SHANGHAI Auto is a relatively small player in the global cars market, but it has big plans. Through joint ventures with Volkswagen and General Motors it sold 612,000 cars last year, a 57 per cent increase on the previous year.

Its factory, in a modern industrial park on the east side of Shanghai, cannot keep up with demand, despite running 24 hours a day, five days a week.

The factory is cost-effective and very productive. It employs 4,000 workers to produce 240,000 cars.

Across the city, a complex of factories is also doing well. Last year, 15,000 workers assembled 400,000 saloons.

Ostensibly, these factories are owned and operated by General Motors and VW. The truth is rather different.

Shanghai Auto, or SAIC, owns half of both operations and takes a 50 per cent share of the profits.

No wonder SAIC is now a member of the Fortune 500 (the list of the world's biggest companies) with revenues of $11.8bn and profits of $689m.

SAIC is owned by the Shanghai city government that controls virtually everything else worth having in the sprawling city.

By the end of the decade, SAIC believes it will be manufacturing 2m vehicles a year. By then, China should be churning out more cars than Japan.

All of which begs the question: Just what does SAIC want with MG-Rover?

Britain's last indigenous mass-market car company is facing a bleak future. Sales have collapsed, new model development has stalled, the workforce has lost its "jobs for life" guarantee, much of the family silver has been sold or restructured (the parts business, land around the Longbridge plant, and the finance operation) and the directors have lost the goodwill they enjoyed when they took over from BMW four years ago.

SAIC is negotiating a deal that will see the Chinese take effec- tive control at MG-Rover. The agreement foresees £1.5bn of investment to build four new models - the medium-sized car already on the drawing board, a small car to replace the Rover 25, a large car based on the 75 platform and a sports car bearing the MG marque.

Although some will be made at Longbridge, in Birmingham, the majority will be manufactured in China.

With SAIC making handsome profits and MG-Rover still haemorrhaging cash, it seems to be a strange match. What could little old MG-Rover offer the Chinese?

The answer may lie in MG-Rover's ability to engineer new cars rather than just build them.

Of the 1.5m cars to be made by SAIC within a few years only a tiny number (less than 50,000), will carry a Shanghai Auto badge.

If SAIC is to become a real world player, it needs to do more than cut itself a share of someone else's cars.

MG-Rover may offer a shortcut to the kind of engineering expertise the Chinese need.

To ram home the point, MG-Rover unveiled a trio of concept cars last week to remind the world that it could build desirable models - provided someone puts up the money. The three - a hard top MGTF, a coupe Rover 75 and an outrageous super car - could even go into production to provide some much-needed interest for hard-pushed MG-Rover dealerships.

SAIC has already paid £40m for access to MG-Rover's intellectual property and engines/transmissions business. This could provide it with the kind of technology it needs to start building cars of its own for the Chinese market.

MG-Rover's technical expertise will help develop these cars, but the British company needs something more.

Mass-market vehicles in China are still a generation behind their Western counterparts.

In short, SAIC could be happy with the current MG-Rover line-up whereas the British desperately need to start work on a new range and get it to market in record time.

Although MG-Rover seems to believe the ink is almost dry on this deal, there are still two formidable obstacles.

First, the Chinese government has to give the plan its blessing. That is expected, but still not certain.

Also, BMW has a right to veto any agreement, because it is still the ultimate owner of the MG and Rover badges.

When it sold the group in 2000, it granted an indefinite, royalty- free licence to manufacture and sell cars under the two brand names.

That may have to be renegotiated if the group is sold.

According to John Towers, one of the four businessmen who bought the company from BMW, it simply has no choice.

In other words, if it wants to avoid going south, MG-Rover simply has to look east.