Dongfeng Buys Stake in Fujian Motor to Gain Factory Capacity

Dongfeng Motor Corp., the second-largest Chinese automaker, will buy a stake in a smaller state-owned rival amid efforts by the government to create more competitive carmakers.

Dongfeng, which makes cars with Nissan Motor Co. and PSA Peugeot Citroen in China, will inject capital into Fujian Motor Industry Group Co. in exchange for an undisclosed stake from the Fujian provincial government, according to an e-mailed statement today, which didn’t include financial details. Zhou Mi, a spokesman for Dongfeng, didn’t answer calls to his office and mobile phones.

China, home to more than 110 auto brands, has said it will curb the increase in auto manufacturing capacity and encourage mergers and reorganizations in the industry in order to create three to five domestic carmakers that can compete with companies like General Motors Co. (GM), which is spending $11 billion by 2016 to expand in China.

“This is part of the ongoing process for industry consolidation, we should be expecting more deals in the coming years,” said Lin Huaibin, a Shanghai-based analyst at IHS Automotive. “It probably is still a little bit too far away for Chinese automakers to be able to compete against foreign automakers, but this is step one.”

Second Auto

Dongfeng was started by the central government in 1969 as the Second Automobile Works. The Wuhan, Hubei province-based company, which produces Nissan’s Teana sedan, Honda Motor Co. (7267)’s CR-V SUV and Citroen’s C5 sedan at its plants in China, is seeking to reduce its reliance on profits from manufacturing and selling foreign brands by boosting sales of its self-developed nameplates.

“Fujian Motor’s self-developed brands will boost and accelerate our self-developed brand strategy,” Dongfeng said in the statement. The strategic cooperation with the Fujian government will also help Dongfeng speed up its pace of exports given the province’s location in China’s southeastern coast, the company said.

Fujian Motor, owned by the government of China’s southern Fujian province, holds 50 percent of a three-way venture with Mitsubishi Motors Corp. (7211) and Taiwan’s China Motor Corp. (2204) Under the deal announced today, Dongfeng and Fujian Motor will set up a separate investment company to take a controlling stake in the venture, known as Southeast Fujian Motor Corp.

Dongfeng’s investment won’t affect the equity structure of Southeast Fujian, China Motor and Mitsubishi said through their respective spokesmen, Chang Shih-Ho and Tomoko Kawabe.

Fujian Motor also has another joint venture with Daimler AG producing vans such as the Sprinter and Vito. Another unit, Fujian Longma Automobile Co., produces mini-commercial vehicles at a factory with an annual capacity of 150,000 units.

Buying the stake in Fujian Motor will give Dongfeng access to manufacturing capacity in southeastern China, where it doesn’t have any factories, according to Lin at IHS. The two companies can also cut costs by sharing technology and purchasing, he said.

To contact Bloomberg News staff for this story: Alexandra Ho in Shanghai at aho113@bloomberg.net

To contact the editor responsible for this story: Young-Sam Cho at ycho2@bloomberg.net

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