A Mercedes-Benz car is seen at an auto show in Zhengzhou, Henan province, Nov 5, 2012. Daimler will pay 640 million euros ($869 million) for a 12 percent stake in BAIC Motor and get two seats on the board. [Geng Guoqing / Asianewsphoto]

FRANKFURT - Daimler secured a stake in its partner BAIC Motor ahead of a planned stock offering by the Chinese carmaker, in an effort to catch up with larger German rivals in what could become the biggest market for luxury cars in the world.

Daimler will pay 640 million euros ($869 million) for a 12 percent stake in BAIC Motor and get two seats on the board in a deal that signals the German company's intention to reverse its flagging fortunes in China.

"We will be the first non-Chinese to take a stake in a Chinese OEM," finance chief Bodo Uebber said on Friday, using the industry acronym for a carmaker.

While Zhejiang Geely Holding bought Sweden's Volvo Cars, Germany's MAN is the only western truckmaker to take a stake in a Chinese peer, acquiring a blocking minority in Sinotruk in 2009.

As part of the new deal, Daimler agreed to BAIC Motor raising its interest in their production joint venture, Beijing Benz Automotive Company, by 1 percent to 51 percent. This would allow BAIC to consolidate operations ahead of its IPO, Daimler said.

In what amounts to a swap deal, Daimler will receive a further 1 percent in the sales joint venture, Beijing Mercedes-Benz Sales Service Co, bringing its holding to 51 percent.

The deal with BAIC Motor is expected to close by the end of this year or in early 2014, Daimler said, suggesting that an IPO of the Chinese carmaker would not come any earlier.

Mainly because of difficulties in China, Daimler's Mercedes-Benz brand is now the smallest of the big three German luxury carmakers after BMW and Volkswagen's Audi, which together dominate the global market for high-end saloons and SUVs.

Increase volumes

After admitting in July that its poor sales in China were more than just temporary, Daimler has moved aggressively to bolster its fortunes there and plans to increase annual volumes by half to 300,000 vehicles in 2015.

In December, Daimler brought in a new sales chief for China, appointed a new management board member responsible solely for its Chinese operations and in December unified its two competing sales channels for locally built and imported cars.

Daimler is not BAIC Motor's only partner, however. Hyundai also operates a joint venture with the Beijing-based company even if the mass market Korean carmaker does not directly compete with Mercedes.

"Daimler will be the lead automotive investor and partner for BAIC Motor, no other carmaker like Hyundai is going to come in on this IPO that they're planning. This is so important strategically because there will be a wave of consolidation in the automotive industry in China," said a source with knowledge of the deal.

"There's around three dozen manufacturers there currently and Daimler doesn't want to wait to see how things play out but actively shape it, strengthening the position of its partner."

Chinese parent group Beijing Automotive Group Co Ltd is planning to take BAIC Motor public after the Daimler transaction clears, with the proceeds used to further bolster its own Chinese brand of passenger cars to be known as "Beijing", which greatly lags its domestic rivals.

"Daimler's investment in BAIC's stake will go a long way in accelerating the development of BAIC's self-owned brand in terms of capital, technology, management, and brand. At the same time, this will help Mercedes-Benz to boost its business performance in China," said Xu Heyi, Chairman of BAIC.

The IPO of BAIC Motor would see it follow rivals Dongfeng Motor Group Co and Geely Automobile Holdings Ltd onto the more international Hong Kong market, eschewing the Shanghai stock exchange.