BEIJING, July 28 -- Two of China's State-owned carmakers - Shanghai Automotive Industry Corp (SAIC) and Nanjing Automobile Corp (NAC) - signed a letter of intent on Friday for a much-heralded association.

    According to a statement from SAIC, the two companies will form a working group to discuss "possibilities and programs for all-round collaboration" in vehicles, spare parts, auto trading and services.

    They will also talk about "an asset re-organization to achieve an all-round amalgamation", the statement said.

    It said the expected consolidation between the two carmakers will help them use State assets more efficiently, build synergies in research and development, purchasing, manufacturing and sales, and improve their product mix and the value of their own brands.

    However, no details have been revealed.

    The move is widely seen to have been ignited by the fact that the two firms are bitterly going head-to-head with their own brands born from the same foreign technology, a battle government officials have said in the past they don't want to see.

    SAIC, China's top carmaker, started selling its Roewe mid-sized sedan in March, while NAC, a much smaller concern, will launch a MG 7 sedan in the market in the second half of this year. Both models are based on the Rover 75 from collapsed British carmaker MG Rover.

    SAIC, the partner of General Motors and Volkswagen, in 2004 bought the intellectual properties of the Rover 75 and 25 sedans, and K-series engines from MG Rover.

    NAC, which runs a car venture with Fiat Auto, in 2006 purchased the MG brand, a plant in England and Powertrain, the engine arm of the British carmaker.

    SAIC, China's top carmaker, plans to spend 10 billion yuan to roll out more than 30 models and aims to sell 200,000 of its own-brand cars a year by 2010.

    NAC is building a production capacity of 200,000 MG cars, 250,000 engines and 100,000 gearboxes in eastern city of Nanjing with a total investment of 3.5 billion yuan.

    An official from the National Development and Reform Commission, China's top industry watchdog, in April said the two firms' own-brand cars are overlapping and they should join forces. Both would fail if they continued to contest fiercely, the official warned.

    Commenting on the two carmakers' planned tie-up, Zhang Xin, an auto analyst with Guotai & Jun'an Securities Co, said one likely option is to create a joint venture in which both of the two firms inject their main assets.

    "This will avoid a sensitive word like merger, which could be a face-saving deal for NAC as it is much weaker than SAIC. However, the latter should have a bigger stake in the joint venture," Zhang said.

    SAIC's sales surged by 27 percent to 1.34 million vehicles last year from 2005.

    Meanwhile, NAC moved 105,050 units, down 5.8 percent.

    SAIC, one of the top Fortune 500 multinationals over the past three years, is the most profitable carmaker in China. But NAC has been in the red for years.

    Consolidations are badly needed for China's fast-growing but fragmented auto industry, analysts say. There are more than 100 vehicle producers in China, the world's second-biggest auto market.

    Vehicles sales in China are forecast to total 8.5 million units this year, up from 7.22 million in 2006.