Rover interest provides curious sideshow to market saga

PUBLISHED : Wednesday, 20 July, 2005, 12:00am
UPDATED : Wednesday, 20 July, 2005, 12:00am

Interest from both Shanghai Automotive Industry Corp (SAIC) and Nanjing Automobile Group in buying defunct British carmaker MG Rover underlines just how fiercely competitive China's car market is going to remain.

SAIC is believed to be offering between GBP50 million ($677.18 million) and GBP60 million, and Nanjing about GBP45 million, for the assets of Rover, which ceased making cars and went into administration in April after SAIC walked away from a previous round of negotiations.

At first glance, it is hard to see why either Chinese company should be interested in bidding for the British company. Although Rover boasts an illustrious early history - it made the first modern bicycle 120 years ago and developed the earliest jet engines during the 1940s - it has been plagued with troubles for years.

With sales of just over 100,000 vehicles last year, Rover is simply too small to compete in the global car market. It offers no economies of scale, its range of models is limited and its production quality is poor. It can no longer even claim ownership of the Rover name, which now belongs to BMW of Germany.

At the same time, the Chinese car market is suffering from crippling overcapacity. Eager to grab a share of a market many forecast will double in size by the end of the decade, foreign manufacturers have invested heavily in new production lines on the mainland.

According to estimates by US bank JP Morgan, China's saloon car manufacturing capacity will grow by 28 per cent this year to just short of five million vehicles. Demand is likely to be closer to half that, say the bank's analysts.

Although passenger car sales did increase by a healthy-sounding 10.6 per cent in the first six months of the year, much of the increase was achieved only after slashing prices. With raw material prices high, profits at leading domestic manufacturers, including SAIC, have fallen by as much as 50 per cent.

There is little relief in sight. With new capacity coming on stream from companies including Beijing Hyundai and Shanghai GM (in which SAIC has an interest), analysts warn there could be further rounds of price cuts, which tend to prompt buyers to defer their purchases.

Even worse for profitability, with the luxury segment of the car market already saturated, sales growth is increasingly concentrated at the cheaper end of the market, where margins are thinner.

But even in such a tough market there is still some logic to SAIC's and Nanjing's bids for Rover. The reason is not, as optimists in Britain hope, to resume manufacturing at Rover's Longbridge plant in the Midlands. That, says Graeme Maxton, managing director of vehicle industry consultancy Autopolis, 'would make absolutely no sense'. The factory is too small, too expensive and too old.

A Chinese buyer may retain a small research and development facility in Britain to take advantage of local engineering know-how.

The real attraction of buying Rover would be to obtain its designs (SAIC has already bought the rights to a couple of models), presses, assembly lines and paint shops and ship the lot to China.

That would bring either Chinese company benefits it could not hope to gain through a foreign joint-venture partner. In buying Rover, SAIC or Nanjing would be able to leapfrog a couple of stages in its development and produce a range of relatively advanced models under its own brands, over which it has full control, in the domestic market: a long-cherished dream for China's car companies.

Rover may not be state of the art when it comes to making cars, but it does have the great merit that it is available.

SAIC's and Nanjing's interest in snapping up the company is a warning that Chinese carmakers are determined to compete head to head with foreign brands in their home market, and that profits are going to remain as elusive as ever.