Shanghai Automotive Industry Corporation (SAIC Group), one of China's biggest vehicle producers, and Shanghai Automotive Co Ltd (Shanghai Automotive) announced yesterday they would set up a joint venture with provisional name SAIC Luwei Co Ltd in Shanghai.

SAIC Group will control 60 per cent of the JV with a 768 million-yuan (US$94.70 million) investment and 60 per cent of its total registered capital of 1.28 billion yuan (US$157.83 million), according to the firm.

Shanghai Automotive will take the remaining shares by providing 521 million yuan (US$63.13 million) in capital formed by cash, land and facilities from its factory in Yizheng, East China's Jiangsu Province.

Total investment will hit 3.68 billion yuan (US$453.76 million) with a 3.401 billion yuan (US$419.36 million) fixed investment and 279 million yuan (US$34.40 million) in bottom-line cash flow.

The JV is expected to develop its business on the research and development (R&D), production and sale of vehicles, engines and spare parts. SAIC Group said by 2009 the JV's vehicle output will stand at 120,000 per year, without revealing what type of vehicles it would produce. The volume of engines is expected to hit 170,000 annually by 2010.

To develop its global strategy, the development of an innovative brand has always been the key target of SAIC Group, according to the company. Using the technology of Ssangyong and MG Rover, SAIC Group hopes the JV will manufacture its own vehicles to make the group more competitive internationally.

SAIC Group owns the intellectual property rights to the technology of Ssangyong and MG Rover after acquisitions last October and this April.

Zhang Xin, an analyst with Guotai & Jun'an Securities Co Ltd, said: "It is my belief the setting up of the JV is to rescue the failing factory in Yizheng. "But it's also an opportunity for SAIC Group to develop its own brand."

Song Bingshen, an analyst with China Securities Co Ltd, told China Daily that SAIC Group's factory in Yizheng had losses of 100 million yuan (US$12.33 million) last year.

"But I think SAIC Group is thinking more about its branding. As China's second-biggest automaker, SAIC Group needs an innovative brand to face the fierce global competition," said Song.

Both analysts expected the JV to come up against difficulties due to hot competition in the auto market, especially the passenger car market, which is largely occupied by world leading automakers.

"If the JV manufactures passenger cars, it will bring unnecessary competition to Buick, Passat and so on, which are also brands of SAIC Group," said Zhang.

Song said: "With a name like Luwei, which sounds like an MPV (mini passenger vans), and the MPV advantages of Ssangyong, I expect the JV to produce MPVs."

The analysts suggested the newly formed JV develop its business on commercial vehicles, rather than passenger cars.

(China Daily July 29, 2005)