Earlier this month and in late December there was plenty of rumors that Beijing Auto and Daimler would create a new alliance to cement ties in China and Globally, facts were thin but rumors were strong. There is no smoke without fire, and preliminary investigation showed that there was a plan in the pipeline to create a partnership similar to Renault and Nissan. Daimler has become the weakest German link in the race for the Chinese luxury market, with Audi and BMW roaring ahead with solid model lines and competitive pricing, both of which Mercedes are lacking in China. The new partnership sees Daimler spending 600 million Euro’s on Beijing Auto Stock, and Beijing Auto/Mercedes working together on Beijing Auto’s new Shen Bao range, the first Shen Bao’s are based on Saab architecture but future models will use the current E-Class platform and engines. Beijing Auto is of course a state owned enterprise with its HQ a stones throw away from the seat of power in Beijing, making it a smart diplomatic move for Daimler.

Reuters reports on the stock swap:

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 (BBAC), 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.

Reuters first reported of Daimler’s intention to purchase an equity stake last month.

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.

“There’s been a lot of talk about Mercedes falling behind, but you can see in the way the deal with BAIC Motor is structured, also in terms of the governance, that this is a very strong signal Daimler really means business in terms of China,” said a source with knowledge of the deal.