Daimler AG took a 12 percent stake in state-run Beijing Automotive Group (BAIC), its joint venture partner in China for $845 million as planned earlier this year.
This makes Daimler the first non-Chinese automotive company to take partial ownership in a Chinese manufacturing company. Conversely, BAIC will increase ownership in the already existing joint-venture from 50 percent to 51 percent.
“Going forward, the cooperation between Daimler AG and BAIC Motor will contribute towards increasing our footprint in China and so enable us to actively participate even better in the huge opportunities the Chinese automotive market offers,” Daimler CEO Dieter Zetche stated.
Daimler and its Mercedes brand are under pressure, as it has fallen behind its rivals in China, one of the fastest growing autos markets.
Demand for luxury cars in China had been forecast to surpass that of the United States by 2020 but sales for Daimler stalled.
BMW and Audi sales had far surpassed that of Mecedes-Benz’s last year, and Nicholas Speeks, head of Mercedes-Benz sales for China, had blamed the “slackness and obliviousness” of dealers for the lack of sales.
“Yes, there have been disagreements and there have been disappointments... but we see momentum is building again,” Zetsche said at the announcement conference. “I am very encouraged and very positive about future prospects of this country.”
Policy Risks
One of the risks for Daimler is the continued influence of party-central. The autos industry in China was always influenced by policy and industry watchers say the policy is often misguided.
“The government has identified the country’s top eight auto companies and it is encouraging them to consolidate the industry,” BAIC CEO Dazong Wang told strategy+business magazine previously. “This is going to accelerate.”
Working in line with this policy, BAIC has also made a handful of acquisitions and seeks to do more.
However, the consolidation process is messy companies don’t always benefit. At the Global Auto Forum last month, a handful of executives expressed their frustration with the policies.
Case in point: Qinghong Zeng of state-run Guangzhou Automobile Group Co. was assured it could buy the small local carmaker Changfeng Automobile Corp. despite their IPO plans. At the end, the state did not approve.
“I was the first to respond to the government’s call for the consolidation, and I was also the first to be swindled,” Zeng said.
Volvo
Shufu Li, chairman of Zhejiang Geely Automobile Holding Group, has similar feelings. His joint venture with Volvo was finally approved in August, three years after he initially bought out the Swedish car-maker.
Geely had acquired Volvo and he was told he had the “blessing from the Chinese government,” but he was soon forced to set up a joint venture between the two fully Chinese companies in order to start producing.
“I feel like I am getting married to myself because I’m the only person to sign off on the agreement for both sides,” Li said. “As an enterprise, I can simply follow the government’s instruction and do what the government told me to do. I can’t think about it too much.”
Hong Kong IPO
BAIC is also planning to go public in Hong Kong in 2014, which Daimler says it supports.
Wang said the plan for public ownership of not just BAIC but more of China’s automakers is also part of the policy. “From the government standpoint, it’s more flexible … it’s more liquid,” Wang said. He added it was also important to have this public governance to grow the companies and ensure better decision-making.
China has also tried to advance the manufacturing of electric vehicles (EV), but failed to create demand. According to local media, BAIC produced 1,200 EVs last year and planned to produce 3,000-5,000 in 2013 despite heavy spending in research and an EV production plant in recent years.
Central and municipal governments in China are recognizing party central interference has gotten in the way of innovation, and Wang said working with more Western companies has helped this. “The shortage of talent is a big problem,” Wang said. “It’s a growing market, and yet we have a shortage of technology and of managerial and technical talent.”
