Privately-owned Chinese mainland car-maker Geely Automobile yesterday said it is in talks to buy British collapsed automaker MG Rover's moulds and production equipment business, and intends to build cars in Hong Kong.

Hong Kong-listed Geely and MG Rover held negotiations on the moulds and production equipment business in April, Geely said.

"Negotiations are at a preliminary stage and not related to a merger of equity shares of MG Rover," Geely said.

Geely and MG Rover started to negotiate plans to form a joint venture several years ago, but talks were suspended in the middle of 2004.

Shanghai Automotive Industry Corp, one of China's top State-owned car-makers, withdrew from talks to merge MG Rover in April.

Also yesterday, Geely and Hong Kong Productivity Council - a government-sponsored organization aiming to promote increased productivity throughout Hong Kong business sectors - signed a memorandum of understanding to collaborate in the development of the first made-in-Hong Kong car, and concerning automotive components.

The car will be a mid-to-high-range model, Geely said.

The two sides will establish an auto parts research and development centre at the end of this year in Hong Kong, which will be joined by Hong Kong manufacturers, it said.

But Geely has not revealed investment in the auto project in Hong Kong.

"Upon successful implementation of this project, we will look into the possibility of producing this new model in Hong Kong for export overseas, or leveraging on the CEPA advantages, to introduce to the mainland market," said Andrew Leung, chairman of the Hong Kong Productivity Council.

CEPA, or Closer Economic Partnership Arrangement, started last year to facilitate Hong Kong's exports to and investment in the mainland.

Li Shufu, chairman of Geely, said the Hong Kong auto project would help the company explore more opportunities in the international auto market.

Song Bingshen, an analyst with Guotai & Jun'an Securities Co Ltd, said: "There seems to be synergies between Geely's talks with MG Rover and its auto development project in Hong Kong."

"If Geely gets MG Rover's moulds and production equipment, it is likely to move them to Hong Kong to develop and build the planned mid-to-high-range car," Song said yesterday.

MG Rover's moulds and production equipment will be very helpful for Geely, a manufacturer of cheap cars which needs to move upwards in product portfolios to expand its profit margins and have a better public image, he said.

Geely, 60.68 per cent owned by Li, is producing compact cars in East China's Zhejiang Province and Shanghai.

However, other analysts don't think highly of Geely's auto project in Hong Kong.

Yale Zhang, the Shanghai-based analyst with US auto industry consultancy CSM Worldwide Corp, said: "I cannot understand why Geely wants to make cars in Hong Kong as the auto market is tiny and costs are much higher there than in the mainland.

"On the other hand, I wonder whether Geely could have enough cash to buy MG Rover's moulds and production equipment according to its current profit-earning ability."

Geely's existing products include Haoqing, Merrie, Ulion, Freedom Cruiser, Maple and Beauty Leopard, most of which retail for between 30,000 yuan (US$3,623) and 80,000 yuan (US$9,662).

Geely's sales grew by 23.3 per cent year-on-year to 53,710 cars in the first five months of this year, said an official of the company.

The company said earlier that it expects to sell 150,000 cars in total this year, up from 100,000 units last year.

Its exports rocketed by 150 per cent to more than 3,000 cars in the period.

Geely aims to double its exports to 10,000 cars this year from last year.

At the end of last month, Geely clinched a deal with a Malaysian partner to assemble its cars in the Southeast Asian nation.

Production in Malaysia will start later this year with components shipped from China and will reach 30,000 cars next year.

Geely, once a motorcycle and real estate conglomerate, started to produce cars in 1998.

It closed at 51 HK cents (6.56 US cents) per share yesterday, up 2 per cent.

(China Daily June 23, 2005)