China's BAIC buys 5% stake in Daimler

FRANKFURT -- China's Beijing Automotive Group Co. (BAIC) has bought a 5 percent stake in Daimler, cementing its relationship with the German automaker after China's Zhejiang Geely Holding emerged as a potential rival.

BAIC was Daimler's main partner in China until 2018 when Geely chairman Li Shufu took a 9.69 percent Daimler stake with the aim of forging an alliance to develop electric and self-driving cars.

About half of the stake being taken by BAIC, which is backed by Beijing’s municipal government, is via rights to acquire shares. The 5 percent holding has a market value of about 2.5 billion euros ($2.8 billion) as of Monday close.

The high cost of electric car batteries has made it hard for automakers to build affordable zero-emissions vehicles, leading several of them to strike alliances with Chinese partners. Daimler in March agreed to build the next generation of Smart cars as EVs in China for global markets in a joint venture with Geely.

Daimler has reassured BAIC that any new industrial alliances involving Mercedes and a Chinese partner would only happen after a consensus is found with BAIC.

Daimler operates Mercedes-Benz factories in Beijing through Beijing Benz Automotive,

Daimler welcomed the BAIC investment. "We are very pleased that our long-standing partner BAIC is now a long-term investor in Daimler," CEO Ola Kallenius said in a statement.

In May, Reuters reported that BAIC was seeking to buy a stake of up to 5 percent in Daimler as a way to secure its investment in Chinese Mercedes-Benz manufacturing company Beijing Benz Automotive.

Daimler has been shareholder of BAIC Group subsidiary BAIC Motor since 2013.

Geely declined to comment on the BAIC-Daimler deal but referred to past statements which said it was committed to long-term investment and healthy collaboration with Daimler.

Daimler shares have lost about 30 percent of their value since Li Shufu disclosed his stake, hit by a string of profit warnings linked to a slowing auto market and diesel-emissions costs.

Another Chinese shareholder at one of Germany’s top automotive companies could stir concerns about influence amid 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 Daimler’s main Mercedes-Benz cars unit.

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 a potential conflict of interest.

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 is 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 has been struggling and its own domestic brands are burning cash as the trade spat with the U.S. is weighing 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.

“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 would expect the company’s problems to look increasingly exposed,” he said.

Bloomberg contributed to this story