Dongfeng Motor Corp, one of the three largest automobile groups in China, will form a joint venture to speed up its passenger car business, paving the way for further consolidation of China's massive auto industry.

In a filing to the Shanghai Stock Exchange, Shanghai-listed Harbin Dong'an Auto Engine Co said its parent company AviChina Industry & Technology Co Ltd is in talks with Dongfeng Motor for a possible tie-up.

It said AviChina and Dongfeng will form a joint venture and AviChina will finance the venture with restricted circulating shares of Dong'an Engine and parts of assets from its subsidiary minivan manufacturer Harbin Hafei Automobile Industry Group.

After the transaction, the new venture will be the biggest stakeholder of Dong'an Engine, with AviChina's 251.893 million shares, accounting for a 54.51 percent stake in Dong'an.

Talks are still on between the two parties with no deal reached, the announcement said. Once it goes through, it will be a landmark deal after the amalgamation of Shanghai Automotive Industry Corp and Nanjing Automobile Group Corp last year.

Dong'an shares fell slightly by 1.26 percent to 11.79 yuan on Monday after its long trading suspension since Jan 17 following rumors that its parent was talking to government departments. Shanghai-listed Dongfeng's stock went up 1.51 percent to 8.05 yuan.

"Once the joint venture is established, Harbin will become another engine manufacturing base of Wuhan-based Dongfeng Motor, helping Dongfeng expand the market for its own-badge cars," said Dong Jianhua, an auto analyst with Southwest Securities.

Dong believes a deal will help both, as State-owned AviChina wants to spin off its none-core assets to focus on aircraft manufacturing, while Dongfeng Motor, which specializes in passenger vehicles and medium-to-heavy duty trucks, faces tough competition from China FAW Group Corp and Shanghai Automotive Industry Corp (Group), the other two of China's top three automakers.

"A merger with Hafei and AviChina's Dong'an Engine, which sold 300,000 engines last year, is definitely the best and the fastest way to realize its dream of making independent cars," he said.

But it's still not clear how AviChina plans to distribute its non-core assets of Jiangxi Changhe Automobile Co Ltd.

"It's also an opportunity for Hafei Auto to shake off the bottleneck of capital and technology for its sedans. It's possible for Hafei to get new technologies from Dongfeng's joint venture with French PSA Peugeot Citroen," Dong said.

(China Daily March 5, 2008)