Premature Infatuation

A few kilometres to the north west of Shanghai, at a place called Anting, a team of German architects are busy planning a new satellite city for China's economic powerhouse.

Dubbed "auto-town", this is already home to a huge Volkswagen manufacturing plant and to China's Grand Prix circuit, to which Bernie Ecclestone's formula one circus paid its first visit in September. Reinforcing the German theme, a BMW plant is now being planned, ready to tap into the market of Shanghai's new entrepreneurial elite.

This is one of nine satellite cities planned over the next five years to help ease an accommodation crunch in Shanghai as Chinese workers migrate, in their scores of millions, from the country's rural interior to China's newly enriched cities on its eastern seaboard.

Each is being modelled on a European national theme. So alongside Italian and Spanish developments, there will be an English city, called Thames Town, complete with narrow, cobbled streets, mock tudor houses, a village green, a medieval square, and a set of red brick Victorian warehouses.

We can now toy with the idea of the Chinese completing this extraordinary piece of urban kitsch with a fallen icon of British industrialism: relocating MG Rover, a broken car maker whose travails have troubled British prime ministers for four decades, to a Chinese industrial themepark.

For the Chinese - we are now being asked to believe - are going to save Rover from the corporate salvage yard. A joint venture is being constructed between the state-owned Shanghai Automotive Industry Corporation, China's biggest car-maker, and the Longbridge-based company, which will eventually see the Chinese pour £1bn or more into developing a series of new Rover models.

Some 5,200 jobs in the West Midlands will be secured as manufacturing volumes at Longbridge are doubled. Meanwhile Shanghai Automotive, which will control the joint venture on a 70:30 basis, will use Rover's engine technology and design skills to produce its own Shanghai-branded cars for the huge domestic market.

It does not seem to matter that Shanghai Automotive is already the world's fourth-largest car maker, sporting well-established joint ventures with General Motors and Volkswagen. Those western partners only license their technology, while Rover has already agreed to sell its knowhow to the Chinese directly - for an upfront payment of about £40m.

Beyond that, we have very little detail on how this joint venture is going to work. John Towers, the lead member of the so-called Phoenix Four, who bought Rover from BMW for £10 four years ago, this week expounded the virtues of the Shanghai deal. Breaking four years of near silence, he said that the object was to produce a partnership where cars continue to be made in the West Midlands as well as new production in Shanghai. All Rover is waiting for, he said, was a formal nod from the Chinese authorities in Beijing, which should be forthcoming by January.

Of course, Towers and his associates have been lambasted for filling their pockets with cash as Rover's sales have plummeted, leaving the company's future looking increasingly bleak. In return for the millions they have awarded themselves, the least the Phoenix Four might be expected to do is keep Longbridge open - and the Shanghai deal is being presented as doing just that.

According to the Chinese media, Rover and Shanghai Automotive signed an initial cooperation deal back in June, and then agreed to set up a joint venture in early October.

However, rather disconcertingly, Shanghai Automotive said yesterday that it had no timetable to sign an investment agreement. The idea that the whole deal might be done and dusted inside two months was "information provided by Rover [that] might be their own opinion", a spokesman said.

In short, it is far too early to declare that Longbridge has been saved.

Indeed, a rather large question mark will hang over all those politically-charged Midlands jobs until someone answers a central question: why would the Chinese even consider investing so much hard cash in a manufacturing plant 6,000 miles from their home city?

Chinese industry enjoys something that economists call comparative advantage. Amid the country's population crush of 1.3 billion people, about 50 million are migrating each year from the countryside to the cities. In their great experimental leap towards economic liberalisation, often described as Market Leninism, the Chinese authorities know they have to create urban jobs at the rate of 50 million a year.

What that adds up to is a quantity of cheap labour on a scale unimaginable in the west. Specifically, it means that the workers in Shanghai Automotive's 50 plants across China earn rather less than 10% of the average Longbridge worker.

So we can put the question more bluntly: why would Shanghai Rover spend a multiple of what it costs to build a car in Shanghai to produce cars in the West Midlands?

There is no easy answer, other than a vague notion that the Chinese want a bridgehead within the European Union.

What we can say is that, if and when the Shanghai Rover venture happens, it will stand as an important marker on China's road to economic development: the point at which a major Chinese industrial entity felt confident enough to start buying up companies abroad, rather than muddling along with foreign partners locally as it has to date.

Some 90% of passenger cars purchased in China carry foreign brands. General Motors recently announced a £2bn expansion plan in China, as it shifted its Asia headquarters from Singapore to Shanghai, while Volkswagen uses China as its main regional manufacturing hub, and pours Chinese-assembled Polos into Australia, for example. The result is an auto industry employing 12 million people, with domestic sales of more than £40bn last year.

Yet much of the profit has gone to all those foreign partners, including every substantive motor company in the world - apart from Rover. In China, meanwhile, there are regular outbursts of governmental criticism over the fact that, in ventures with foreign firms, local manufacturers have failed to assimilate foreign technology and develop their own commercial skills, such as brand development.

Shanghai Automotive, which proudly declares itself to be one of the world's top 500 companies, is promising to answer those critics by going out and buying the expertise it lacks. In the eyes of the Shanghaiese, Rover not only has the technology, but also the financial vulnerability that makes a deal possible.

In the era of globalisation, we are told repeatedly by the chancellor and others, we must replace those jobs lost in manufacturing with skills on a higher plain: the so-called knowledge economy.

Yet Towers and his team have simply sold the knowledge. Rather than saving jobs in the West Midlands, Rover is succumbing to the ruthless flattening effect of globalisation. It is a force the business community knows all about, but which politicians and union leaders have barely begun to debate.

Paul Murphy is the Guardian's financial editor