More and more Chinese customers prefer cars with automatic transmissions. At the moment, all automatic transmissions used within our industry are imported. We believe that our engine manufacturing experience in partnership with the unique resources provided by Antonov provide significant opportunities to address a major market for Chinese produced automatic transmissions.

—Tu Jianhua, Loncin’s Chairman

The partnership with Loncin, originally announced in September 2007, was to be Anontov’s second in China. In January 2007, Antonov had signed a Production License Agreement with Zhejiang Geely Automobile Gearbox Co, the transmission manufacturing subsidiary of Geely Automotive. This followed an announcement on 27 November 2006 that Geely and Antonov had signed Heads of Agreement for the license, which is for the production of the Company’s TX6 six-speed automatic transmission. (Earlier post.)

However, in November 2007, Antonov’s board announced that the company would not go ahead with its cooperation with Geely. Antonov claimed that Geely had not fulfilled its financial and other obligations agreed upon in the contract. The initial production licence lapsed in September 2007.

Loncin is a Chinese manufacturer of motorcycles, small engines and a range of automotive components. It currently manufactures 1.5 million motor cycles per annum and more than 3 million engines both for domestic use and export. It supplies components to domestic and major Western automotive brands.

In order to be fully prepared for the joint venture between Antonov and Loncin, an Antonov WOFE (wholly owned foreign enterprise) is being established in China and an additional funding facility of €10 million (US$14.7 million) has been secured to finance Antonov’s contribution to the JV. This is an extension to the €15 million (US$22 million) facility announced on the 9 August 2007 with Quivest, its largest shareholder.

Negotiation continues on the details of the joint venture, but under the heads of terms agreed with Loncin, it will be funded by both parties in proportion to the JV shareholding.  It is intended that this be close to a 50:50 split but with Loncin having the majority holding. Total initial capitalization is expected to be between €20 million (US$29.3 million)  and €30m (US$ 44 million) which will be used to invest in setting up an automatic transmission manufacturing plant in Chong Qing, PRC.

The JV will receive a licence for the Antonov patents and Antonov will receive a royalty on each unit sold in addition to any dividend due in respect of its shareholding in the JV. Initial sales will be targeted at Chinese domestic car makers but the intention is to export in the longer term. The initial production capacity is planned at 200,000 units per annum.

It is expected that the joint venture will be formed once Antonov has completed its prototype vehicles and Loncin has completed the detailed production planning and costing. These are due to be complete in May 2008.

Antonov views the joint venture as a key element in its commercial strategy to maintain direct involvement in the application of its technology. This enables the company to have closer control over its intellectual property rights in order to reduce risk and generate better returns compared with a pure licensing business model, as originally set out with Geely.