Daimler CEO Dieter Zetsche (l) and BAIC ChairmanXu Heyi formally agreed on greater cooperation Feb 1 (Photo: Daimler)

Daimler will acquire a 12 pc stake in Beijing Automotive Group's (BAIC) passenger car division, the first time a western carmaker invests directly in a Chinese auto group.

The two companies were already working together in various areas, but the investment lays the groundwork for closer cooperation in the world's biggest car market. Daimler will also benefit from the expected future growth of BAIC, which is a major domestic player in China.

BAIC Motor plans to raise capital through an initial public offering and Daimler will participate in the issue by buying some of the new shares. The German premium carmaker will receive two board-of-director seats at BAIC Motor.

As part of the agreement, there will be a change in two of the companies' biggest 50-50 owned joint ventures. BAIC will increase its stake in Beijing Benz Automotive Company (BBAC), a manufacturing operation, by 1 percentage point to 51 pc. At the same time, Daimler will get 51 pc of the two companies' joint sales venture, Mercedes-Benz Sales Service Co. Both currently hold 50 pc of this unit.

"We are now taking the next step in deepening our relationship even further," Daimler CEO Dieter Zetsche said in a press release. "Our investment is a strong sign of the increased level of trust and cooperation between our two companies and clearly emphasizes the long-term commitment to a joint successful future."

Xu Heyi, chairman of BAIC, also saidthe closer ties will be beneficial to both companies. "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," he said. "At the same time, this will help Mercedes-Benz to boost its business performance in China."

In 2011, BAIC Group sold more than 1.5 million vehicles. Daimler sold around 210,000 Mercedes-Benz cars in China in 2012.

BBAC, the manufacturing joint venture, started building Mercedes E-Class models in 2006 and C-Class cars in 2008. The joint venture has been manufacturing a long-wheel-base version of the E-Class since May, 2010. A year ago, Mercedes also started making the GLK SUV in China.