The Smart microcar brand will be expanded into the subcompact segment and will build all future models in China for global markets in a joint venture owned by Daimler and Zhejiang Geely Holding Group.
The 50-50 joint venture will build a new generation of Smart models in a purpose-built electric-car factory in China with global sales due to begin in 2022, Daimler said in a news release on Thursday.
Daimler will share its expertise in manufacturing, engineering and design with Geely. Mercedes designers will style future Smart vehicles and Geely will engineer them.
As part of the vehicle-development program, the Smart product portfolio will be extended into the "fast-growing" B- (subcompact) segment, Daimler said.
Daimler and Geely did not disclose financial terms of the deal. The details of the joint venture will be finalized by the end of this year, the companies said.
Zetsche said Geely will be a "strong partner" in the electric vehicle segment. "We will jointly design and develop the next generation of Smart electric cars that combine high-quality production and known safety standards for sale both in China and globally," Zetsche said in the news release.
Smart's global sales fell 4.6 percent to 128,802 last year.
After racking up losses from Smart since its launch in 1998, Daimler is betting young, city-dwelling consumers in China, the world’s largest auto market, to help rejuvenate the brand. Financial analysts Evercore ISI estimates Smart loses as much as 700 million euros ($787 million) annually.
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's German rival BMW recently unveiled plans to build electric Minis in China, where production costs are low and demand for small electric cars is rising.
Enlisting Geely’s help in steering Smart forward is the most significant step Daimler has taken to collaborate with the Chinese company since it disclosed Li had taken a $9 billion stake in Daimler last year. The two have also joined forces to start ride-hailing and car-sharing services in China and take on market leader Didi Chuxing.
The joint venture's board of six people will include Daimler's China chief Hubertus Troska, global sales and marketing boss Britta Seeger and production boss Markus Schaefer. Geely's members will be Shufu, Geely CEO An Conghui and Geely finance chief Daniel Donghui Li.
Daimler previously was in talks with a unit of Chinese partner Beijing Automotive Group to build an electric version of the ForTwo two-seater model, people familiar with the matter said in August. Daimler has been building Mercedes cars with the state-owned Beijing Automotive since 2005.
Until 2022, the ForTwo will continue to be built at Smart's factory in Hambach, France, and production of the ForFour will continue at Renault's plant in Novo Mesto, Slovenia. The two Smart cars share underpinnings with the Renault Twingo.
After 2022, the Hambach factory will build electric cars for Mercedes.
Daimler said last year that it will invest 500 million euros in the Hambach factory to start producing a compact electric car for Mercedes' new EQ electric subbrand.
Reuters and Bloomberg contributed to this report