GM and and China's SAIC deepen ties

General Motors and China's SAIC Motor Corp deepened their ties to include the joint development of small engines and transmissions as the U.S. automaker seeks to draw on the allure of the fast-growing China market ahead of a highly anticipated IPO.

The agreement, announced by the two automakers in Shanghai on Wednesday, marks a further expansion of their successful 13-year partnership after they agreed in December to set up a joint venture in India to make small cars and commercial vehicles.

The latest deal paves the way for GM to meet demand for small city cars in emerging markets and cut the costs of developing fuel-saving technologies for the U.S. market, where it faces the challenge of meeting tough new fuel economy standards by 2016.

Analysts have said potential investors in the top U.S. automaker will be looking in part at how it manages a strategy for sustained growth in the Chinese auto market, now the world's largest.

GM is expected to announce plans for a public offering of stock in a filing with securities regulators as soon as Wednesday that will allow the Obama administration to reduce its 61 percent stake in the automaker.

The IPO could provide another opportunity to bring GM and SAIC even closer together, industry observers said.

The GM-SAIC partnership is the most successful one in China's auto industry. There is a big chance that SAIC may take a stake in GM and bring their relationship to the next level, said Sheng Ye, associate research director at industry consultancy Ipsos' Greater China region.

Asked about SAIC's interest, SAIC Chairman Hu Maoyuan said on the sidelines of a news conference: We cannot comment on whether we will participate in GM's IPO before we study the details of the IPO.

SAIC shares jumped 4 percent after news of the joint development deal, and were the biggest gainer on the CSI 300, one of the market's benchmark indexes.

ENGINES, TRANSMISSIONS TO BE USED GLOBALLY

Under the deal, GM and SAIC will develop engines with displacements of from 1.0 to 1.5 liters in a collaboration of engineers in Detroit and at their engineering and design joint venture in Shanghai.

The engine will be used by GM and SAIC in China and worldwide in the future.

Engine and transmission systems -- known as vehicle powertrain systems -- are typically the most expensive parts of a new vehicle programme with costs in the hundreds of millions of dollars.

In addition to cost savings, the new project with SAIC could expand GM's foothold in China, where it had been competing with Volkswagen AG and others mostly in the mid- to high-end segments, leaving the burgeoning lower end to local brands.

There is no doubt that GM and SAIC may eventually launch small cars globally, but they would most likely focus on the China market to begin with, said Boni Sa, an analyst with IHS Automotive.

China has become the most important market for many global automakers, with sales still growing at a fast clip thanks to Beijing's policy to stimulate demand, especially in smaller cities.

The new GM-SAIC engines will twin direct injection and turbocharging to boost fuel efficiency and performance. Combined with the transmission also to be developed with SAIC, the new powertrain would improve fuel consumption by up to 20 percent, GM said.

Industry observers said the new engines could be initially used by GM's minivehicle venture in south China, which last month unveiled its first car brand, Bao Jun. The brand is targeting the entry segment, where local name plates such as Chery Automobile and Geely Automobile Holdings dominate.

U.S. rival Ford Motor Co is also aiming to improve fuel efficiency for products in the Asia-Pacific and Africa region by up to 20 percent across by 2012.

(Additional reporting by Kevin Krolicki in Detroit; Writing by Chang-Ran Kim; Editing by Michael Watson)