DONGFENG Motor Corp, the second-largest Chinese automaker, will buy a stake in a smaller state-owned rival amid efforts by the government to create more competitive carmakers.

Dongfeng, which makes cars with Nissan Motor Co and PSA Peugeot Citroen in China, will inject capital into Fujian Motor Industry Group Co in exchange for an undisclosed stake from the Fujian provincial government, according to an e-mailed statement yesterday, which didn't include financial details.

China, home to more than 110 auto brands, has said it will curb the increase in auto manufacturing capacity and encourage mergers and reorganizations in the industry in order to create three to five domestic carmakers that can compete with companies like General Motors Co, which is spending US$11 billion by 2016 to expand in China.

"This is part of the ongoing process for industry consolidation, we should be expecting more deals in the coming years," said Lin Huaibin, a Shanghai-based analyst at IHS Automotive. "It probably is still a little bit too far away for Chinese automakers to be able to compete against foreign automakers, but this is step one."

Dongfeng was started by the central government in 1969 as the Second Automobile Works. The Wuhan-based company, which produces Nissan's Teana sedan, Honda Motor Co's CR-V SUV and Citroen's C5 sedan at its plants in China, is seeking to reduce its reliance on profits from manufacturing and selling foreign brands by boosting sales of its self-developed nameplates.

"Fujian Motor's self-developed brands will boost and accelerate our self-developed brand strategy," Dongfeng said in the statement.

The strategic cooperation with the Fujian government will also help Dongfeng speed up its pace of exports given the province's location in China's southeastern coast, according to the company.

(Bloomberg News)