China's BAIC Takes 5% Stake in Daimler to Boost Partnership
Transactions would take the level of Chinese ownership in the world’s biggest luxury carmaker to 14.7%.
(Bloomberg) -- One of Germany’s most storied industrial icons just became more Chinese.
Daimler AG’s Chinese partner, state-backed Beijing Automotive Group Co., is buying a 5% take in the Mercedes-Benz maker, cementing a more than decade long alliance of the auto manufacturers. Together with Daimler’s top shareholder -- Zhejiang Geely Holding Group Co.’s billionaire owner Li Shufu -- the transaction would take Chinese ownership in the world’s biggest luxury-car maker to almost 15%.
“This step reinforces our successful partnership and is a signal of trust in the strategy and future potential of our company,” Daimler Chief Executive Officer Ola Kallenius said.
Daimler shares rose as much as 5.2% in Frankfurt trading, after declining 15% in the past 12 months. The company, due to release detailed earnings Wednesday, has issued four profit warnings in just over a year after markets weakened and the carmaker increased provisions for charges including for the financial fallout from investigations into alleged tampering of diesel emissions.
The string of bad news underscores an urgency for the new CEO to show he can lift poor returns. BAIC’s investment is another example of how carmakers fight for survival by forging deeper partnerships as new technologies and regulations upend the industry. Profit margins at the core Mercedes-Benz cars division are expected to fall as low as 3% this year, trailing typically lower-returning mass-market carmakers like PSA Group.
Beijing-Backed
About half of the stake being taken by BAIC, which is backed by Beijing’s municipal government, is linked to unspecified financial instruments, according to a statement. The 5% holding has a market value of about 2.5 billion euros ($2.8 billion) as of Monday close.
Another Chinese shareholder at one of Germany’s automotive giants could stir concerns in Europe about China’s influence, while carmakers already battle a trade war that has left global shipments of cars at the mercy of tit-for-tat tariff measures. China and the U.S. are the two largest markets for Mercedes-Benz. BAIC’s transaction also raises the question of whether Daimler and BAIC may reorganize their joint venture in China after restrictions for foreign investors in the world’s largest auto market eased.
“Despite all joy about long-term anchor shareholders: we still want to see the Mercedes star and not the Chinese dragon on the hood,” Ingo Speich from Deka Investment GmbH said at Daimler’s annual meeting in May. Deka, which represents some 9 million Daimler shares, is against granting BAIC or Geely a seat on the company’s supervisory board due to potential conflict of interest.
Chinese investments in German companies have had a mixed record. HNA Group Co. plans to divest its stake in Deutsche Bank AG after becoming the ailing bank’s top investor, marking the unwinding of one of the most high-profile investments made during a multi-year acquisition spree. Last year, Germany blocked a Chinese investor from buying machine tool manufacturer Leifeld Metal Spinning AG after a public backlash in the wake of Midea Group’s controversial purchase of robot maker Kuka AG in 2016.
For its part, BAIC views the purchase as a natural evolution of its relationship with Daimler.
“It has been our intention to strengthen our alliance with Daimler through an investment,” said Heyi Xu, chairman of BAIC. “This step reinforces our alignment with, and strong support for, Daimler’s management and strategy.”
While China is already the world’s biggest car market, it’s coping with its first contraction in a generation, prompting automakers to take steps to expand overseas. For BAIC, maintaining ties with Daimler is strategically important as its joint venture with Hyundai Motor Co. has been struggling and its own domestic brands are burning cash as the trade spat with the U.S. weighs on demand for new vehicles.
Cooperation with Western brands gives the Chinese companies potential access to technical expertise and instant credibility as they seek to win over consumers in Europe and the U.S. Even so, BAIC is already China’s biggest producers of electric cars.
“Run by politically-minded management, BAIC is comfortably the lowest quality company under our coverage,” Sanford Bernstein analyst Robin Zhu said in a recent note to clients. With growth slowing and margins squeezed “we’d expect the company’s problems to look increasingly exposed,” he said.
While BAIC is a government-controlled entity, it’s supervised by the Beijing branch of the State-owned Assets Supervision and Administration Commission and doesn’t belong to a group of central state-owned enterprises.
Geely Ties
Daimler is exploring additional cooperation projects with Geely, former CEO Dieter Zetsche said at the company’s annual general meeting in May and sought to allay concerns about potential conflicts with BAIC. His successor Kallenius said in January he’s “open to talk” about more collaboration with industry peers and technology firms to share surging development cost.
Geely declined to comment on the BAIC investment. The Chinese automaker in February last year disclosed a 9.7% in Daimler it had amassed through complex derivative transactions known as collar trades. The strategy allowed Geely to build up the stake quickly while potentially avoiding breaching German rules that require shareholders to disclose holdings exceeding 3%.
Li has sought to harvest synergies from his investments, which include Sweden’s Volvo Cars to improve Geely’s product lineup and move to higher-end models. Geely formed a joint venture with Daimler to transform the German company’s diminutive Smart into an all-electric brand based in China. Other major Chinese interests in foreign carmakers include Tencent Holding Ltd.’s 4.7% stake in Tesla Inc. while Dongfeng Motor Corp. is PSA’s second-biggest holder with a 12% shareholding.
Since 2003, BAIC and Daimler have set up a number of cooperations in China, including the joint venture Beijing Benz Automotive Company that produces premium cars in the country, as well as separate entities that make vans and trucks. Daimler has a 9.6% stake in the BAIC’s Hong Kong-listed unit, BAIC Motor Corp.
--With assistance from Ville Heiskanen, Jinshan Hong and Dong Lyu.
To contact the reporter on this story: Christoph Rauwald in Frankfurt at crauwald@bloomberg.net
To contact the editors responsible for this story: Kenneth Wong at kwong11@bloomberg.net, Elisabeth Behrmann
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