he said.

SAIC is attempting to complete a restructuring program inside two years to position itself for a listing.

As of this week, preparations at SAIC, the biggest shareholder in the actual car manufacturer operations of Shanghai Automotive Co Ltd, include plans to transfer a 70 percent stake in the group into a new holding company.

The transaction would clean house but also free up government-controlled SAIC to meet financial obligations, analysts said.

At the same time a deal with MG Rover would contribute its design and engineering resources, and its brands, while Shanghai Auto would fund new model development.

"Shanghai Auto will definitely benefit from deals in terms of technologies and managing experiences in the long run," said Qian Xiaoyu, auto analyst at United Securities in Shenzhen.

"But it's hard to say whether they could be economically effective in the restricted period of time."

A conclusive agreement with MG Rover would follow SAIC's acquisition of South Korea (news - web sites)'s fourth largest carmaker Ssangyong Motor in October.

"The acquisition of Ssangyong is part of our global strategy," company president Hu Maoyuan said after signing a contract to buy a 48.9 percent stake in Ssangyong for 500 million dollars.

"From now, (Shanghai Automotive) will be able to branch out into the global market."

Qian said the purchase of Ssangyong was typical of the government trying to aid big auto groups while preventing other companies from entering the auto industry.

"The more companies it wants to buy the more it worries me," Qian said of SAIC, which has also reportedly expressed interest in assets in Poland and Ukraine.

"I would not see the purchase of overseas companies as something good," Qian said. "It has to do with the image strategy of the government, which is to try to ensure more of its state companies enter the global 500 list."