China's third-largest car maker Dongfeng Motor Group Co is in talks to acquire smaller home rival Hafei Automobile Group, people close to the deal said.

The buyout might be the latest merger and acquisition deal in China's auto industry following the alliance of SAIC Motor and Nanjing Auto last month as the nation encourages industrial tie-ups to increase competitiveness against overseas peers.

Wuhan-based Dongfeng has already launched a due diligence probe against the mini van maker Hafei, the people, who preferred to remain anonymous, said yesterday.

Zhou Mi, a spokesman of Dongfeng Motor, didn't deny the possible takeover, saying he was not aware of the issue yet. Officials from Hafei were not available for comment yesterday.

Details of the deal emerged as part of consolidation plans of China National Aviation Corp Group, or CNAC, which plans to exit the auto business and focus on the airline and aviation-related sector.

CNAC, the parent company of China's second-largest carrier Air China, also has other auto-related assets in an engine manufacturer and Chang He Auto, the Chinese partner of Japan's Suzuki Motor Corp.

"Dongfeng will benefit from an expanded output with Hafei's facilities in north China and a more complete product line-up with its small engine-sized vehicle," said Dong Jianhua, an auto analyst at Southwest Securities Co Ltd.

"The deal will also help Hafei enter the profitable and passenger car segment."

(Shanghai Daily January 25, 2008)