SAIC intends to participate in the share of Shang Chai: It will be clear within 3 months

SAIC Group is in talks with Shanghai Diesel Engine Co., Ltd. (600841.SH, referred to as "Shangchai") and is exploring ways to become involved in the company. As a key player in the acquisition of Nanjing Automobile Group, SAIC’s move aims to address its weaknesses in the commercial vehicle sector. A senior executive from Shanghai Shangchai Securities confirmed the news to reporters, stating that this is a strategic partnership between the two parties. “An official announcement is expected within three months,” he said. According to an insider at SAIC Group, the discussions are still in the early stages, and no concrete plans have been made regarding how they will collaborate or share ownership in Shangchai. SAIC has also mentioned that both sides are currently only discussing potential business cooperation. It has been reported that the working group from Shanghai Electric, Shangchai's parent company, has already stationed itself on the company’s shares. Shangchai is a leading force in China’s internal combustion engine industry, offering a wide range of products across five series with over 300 variants. The two companies first connected in 2002. A source from Shangchai told reporters that the company has long sought a strategic partnership with a vehicle manufacturer. “In today’s market environment, a standalone engine company finds it increasingly difficult to compete,” the insider said. In 2000, Shangchai even invited McKinsey & Co. to evaluate its future development strategy, which ultimately recommended integration with OEMs for sustainable growth. In 2002, Shangchai approached SAIC with the idea of introducing its capital into SAIC’s commercial vehicle project. However, disagreements over bidding and control led to the failure of the deal. Later, in 2006, Shangchai tried to partner with Caterpillar but failed to reach any agreement. A veteran in the diesel engine industry believes that while Shangchai has strong R&D capabilities, it lacks integration with downstream industries, limiting its market expansion. “OEMs are now more inclined to develop their own engine systems or form partnerships,” he noted. Beiqi Futian, once a major client of Shangchai, has shifted its focus to Daimler-Benz engines after partnering with Beiqi Foton. This shift highlights the challenges Shangchai faces in maintaining its relevance. Since 2005, Shangchai’s growth has slowed. Its Q1 2007 financial report showed operating income of around RMB 8.1 billion, but net profit dropped to just RMB 2.01 million, a 47% decline from the previous year. For SAIC, the collaboration with Shangchai could be a significant step forward. According to an insider, the partnership would help SAIC strengthen its commercial vehicle division by addressing the lack of diesel engine support. “SAIC lacks commercial vehicle production licenses, and the main issue is the engine,” the source explained. Although SAIC is among the world’s top 500 companies, its commercial vehicle segment remains weak. It primarily produces buses through Shenwo, with limited presence in heavy trucks, light trucks, and passenger vehicles. In contrast, FAW and Dongfeng have well-established commercial vehicle divisions. Under its “Eleventh Five-Year Plan,” SAIC aims to combine mergers and acquisitions with self-development to balance its passenger and commercial vehicle businesses. Chairman Hu Maoyuan emphasized that the second goal was to produce 600,000 self-branded vehicles, including 400,000 commercial vehicles. Recently, SAIC announced the formation of a new commercial vehicle division to consolidate its operations. After several reorganizations, its commercial vehicle structure is nearly complete. In the heavy truck sector, SAIC and Iveco established a joint venture, and SAIC acquired 67% of Chongqing Hongyan. In the light truck market, SAIC is currently negotiating a merger with another entity to gain access to its light truck base. Additionally, SAIC has strengthened its control over subsidiaries by acquiring 50% stakes in two companies for RMB 1.475 billion. Analysts believe that for SAIC to expand in medium- and heavy-duty trucks, it must secure engine supply. While Chongqing SAIC Iveco Hongyan uses CKD assembly, the engines are costly and target the high-end market. NAC produces smaller diesel engines suitable for light trucks. Therefore, SAIC’s partnership with Shangchai can provide critical support for its commercial vehicle ambitions. Currently, only Weichai, Dongfeng Cummins, and Shangchai are capable of producing high-powered engines domestically.

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