General Motors and Shanghai Automotive Industry Corp on Thursday signed a deal for a fourth jointly-owned car factory in China as GM tries to catch up with Volkswagen AG.

Their 50-50 venture, Shanghai GM, will buy a 50% stake held by four Chinese firms in the troubled Jinbei GM plant in the northeastern city of Shenyang, a GM executive told Reuters.

Analysts told the news agency this is the kind of expansion GM must maintain as it battles to take market share from domestic leader Volkswagen. GM reportedly controlled 8.5% of the market in 2003, against some 33% for Volkswagen.

“It’s not just got to keep an eye on Volkswagen. The whole market is incredibly competitive now,” Liu Fei, an analyst at Automotive Resources Asia told Reuters, adding: “It’s not a surprise GM felt it had to do this.”

Despite the competition, GM increased sales from its Chinese plants by 15.2% in January from a year earlier, to 34,982 vehicles, the report noted.

According to Reuters, Jinbei GM, which has capacity for 30,000 vehicles a year, sold just under 3,300 in 2003, hampered by a poor distribution network and reliance on a single product – the Chevrolet Blazer sport utility vehicle.

“Jinbei GM has always performed under par since it was set up, probably because it had weak Chinese partners,” China Southern Securities analyst Xu Xiang told Reuters, adding: “Shanghai Auto is an old hand in the domestic car market, and their entry into this venture will be of great help.”

The report said that, under the deal, GM would cut its direct holding in Jinbei GM to 25% from its current 50% by transferring a quarter-stake to Shanghai Auto. The four Chinese shareholders would then offload their stock to the Shanghai GM joint venture, lifting GM’s direct and indirect stake back to 50%.

GM spokeswoman Daphne Zheng reportedly declined to disclose financial details of the deal, but said there would be new investment in the $US230 million plant. She added the transaction required government approval and should be finished by the end of the year, Reuters noted.

The news agency noted that GM said in November it would raise capacity at its Chinese plants 50% by 2006 to 766,000 units, taking on production lines at its main Shanghai plant and another in the southern region of Guangxi.

Now Jinbei GM’s restructuring would enable the plant’s products to be sold through Shanghai GM’s nationwide sales network, and would enhance the plant’s skimpy product line-up, Reuters added.

Zheng reportedly said the factory would make cars as GM worked to put idle manufacturing capability to more productive use.

“The distribution network will be much stronger. We believe the new model will… allow us to fully utilise the manufacturing capacity,” she told Reuters.

Analysts reportedly said Shanghai Auto will gain from access to the north-eastern China market, where arch rival First Automotive Works has a massive factory with Volkswagen.

According to Reuters, Shanghai GM now runs two plants – one in China’s richest city and the other in the north-eastern province of Shandong.

Shanghai Auto is also a partner in GM’s Guangxi plant, along with another Chinese company, the report added, noting that GM posted a 46.4% rise in Chinese sales in 2003 from its local ventures to 386,710 units.