Top Chinese automaker SAIC Motor and smaller rival Nanjing Automobile Group announced a long-expected merger on Wednesday, creating a national car champion that aims to rival big multinationals.
Separately, Italy's Fiat said it had agreed to sell its 50 percent stake in its loss-making passenger car venture with Nanjing Auto to the Chinese firm, ending a long-strained relationship.
SAIC Motor will pay 2.095 billion yuan (US$285.7 million) for the vehicle and core auto parts operations of Nanjing Auto, owner of the classic MG Rover brand, the Chinese firms' parent companies said in a joint statement.
Nanjing Auto's parent company, Yuejin, will in return get 320 million shares in SAIC Motor, the statement added, equal to 4.9 percent of the Shanghai-listed firm's total shares.
"Faced with global competition, we need to go down the path of mergers and consolidation," SAIC Motor Chairman Hu Maoyuan told reporters.
SAIC Motor's ventures with General Motors and Volkswagen are China's biggest car sellers, with combined sales of 441,584 cars in the first half of 2007, or 14 percent of the market.
The MG Rover facilities in England, acquired by Nanjing Auto in 2005, will serve as a platform for tapping the European market, SAIC Motor President Chen Hong said.
Nanjing Auto's Yuejin light trucks, as well as Iveco light buses made in another tie-up with Fiat, could be a welcome addition to the portfolio of SAIC Motor, which faces strong competition in the commercial vehicle segment from FAW Group and Dongfeng Motor.
Announcing the sale of its stake in the passenger car joint venture with Nanjing, FIAT said it would nevertheless keep working with the Chinese group in the commercial vehicle and components sectors.
Fiat had been openly concerned about its relationship with Nanjing ever since the Chinese automaker began working on the relaunch of the MG brand. Fiat was worried that this was distracting Nanjing from its commitments to the joint venture.
China's fast-growing auto market, the world's second largest, is crowded with more than 100 players, with global heavyweights such as GM and Volkswagen playing a major role.
Government officials in Beijing have said they want to see an industry centered on three or four auto groups that have the resources and technology to succeed globally.
The tie-up between Nanjing Auto and its much bigger rival could be held up as a model as regulators coerce small auto makers to merge into bigger players, analysts and executives said.
"We have seen that happening in the steel industry. Consolidation of the auto sector is also inevitable sooner or later," said a Beijing-based analyst, who asked not to be named.
The SAIC Motor group sold 1.25 million vehicles in the first 10 months of this year, dwarfing Nanjing Auto's sales of 79,196 units, according to official figures.
Under the tie-up, Nanjing Auto's non-core assets, including trade and services, will be folded into Dong Hua Co, a joint venture between SAIC Motor's parent company and Yuejin, the statement said.
SAIC Motor's shares, which were suspended from trading on Wednesday, closed up 2.7 percent at 27.01 yuan on Tuesday. They have surged more than 230 percent this year, vastly outperforming a 96 percent rise in the benchmark index.