MG Rover in talks to forge strategic alliance with Chinese car builder

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MG Rover, the country's only remaining volume car maker, is in talks about a wide-ranging alliance to develop and build new models with a Chinese motor manufacturer.

The company, which was saved from closure last year after being bought from BMW for £10 by a consortium of West Midlands businessmen, said the discussions could lead to MG and Rover models being built in China.

The talks with the China Brilliance Group, which is partly state-owned, could also lead to the joint production of engines, the establishment of a common component supplier base and the creation of a joint research and development centre.

The proposed tie-up has echoes of Rover's alliance with the Japanese car maker Honda, which ended in acrimony in 1994 after British Aerospace agreed to sell Rover to BMW for £800m.

An MG Rover spokesman said last night, however, that the alliance with China Brilliance would not involve cross-shareholdings unlike the Honda agreement which resulted in the Japanese company taking a 15 per cent stake in Rover.

China Brilliance is the country's biggest producer of minibuses and has a licence to manufacturer the Toyota Hiace in China. It also plans to start building saloon cars next year. The parent company Brilliance Group also has joint ventures with General Motors and Renault through other subsidiaries and is currently negotiating with BMW to produce cars under licence in China.

The chairman of the Chinese company is Dr Hyang Rong, who has controlling interests in several listed companies in Shanghai, Hong Kong and New York as well as unlisted automotive and component manufacturers in China. The group has revenues of $2.5bn (£1.7bn) a year.

Discussions between MG Rover and China Brilliance began several months ago although it is unclear who approached whom. An MG Rover spokesman said: "Initially we began talking about marketing opportunities in China but as we got more familiar with one another it blossomed into something much wider and more strategic."

Details of how many cars might be built jointly or where the R&D centre might be located are sketchy. If the talks come to fruition, then the first jointly-developed model is likely to be the R35, the successor to the medium-sized Rover 25 and 45 and the MG-badged versions, the MGZR and ZS. The new car, which Rover estimates will cost £300m to £400m to develop, is due to appear in spring, 2004.

MG Rover has been in talks with various potential collaborative partners for more than a year. Possible partners have included Proton, the Malaysian car maker which controls Lotus, and various UK and European component groups.

But this is the first time the company has disclosed the name of any potential alliance partner and the fact that it is a comparatively little-known Chinese group without much of a track record in car production will come as a shock to many in the motor industry.

MG Rover's Longbridge plant in Birmingham will make around 180,000 cars this year. It is aiming for annual production of around 200,000 vehicles of which roughly a quarter would be MG-badged versions.

In 1999, the last full year under BMW's ownership, Rover lost £780m. In the first eight months of MG Rover's existence, following the purchase of the company from BMW by the Phoenix consortium in May last year, it lost £254m. Losses this year will be less than £200m and the aim is to break even in 2002.