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UPDATE 2-China's biggest auto tie-up valued at $171.6 mln

(adds FAW-Toyota cooperation, analyst comment)

By Tiffany Wu

SHANGHAI, Aug 29 (Reuters) - China's top auto group, FAW, will take a controlling stake in the country's fourth largest car maker for 1.42 billion yuan ($171.6 million) in a landmark merger aimed at fending off increasing foreign competition.

The tie-up, first announced in June, also helps cement a budding partnership between the Chinese firms and Japan's largest automaker, Toyota Motor Corp , analysts said.

Compact car maker Tianjin Automotive Xiali Co Ltd said in a statement on Thursday its parent had agreed to sell 50.98 percent of the listed unit to First Automotive Works (FAW).

Tianjin Automotive Industry Corp will retain 33.99 percent. The statement gave no date for completion of the deal, which would be the biggest tie-up in the Chinese auto industry so far.

Separately, Toyota and FAW said on Thursday they had agreed to produce luxury cars, compact cars and sport-utility vehicles for the fast-growing China market, aiming to achieve sales of 300,000 to 400,000 vechicles by 2010.

Analysts said that pact expanded an existing partnership between Toyota and Tianjin Xiali. They have a joint venture that will start making mid-range cars in October with an annual capacity of 30,000 a year.

Xiali also uses Toyota technology for its own brand compacts.

"One of the attractions for FAW in investing in Tianjin Xiali is its partnership with Toyota," said analyst Angela Gu of Automotive Resources Asia.

"Toyota is the world's third largest auto company and its brand recognition in China is very good," she said.

KEY FOR EXPANSION

FAW already has a flagship sedan-making plant with Germany's Volkswagen AG , but has been seeking another foreign partner to expand in a market that has become hotly competitive since China joined the World Trade Organisation, analysts said.

China has promised to lower tariffs on car imports gradually and let in more foreign cars by lifting import quotas.

FAW's main rival, Shanghai Automotive Industry (Group) Corp, has ventures with both Volkswagen and General Motors Corp -- so FAW has been hoping to catch up, analysts said.

Toyota, meanwhile, like many Japanese auto firms, wants a greater slice of the potentially massive China market, one of the fastest growing in the world due to steady economic growth.

"Both companies view this new dimension to their relationship as helping them establish a steadfast position in the Chinese automobile market through the production of numerous models of high-quality automobiles," FAW and Toyota said in a statement.

The Japanese firm is a relative latecomer to China and -- unlike GM and Volkswagen which have tied up with two of three Chinese auto giants -- its Tianjin partner is second tier.

Xiali has also seen its share of the compact car market fall in the past two years as the technology it uses ages and competitors roll out new and cheaper models. The Shenzhen-listed firm reported a net loss for 2001 and the first half of 2002.

"Although Xiali's market share is shrinking, it is still a significant player and attractive to FAW because FAW does not have its own compact car line," said Gu.

"First-time buyers like small cars so the segment has a lot of potential and FAW needs to be in this market if it wants to compete across the board in China."

Xiali's statement said FAW would buy 739.3 million of its shares at 1.9229 yuan per share -- which would be a slight premium over the listed firm's net asset value per share of 1.90 yuan as of June 30, according to its 2002 interim results report.

"After both sides consulted and agreed, Tianjin Auto and FAW signed the agreement on Monday," said Xiali's statement published in the official Securities Times on Thursday.

"The price was set in reference to our company's audited net asset value per share by June 30, 2002," it said.

FAW would also get a one-for-10 bonus share offer -- issued by Tianjin Xiali to all shareholders on July 29 from its 2001 capital reserves -- and hold a total of 813.2 million shares, or 50.98 percent, the statement said. ($1 = 8.276 yuan)