The German government rarely comments on ownership issues within the realm of its amazingly successful automotive industry but a Chinese’s purchase of nearly 10% of Mercedes has not gone unnoticed.
Chinese brand Geely has bought 9.7% of Mercedes-Benz for R100-billion, eliciting comment by German Economy Minister, Brigitte Zypries, that although Germany remains an open economy, they are scrutinising the deal as it develops. The size of this transaction will startle many German auto analysts.
Analyse the corporate event and it’s not quite the surprise some would imagine. Geely already owns a northern European premium automotive brand – Volvo – hence the Chinese company’s management knows how to do business in Europe and has confidence interacting with management structure there. Volvo has thrived under Geely, which saturated its R&D requirements with lavish funding and allowed the Swedes to do what they thought appropriate in terms of product development.
What are their motives?
In the case of Mercedes-Benz, the logic behind Geely’s equity stake is less obvious. At 9.7% it won’t be able to direct any dedicated engineering initiatives, or alter the decision making at board level, unlike Volvo – where Geely is the sole owner.
An official position from Geely in relation to the Mercedes-Benz deal is that the Stuttgart automaker’s electric vehicle technology is what the Chinese were incentivised by, with the hope of integrating some of it in future Geely products.
For Chinese automakers the future is battery powered, given its horrendous emissions issues the urgency is real as Beijing has stipulated strict requirements. By 2020 any brand selling new cars in China will have to ensure that 12% of its volumes are battery powered.
It’s a national imperative to hedge against rampant air pollution and one that has started a panicked search for quality battery drivetrains solutions. Mercedes-Benz spends R150m per day on R&D and Geely knows that even if it got close to spending that much money, the quality of results would not necessarily be equal because of the sheer capability of those German engineers being employed in Stuttgart.
The business case for this decision is clear, Geely needs to radically transition from internal-combustion to electric vehicles for its domestic market and buying a stake in Mercedes is the most cost- and time-efficient way of accessing the required technology to make that happen. What is troubling, is where this leaves Volvo.
What does this mean for Volvo?
All things considered the Swedish brand has built some brilliant cars of late, with hybrid and autonomous driving technologies and committed to becoming an electric vehicle manufacturer in future.
Its standalone Polestar performance brand will only be battery powered. If Volvo is orientating all its engineering resources around batteries and electrification, and they are wholly owned by Geely, why would the Chinese feel compelled to buy a stake in Mercedes to access German battery technology instead? Is there a capacity problem at Volvo?
For Mercedes the deal might appear to have some risk of brand dilution but considering China will be the most important car market for the remainder of this century, partnering with a local manufacturer is rather clever. How it will influence Mercedes-Benz’s other partnership with BAIC, which concerns an R18-billion production facility to built electric cars in China for the domestic market, is unclear.
Mercedes-Benz could be undertaking masterful game of corporate chess by taking cash from privately owned Geely, whilst also maintaining a strong partnership with Chinese government owned BAIC.
The ambitions of Geely founder, Li Shufu, is very clear. An engineer by trade, Shufu has realised that to make the technological advances he requires could possibly only be done by buying the best, and that means German technology. Whether becoming the single biggest shareholder in Mercedes-Benz will allow him access to the privileged information Geely might desire, is a decision which now rests with the supervisory board in Stuttgart.
For South Africa the material repercussions are negligible. Geely is a peripheral brand here and Mercedes-Benz’s factory in East London supplies mostly right-hand drive vehicles and China is not a destination market. The effect of this deal is likely to more cerebral and to the advantage of all Chinese car brands trading in South Africa, as there is now a subconscious association with Mercedes-Benz, which indicated acceptance of a most premium calibre.
Will there be a shift towards Chinese cars locally?
AutoTrader CEO, George Mienie comments: “South Africans are loyal and traditional car buyers, favouring the German brands. We have seen this for many years – it’s reflected in AutoTrader search statistics – the most searched-for vehicle in 2017 was the BMW 3 Series, followed by the Mercedes-Benz C-Class and the Volkswagen Golf.
“However, given international trends – and the fact that Daimler, the world’s most prestigious vehicle manufacturer, now has Li Shufu, chairman of Chinese automaker Geely, as its largest shareholder – we could see a shift in buying preferences, with South Africans aspiring to own Chinese vehicles.
“Although I don’t think that this will happen anytime soon, this scenario is not as far-fetched as some industry commentators may think.”