UPDATE 1-Daimler's Mercedes-Benz outlines strategic plan for China growth

BEIJING, Aug 27 (Reuters) - Daimler AG’s Mercedes-Benz will launch around 20 new or upgraded car models in China over the next two years, part of a broader turnaround effort aimed at reversing the brand’s recent struggles in the world’s biggest auto market.

Unveiling details of the strategy in Beijing on Tuesday, Daimler’s new China chief, Hubertus Troska, said the company would spend 2 billion euros ($2.67 billion) over the next two years as it seeks to boost sales of Mercedes-Benz cars in China by a third to more than 300,000 cars a year by 2015.

The plan, a key component of Mercedes’ broader “2020 initiative”, includes expanding manufacturing capacity and its sales network in a country where car density is still relatively low.

“There is a lot of room for development,” Troska told a news briefing. “We are very confident this market is going to grow significantly in the next years. We are seeing it this year and we firmly believe it will continue in the next years.”

If the sales target were achieved it would make China the brand’s biggest market globally. Last year Mercedes-Benz sold slightly more than 200,000 cars in China, currently its No. 3 market behind Germany and the United States.

Troska’s turnaround initiative will kick off with the China launch of a significantly redesigned E-class sedan on Friday at an auto show in the southwestern city of Chengdu.

That will be followed quickly by a China launch of the overhauled flagship S-class sedan during the third quarter of this year, as well as a more affordable small sport-utility vehicle (SUV) called the GLA next year.


Mercedes-Benz has struggled in China since the start of 2012, when overall demand for luxury cars began weakening amid an economic slowdown in the world’s second-largest economy that affected luxury car brands in general.

Mercedes fared worse than most because of a dearth of new or redesigned models and what industry insiders and key operators of Mercedes-Benz dealers described as a short-sighted volume grab that hit the brand’s profitability.

Mercedes-Benz’s sales rose just 4 percent to 206,150 cars, last year. By contrast, sales of Audi cars rose 32 percent to 407,738 cars, while BMW’s volume increased 41 percent to 313,638 cars, according to consulting firm LMC Automotive.

BMW and Audi posted impressive gains, but they were also accused by dealers and analysts of boosting sales through heavy discounts and other costly incentives.

With China’s economy still slowing compared with the breakneck pace of expansion over the past 15 years, there remains some doubt over whether Mercedes-Benz is going to be able to boost its sales by a third by 2015.

But Yale Zhang, head of Shanghai-based consulting firm Automotive Foresight, said he believed the objective was “doable”, partly due to the array of “strong new products they are planning to put in play over the next year”.

Aside from the slew of new products, Troska aims to make Mercedes-Benz cars more affordable by producing significantly more of what it sells in China.

The turnaround plan envisages seven out of 10 cars it sells in China will be made in the country by 2015 - up from around half now - a move that would allow the company to avoid the high tariffs and taxes levied on imported cars.

The primary lever to boost in-China production is the new compact GLA SUV that the German carmaker plans to produce at its factory complex in Beijing, which is jointly run with state-owned auto group Beijing Automotive Group.

The GLA, which is intended to be a more affordable luxury car, is due for a launch in China next year.


The company says that its customers no longer believe a car carrying the Mercedes badge must be German-made.

“The quality of vehicles and engines you get out of our Chinese production is to the same identical levels of quality ... as our cars being produced in Germany,” said Troska.

It was not immediately clear whether the move to cut prices by boosting local production was in any way a response to a wave of Chinese government investigations into possible anti-competitive violations in the way that global companies, including car makers, price their products in China.

Mercedes-Benz hopes to respond more quickly to changing consumer preferences, which often lead to swings in demand for different types of vehicles, by producing more cars locally.

Cutting prices “is not a bad idea given China’s economic growth slowdown”, said Jeff Chung, a Hong Kong-based auto-sector analyst for Japanese brokerage Daiwa Securities.

Nonetheless, demand for luxury cars in China is likely to reach 2.7 million vehicles a year by 2020, displacing the United States as the world’s biggest luxury car market.

As the economy slows, “even wealthy consumers are likely to shift to more affordable luxury cars, most of which are produced locally in China rather than being imported”, Chung said.

That’s how Volkswagen AG’s Audi, the No. 1 luxury brand by volume in China, stays ahead of its German rivals that together dominate China’s top-end market. Audi produces more than nine out of 10 cars it sells in China, according to Daiwa’s Chung.