Will Rover get Shanghaied?

Are they or aren't they? Reports that Chinese state-owned auto giant Shanghai Automotive Industry Corp (SAIC) was set to buy up troubled British carmaker MG Rover added a touch of Eastern mystery to the late summer 'silly season' on the UK's business pages.

Rover's Birmingham management moved swiftly to deny the story, which first appeared in trade journal Automotive News Europe. Talk of such a deal was "very flattering," group chairman John Towers told the BBC, but it was simply "not the case."

That, though, did little to quell media speculation that part or all of MG Rover was about to transfer to Chinese ownership, with all the implications for jobs and the future of Britain's last mass production carmaker. Several follow-on reports in the British press speculated that some if not all of Rover's production would be moved to cheaper Chinese plants in the wake of the supposed takeover.

Several cited an unnamed MG Rover source as saying there was "an absolute and definite plan" for SAIC to take an equity stake in the company, starting a gradual transition to full ownership. "Over the course of months it becomes more Shanghai and less Longbridge," the source said.

Chinese media also reported the story, citing unnamed sources apparently from SAIC as saying the company saw Rover as a steppingstone for its expansion into Europe.

Contacted by the China Economic Review, an SAIC spokesman said he couldn't comment on the relationship between the two companies.

And so the mystery continues. Either way, whether or not such a deal eventually materializes, the very fact that it is considered a serious possibility speaks volumes about the shifting balance of power in the global auto industry.

"If it goes ahead it will certainly be a major breakthrough for Chinese car manufacturers, but I think it really just shows the future direction for such companies to grow in," said Angela Gu, Shanghai-based analyst with consultancy Auto Resources Asia (ARA).

Such buy-ups were an inevitable part of the "process of natural evolution" that was now due for the Chinese auto industry, she added.

"Just as more and more foreign car companies are coming [to China], Chinese manufacturers are also feeling the need to go global."

In the space of just a few years SAIC has become the number one carmaker in China. Its highly profitable joint ventures with General Motors and Volkswagen have put it at the forefront of China's rapidly expanding domestic car market.

In June SAIC announced the signing of a cooperation agreement with MG Rover, a contact that appears to have been the basis for the supposed buy-up plan. Pending regulatory approval, neither company has released specific details of the agreement.

SAIC, however, has made little secret of its appetite for expansion beyond China's borders. Two years ago it bought a 10% stake in South Korea's Daewoo Motors and as of mid-2004, it was in the process of buying a US$488 million controlling stake in Ssanyong, another South Korean manufacturer, the latest in what it said would be a series of overseas acquisitions.

The group's well-publicized grand plan is to become one of the world's big six automakers – up there with GM and Ford. Reports emerged in July that, to fund that growth, the group was planning a US$1 billion share floatation in Hong Kong.

For its part, Rover is a long way from its glory days and has struggled to break even following its sale in 2000 by Germany's BMW to the Phoenix private equity group.

Sales have been on a downward slide for most of 2004. In July, for example, sales of Rover brand cars fell to just 2,900 units, a year-on-year drop of 36%. The MG brand of sports cars has done little better – its sales fell 27%.

In an effort to reverse that trend, Rover has been looking further afield at opening up new markets. It already has a cooperation deal with Tata of India, and China, something of a 'flavor-of-the-month' in the car trade, would seem a likely next target.

Added to that the company is in need of cash to fund the repeatedly delayed launch of a replacement for its mid-size Rover 45. With assets of some US$9.4 billion, according to its 2003 company report, SAIC would seem like a good bet.

From Rover's perspective, ARA's Gu said, "SAIC would seem like the perfect candidate", having the cash to invest, resources and ambition to build up the brand in China.

So were it eventually to buy MG Rover, SAIC would likely have to pay substantially more than the token US$15 Phoenix paid to BMW – but what would they actually get for their money?

Falling sales aside, the group has a well-established and experienced technical design department based at Longbridge – a capability and technology that SAIC is looking to acquire.

Then there is Rover's Western European network of more than 1,000 dealers, a potentially lucrative readymade foothold in Europe.

MG Rover also has a respected, if slightly battered, brand heritage, not least with the MG badge that would give SAIC a sporty, prestige model of the kind that appeals to China's new generation of cashed-up entrepreneurs.

Another simple fact, said auto analyst Angela Gu, is that "there aren't many independent car manufacturers left in the world." For a company like SAIC, seeking a fast track to global expansion, that's an important consideration and a chance possibly not to be passed up.