Shanghai Automotive said on Friday that a proposed tie-up between its state parent and Nanjing Automobile Group would include a merger of the firms' assets.

The parent groups of the two companies signed a letter of intent on 27 July to discuss ways of achieving a "complete union" through business cooperation and restructuring.

According to Reuters, Shanghai Auto chairman Hu Maoyuan told a shareholders' meeting on Friday that the intent was to merge all assets of Nanjing Auto, owner of the MG car brand, into Shanghai Auto's parent.

Nanjing Auto's vehicle assets would be folded into Shanghai Auto, while its auto parts assets would remain with the parent company, Shanghai Automotive Industry Corp. (Group), Hu was quoted as saying.

The specific means for implementing the combination will be decided after the completion of due diligence on Nanjing Auto, which will take more than a month, he added.

Reuters noted that the Beijing government has been encouraging consolidation in China's fragmented motor industry, with more than 100 players, to create a few national champions able to compete with global giants at home and overseas.

Shanghai Auto's ventures with General Motors and Volkswagen are China's biggest car sellers, with combined sales of 441,584 cars in the first half of 2007, or 14% of the market but the company faces tough competition in the commercial vehicle segment from local rivals FAW Group and Dongfeng Motor, whose Jiefang and Dongfeng brands are strong, Reuters noted.

Nanjing Auto's MG brand cars, acquired from failed British car maker MG Rover, its internally developed Yuejin light trucks and its Iveco light buses made in a tie-up with Fiat could be a valuable addition to Shanghai Auto's portfolio, industry analysts have said, according to the news agency.

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