Daimler Ties With China's BAIC As Car Ad Sales Zoom

| About: Daimler AG (DDAIY)

China's restless car market is showing signs of new stress, with automakers revving up spending at the nation's top advertising auction this year as competition heats up and growth slows. Meantime, German car maker Daimler-Benz (OTCPK:DDAIY) has already moved into the slow lane in recent years due to poor execution, but hopes to turn things around with a new ground-breaking tie-up with its main China partner, Beijing-based BAIC Motor.

Before we begin with a look at the latest news bits from the car sector, I should take this opportunity to point out that my own constant predictions of a slowdown for China's zooming auto market still have yet to really materialize. Vehicle sales surged 22 percent in October alone this year, and are up a smaller but still quite healthy 17 percent for the first 10 months of the year combined.

Still, I suspect the true picture is probably not quite as strong as the numbers might indicate, since the reported figures represent cars that are simply shipped to dealers and not actual sales. What's more, cars are an easy target as Beijing accelerates its drive to clean up the nation's highly polluted air. Big cities like Beijing and Shanghai are already scaling back the number of new license plates they issue each month, and other measures to control pollution should also dampen consumer enthusiasm for new car purchases in 2014.

Sensing such a slowdown, car makers have flocked to the annual advertising auction held by CCTV, China's main national broadcaster whose sales are often seen as a strong indicator of national activity. Media are reporting that car companies sharply boosted ad spending at this year's auction, with sales from foreign joint venture car makers doubling from year-ago levels. (Chinese article) As an interesting footnote, this year marks the first time CCTV didn't release actual sales from the auction, indicating that the final numbers probably weren't too good after sales already grew a relatively weak 11.4 percent last year. (previous post)

From the bigger picture, let's zoom in on Daimler-Benz, which has broken new ground with a major equity tie-up with BAIC, China's fourth largest automaker. The centerpiece of the tie-up will see Daimler buy 12 percent of BAIC Motor, the passenger car unit of Beijing Automotive Group, for 625 million euros ($845 million) (English article) The tie-up will also see Daimler take a controlling 51 percent stake of the two companies' sales joint venture, up from a previous 50 percent. That makes Daimler the first foreign company to take a major equity stake in its Chinese partner, and also the first to get a controlling stake in one of its joint ventures, which was previously prohibited under Chinese law.

The move comes as Daimler has lost steady share to its two main German rivals, Audi and BMW, in China's booming luxury car market. Audi has always been the clear leader, thanks to the early arrival to the market by its parent, Volkswagen (OTCPK:VLKAY). But Daimler and BMW were roughly equals until the latter started pulling ahead over the last two years. BMW's sales grew 27 percent in the first 10 months of this year to about 318,000, while Daimler's sales sputtered ahead by a meager 9 percent to 186,000 units.

Media reports cite a number of factors behind Daimler's recent weak performance, including poor relations with its dealer network. I'm not too optimistic that this new tie-up will do much to revive the company's fortunes. I've never been that impressed by BAIC in general, and Daimler's China problems look related to a corporate culture that could be hard to change. Of course anything is possible and maybe Daimler will suddenly find new life in China with this new partnership. But more likely the company will continue to sputter as its tie-up adds a new layer of bureaucracy to its China operations but contributes little else.

Bottom line: Automakers are ramping up their ad spending in anticipation of slowing sales in China as a new tie-up between Daimler and BAIC looks set to offer tepid results.