Soueast brand cars are made at a three-way venture among Fujian Motor, Taiwan's Yulon Group and Mitsubishi from Japan. Zhen Huai / China Daily

Reports: No 2 auto group looking for SE China base

China's second-largest auto group Dongfeng Motor Corp has made plans to acquire Fujian Motor Industry Group Co Ltd as it moves to set up a southeastern production base, according to recent local media reports.

The Chinese partner of several foreign automakers including Honda and Nissan, Dongfeng signed a memorandum of understanding earlier this month with Fujian Motor and the Fujian provincial government and are now in discussions on a framework agreement, anonymous insiders told the media.

Dongfeng, based in Wuhan, Hubei province in Central China, plans to use Fujian Motor as a strategic production site in the southeastern region and produce passenger vehicles under its wholly owned brand, said the sources. Both companies declined to confirm the information.

If completed, the deal would be the latest big merger in the country's highly fragmented auto industry. The central government has made several calls for further consolidation in the sector.

The last big merger was in 2009 when State-owned Chang'an Automobile Group based in Chongqing acquired the two automobile manufacturing subsidiaries of aircraft maker Aviation Industry Corp of China.

Analysts said that Dongfeng's plan might be driven by geographic ambitions. Almost every large auto group in China is now expanding across the nation, usually by taking over existing facilities.

The group's export strategy also makes coastal Fujian attractive, they said.

Dongfeng currently operates joint ventures with Honda, Nissan, Kia, PSA Peugeot Citroen and Yulon Motor Co from Taiwan. It also makes cars under its own brand Fengshen and trucks carrying both foreign marques and its own nameplates.

The company sold 3.06 million vehicles last year, including 2.33 million passenger vehicles. Its 2012 target is to deliver 3.3 million vehicles.

Among Fujian Motor's multiple business units is Soueast Motor, a three-way joint venture with Japan's Mitsubishi and China Motor Corp from Taiwan. Soueast Motor makes cars under its namesake brand as well as several foreign brands.

It also operates a joint venture with Daimler that makes Mercedes-Benz vans.

The group last year sold 123,100 vehicles, down 6 percent from a year earlier, and sales are continuing to stagnate in a sluggish market.

Fujian's output is relatively small, so Dongfeng could offer sufficient funding for development of new models, said Lin Huaibin, analyst of consultancy IHS Automotive.

In addition to Dongfeng, Beijing Automobile Group and Guangzhou Automobile Group have also contacted Fujian Motor about possible acquisition.

But Dongfeng's status as a large enterprise under the management of the State-owned Assets Supervision and Administration Commission makes it stand out from the competition, analysts said.

Additionally, Dongfeng's joint venture partner Yulon Motor and Fujian Motor's partner China Motor Corp are both subsidies of Taiwan's Yulon Group, which might also play a role in promoting the acquisition, they said.

While the deal remains uncertain, analysts question whether it will work in any event with such a complex range of parties involved.

"Being bigger and being stronger are different things," said Zeng Zhiling, director of LMC Automotive Asia Pacific Forecasting.

"The move can help Dongfeng grow its size but it won't necessarily lead to improvement in the company's competitiveness," he said.

hantianyang@chinadaily.com.cn