Dongfeng move to buy Hafei clouded by merger-source

SHANGHAI, July 2 (Reuters) - Dongfeng Motor Corp's move to buy control of minivan maker Harbin Hafei Automobile Industry Group faces an uncertain future after Hafei's parent company agreed to merge with a larger rival, a source familiar with the matter said on Wednesday.

Dongfeng Motor Corp, the parent of PSA Peugeot Citroen's (PEUP.PA: Quote, Profile, Research, Stock Buzz) China partner Dongfeng Motor Group Co (0489.HK: Quote, Profile, Research, Stock Buzz), has been seeking to buy Hafei, which is controlled by state aircraft maker AVIC II.

AVIC II had planned to ease out of the automotive sector to focus on its core business, people with knowledge of the situation told Reuters in January. (For details click [ID:nSHA124028])

But a government-ordered merger between AVIC II and AVIC I, officially announced last month under a plan to pool resources to develop and build large aircraft, has left the Hafei deal in limbo, the source told Reuters on Wednesday.

"The merger creates a lot of uncertainties for the Hafei deal. I have no idea whether the management of the new company still wants to gradually pull out of the auto sector as previously planned," the source said.

"It is hard to say at the moment which way the Dongfeng-Hafei deal will be heading in the end."

A spokesman for Hong Kong-listed Dongfeng Motor Group declined to comment on deals handled by its parent.

Executives at Dongfeng's parent and Hafei could not immediately be reached.

Dongfeng Motor, which is strong in passenger cars and medium- to heavy-duty trucks, faces tough competition from SAIC Motor (600104.SS: Quote, Profile, Research, Stock Buzz) and Changan Automobile (Group) in the booming minivan segment, which has been boosted by strong rural demand.

Industry analysts said Hafei would be a valuable addition to Dongfeng, which also has joint ventures with Japan's Nissan Motor (7201.T: Quote, Profile, Research, Stock Buzz) and Honda Motor (7267.T: Quote, Profile, Research, Stock Buzz).

Peugeot, which makes the Peugeot 307 and C-triomphe sedans in partnership with Dongfeng Motor, had expressed an interest in joining hands with Hafei to make minivehicles in China.

Peugeot Chief Executive Christian Streiff said in October last year that a tie-up with Hafei would give the French company a new growth area.

A Peugeot spokesman in China said on Wednesday that the French company's stance on Hafei remained unchanged.

Peugeot, the second-largest European auto maker by production capacity, is doubling the capacity of its car joint venture with Dongfeng in central China to 300,000 vehicles a year and the two are jointly building a second facility to add another 150,000 units of annual capacity.

AVIC I, which is developing China's first domestically designed regional jet, is the parent of Xi'an Aircraft International Corp 000768.SZ.

AVIC II controls loss-making Jiangxi Changhe Automobile Co (600372.SS: Quote, Profile, Research, Stock Buzz). AVIC II's Hafei Aviation Industry Co (600038.SS: Quote, Profile, Research, Stock Buzz) makes the ERJ-145 regional jet in partnership with Brazil's Embraer (ERJ.N: Quote, Profile, Research, Stock Buzz)(EMBR3.SA: Quote, Profile, Research, Stock Buzz). (Reporting by Fang Yan; Editing by Edmund Klamann)