MG Rover has denied reports of a takeover by China's Shanghai Automotive. But closer co-operation could be good for the British carmaker, says Sean O'Grady

After years of searching for a suitable long-term partnership could MG Rover have found its true love?

After years of searching for a suitable long-term partnership could MG Rover have found its true love?

Reports in the motor trade press last week suggest that a liaison with the ambitious Chinese maker Shanghai Automotive may be blossoming. Sources close to the Chinese concern were reported in Automotive News Europe as saying a takeover was inevitable. An unnamed MG Rover source was quoted as confirming the picture, albeit in the long term.

It all caused quite a flurry. The denials that emanated from some parts of MG Rover were fairly flat, although it was not quite a unanimous front.

The truth is probably as follows. First, the MG Rover-Shanghai deal has to clear its way through Chinese government bureaucracy. Despite the outspoken comments quoted in the trade press, neither side will want to be fully open about the details of their agreement until it has all been approved by Chinese ministers, not exactly laissez faire in their approach to business.

It is a delicate matter and until this process is complete, probably towards the end of this year, little will be disclosed that can be relied upon. There is also the problem of MG Rover's negative dowry; the obligation to repay a £500m soft loan from former owner BMW if MG Rover is taken over, a poison pill left behind by the German maker in 2000 that complicates things.

Furthermore, MG Rover desperately needs a partner, and has done so for years. The search began 25 years ago in the days of British Leyland and has encompassed many suitors: Renault (an early snub); Honda (a happy marriage); General Motors (a failed arranged marriage by which the Thatcher government tried to offload British Leyland in 1986); British Aerospace (a somewhat complacent owner); BMW (a catastrophe that ended the harmonious Honda relationship and lost the Rover Group its Mini and Land Rover assets and know-how); FSO of Poland (where the collapse of Daewoo's enterprise opened the possibility of MG Rover buying the factory); China Brilliance (cancelled when Brilliance went bust); Proton (exploratory talks are now officially ended); Tata (which may be jealous of the latest move and was in any case a little cool at times) and now, Shanghai.

Whoever MG Rover eventually gets hitched to, some sort of burden-sharing is essential. The cost of developing a completely new modern car is about £1bn, way beyond MG Rover's means. As is endlessly repeated in the motoring press, the basic look of some of the MG Rover ranges is becoming a little dated, although it has to be said that MG Rover's band of engineers and stylists have done an extraordinarily good job of freshening up their products on an extremely limited budget.

The tweaking of the apparently unpromising Rover 25 and 45 into the sporty MG ZR and ZS ranges has been especially accomplished. Going to Ford of America to source the Mustang's beefy V8 for new top of the range versions of the Rover 75 and MG ZT was just the sort of creative move that has kept the company going against all odds. The MG SV might prove to be some sort of Porsche-beater, while the steadily updated MG TF roadster is still competitive.

Approaching the Tata of India to rebadge their Indica as a CityRover was also a smart move, one that might one day open up another huge market to MG Rover. Even the universally derided Streetwise, a Rover 25 with Audi Allroad-style plastic cladding, at least shows the company is aware that it needs to change its "pipe and slippers" image.

Nonetheless, sales are sagging a bit, not helped by MG Rover directors giving the impression that they are feathering their own nests. The TF, Rover 25/MG ZT and 45/ZS ranges date back about a decade and even the 75/ZT is edging into middle age. The SV sports car and the V8 saloons are essentially nice models that may do much to garnish the company's image but which yield little extra volume. The CityRover has had disappointing sales, and in any case creates virtually no jobs at Longbridge, whatever the long term holds. MG Rover do need a partner to help them complete the development of their new mid range models, and Shanghai Automotive may be the answer.

Which brings us to the third point, and the one that confirms why these two firms could be an excellent match. Shanghai is ambitious and MG offers the company an excellent entré into the UK and continental Europe. The Chinese car market may have doubled in size last year, but it is still small compared to that of the West. China is also much more volatile. With MG Rover Shanghai can easily access knowledge about the European industry, the tastes of European, styling, marketing and engineering expertise at Longbridge, and the MG Rover dealer network.

In the short run they can take the Rover 75 design to produce a more up to date and upmarket saloon than the 1980s VW and GM designs they've been putting together under licence. In the medium term they can jointly produce a 45 replacement. Shanghai has the financial resources and, potentially, the volumes and low cost base to make such a proposition viable. Even the production division between Shanghai and Birmingham suggests itself. Chinese tastes demand booted saloons; Europeans prefer hatchbacks.

The real question, however, is how such a move would affect jobs at Longbridge. Would the inevitable attractions of the low cost Chinese base drag the balance of power and production eastwards, leaving MG Rover as little more than the marketing and distribution arm of a Chinese-run transnational? It is possible to envisage MG Rover selling small cars made in India, medium cars made in China and larger cars made in Britain into the European market. That could be a highly profitable venture; but would such a set up deliver the volumes that Longbridge needs to make it break even? That means, say, 200,000 cars per annum or going on for double its present output.

That must be the worry at the back of every MG Rover employee's mind. And yet the Honda precedent might give them some room for hope. When that liaison started in the 1980s it was essentially as an assembly operation for Honda, making "Rondas", and decried as such. On some models it remained that way, but in others there was much more of a spirit of joint endeavour and some of the products of the partnership had a surprisingly high degree of British engineering and styling.

The other way of looking at the Honda-BL years is to ask what would have happened if MG Rover hadn't had that deal with Honda and had tried to survive on its own. Honda bought valuable time and expertise to the company when it was in dire straits. The two firms drew legally as well as commercially close. Honda took a 20 per cent equity stake in Austin Rover, as it was, and Austin Rover had a similar ownership share in Honda's UK manufacturing outfit, a symbolic cross-shareholding. Something in that spirit is already officially on the cards for the MG Rover-Shanghai deal, with a joint venture company that both will be part owners of. That might also neatly sidestep the BMW loan problem. Legal structures aside, though, if the relationship with Shanghai goes as well as the Honda one did, then MG Rover and the folk at Longbridge will once again have confounded their critics. MG Rover and Shanghai Automotive; For richer for poorer, til death us do part.

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