Shanghai Auto and Nanjing Auto contemplate merger

Shanghai Automotive Co.<600104>, China's biggest car maker, and Nanjing Automobile are contemplating a merger to compete against bigger multinational car makers in China and overseas.

Shanghai Auto said last Friday that both companies have signed a Memorandum of Understanding in which they will discuss future co-operation and a possible merger of their auto operations. At present, both companies have been competing against each other in the domestic market.

According to industry experts, China's officials are supportive of this move as a way to promote Shanghai Auto as an all-rounded auto maker to compete with foreign car makers in China, and ultimately overseas.

Analysts said the government is stepping up its efforts to enforce a consolidation of China's fragmented auto industry, which currently houses over 100 players, into an industry with three to four main players. With Shanghai Auto being first in the domestic car market, a merger with Nanjing Auto would boost its competitiveness, sources said.

However, Shanghai Auto has not revealed details on the merger, stressing that the merger is still uncertain. Industry sources have also said both companies remain undecided on terms of any tie-up, and any decision could take months.

While Shanghai Auto has been insisting on the final control of any alliance, Nanjing Auto has been calling for equal control. State media reported that Nanjing Auto has long been seen as an acquisition target for Shanghai Auto.

Sources predict that with the government's backing of the merger, together with the commercial benefits to a merger, there will eventually be some form of cooperation between both companies at the minimum.