On September 8, a wave of excitement swept through local Chinese suppliers after they caught a glimpse of a rare opportunity: to become a supplier for Mercedes-Benz. For them, this wasn’t just about boosting sales—it represented a chance to elevate their manufacturing to the standards of a luxury brand, with the possibility of entering global markets. Behind these targeted inquiries lies months of preparation. Over the past six months, Mercedes-Benz’s China business has been gearing up for an open bidding process for suppliers for specific models.
The catalyst for all of this? Mercedes-Benz’s September 4 announcement of two major developments: a RMB 14 billion (USD 2 billion) investment in China with its partners, and the launch of three new models, developed by Chinese teams, slated for 2025.
Mercedes-Benz is not the only luxury brand doubling down on China.
In April, BMW announced a RMB 20 billion (USD 2.8 billion) investment in its Shenyang production base, focusing on large-scale upgrades and technological innovation. This came after a RMB 10 billion (USD 1.4 billion) investment in its high-voltage battery plant. Volkswagen, meanwhile, has invested over RMB 44 billion (USD 6.2 billion) in China. By the end of 2023, Volkswagen had poured nearly RMB 5 billion (USD 702.1 million) into a 4.99% stake in Xpeng Motors, along with RMB 19 billion (USD 2.7 billion) into a software joint venture. In July, Volkswagen followed this up with a RMB 20 billion (USD 2.8 billion) investment to expand its manufacturing base in Hefei, Anhui.
But these enormous investments mask a larger challenge—automakers are struggling with the transition to electric vehicles, especially as competition from local Chinese automakers intensifies. Sales in China have shrunk, dragging profits down with them. Yet, amid the challenges, there are success stories: in 2023, BMW’s localized X5 racked up 93,000 sales. In China, the world’s largest single market, lowering prices to drive sales remains a winning strategy.
Tapping into local suppliers to produce vehicles that resonate with Chinese customers seems to be the best way forward for both Mercedes-Benz and BMW.
Balancing cost and speed
Mercedes-Benz and BMW both understand the advantages of localizing production. However, the rise of domestic Chinese brands is continually squeezing their market share.
Between January and July 2024, Mercedes-Benz’s GLE, starting at RMB 699,800 (USD 98,252), sold 24,629 units. In the same period, BMW’s X5, priced from RMB 615,000 (USD 86,346), sold 53,910 units. Meanwhile, Chinese competitor Li Auto’s L8, starting at half the price of the GLE, sold 43,613 units. As these competitors’ sales rise, their economies of scale grow, allowing them to drive down production costs. Localization pressures are mounting—not just on costs but also on speed.
Take Mercedes-Benz as an example. Its newly announced long-wheelbase versions of the CLA and GLE are both being localized for the first time. The CLA’s localization is even more extensive than that of the GLE.
According to 36Kr, the first-generation localized long-wheelbase GLE is still in the stage of negotiating for parts procurement. Mercedes-Benz’s current system keeps the suppliers for the localized GLE almost identical to those for the imported version. The only difference is that parts will be produced at local factories in China rather than US facilities, with some parts still being imported directly from the US.
“Mercedes-Benz’s normal development cycle is three years, but the localization of the GLE has been forced by circumstances,” a Mercedes-Benz insider told 36Kr. “With competition from BMW’s X5 and domestic EVs, if the GLE isn’t localized soon, it will struggle to hold its market share.”
While the CLA’s localization, tied to a new platform, spans a full 36 months, the development timeline for the GLE long-wheelbase version has been cut to just 24 months. With such a tight schedule, Mercedes-Benz has had to adopt a more streamlined procurement process.
And rushing production is just the beginning.
According to earlier reports from 36Kr, Mercedes-Benz held high-level discussions about how to achieve 100% localization of the GLE in China. The GLE is one of Mercedes-Benz’s most profitable models, and the company’s goal is to increase both sales and profits through localization.
“For the past six months, the Chinese team has been discussing how to carry out an open bidding process for GLE suppliers,” an insider revealed to 36Kr. Within Mercedes-Benz’s German headquarters, senior R&D officials are pushing for deeper localization of the GLE in China. The first step, according to Mercedes-Benz China, is securing quotes from local suppliers.
Local suppliers, sensing an opportunity, have already begun making moves. They are keen to join Mercedes-Benz’s supply chain, showcasing their technical capabilities, preparing funds to upgrade production lines, and emphasizing their cost advantages.
However, while local suppliers might offer advantages in reforming the supply chain, the ultimate question remains: can localization meet expectations? The answer hinges on both speed and efficiency.
Can the localized GLE save Mercedes-Benz?
In China’s fiercely competitive market, Mercedes-Benz still holds a unique edge. Over the past year, its C-class, E-class, and GLC SUV models have maintained average monthly sales of over 10,000 units. In the luxury car category, its S-class vehicles have accumulated 10,396 sales. It’s fair to say that Mercedes-Benz still dominates the luxury car market, but the margins are shrinking.
In 2023, Mercedes-Benz’s net profit was EUR 14.531 billion (USD 16 billion), down 1.9% from the previous year. In the first half of 2024, its net profit dropped by 25%, down to EUR 7.9 billion (USD 8.7 billion). These financial pressures have heightened Mercedes-Benz’s sense of crisis. Faced with the broader challenge of electrification, the company must first stabilize its profits. Naturally, China—its largest single market—is where Mercedes-Benz is focusing its efforts.
Historically, Mercedes-Benz aimed to maintain uniformity across its global markets, using the same suppliers and production standards worldwide. However, this approach raised costs and prevented the company from offering products tailored to local markets.
By introducing long-wheelbase models specifically for China, Mercedes-Benz took its first step toward deeper market integration, and Chinese consumers have embraced it. The long-wheelbase models have further solidified Mercedes-Benz’s position as a luxury brand.
The localization of the GLE is the next step in Mercedes-Benz’s strategy for the Chinese market. Judging by sales trends, lowering prices to boost volumes still works. In January 2024, the GLE sold 6,630 units, driven by price fluctuations due to inventory clearance. To increase sales, Mercedes-Benz must continue pushing localization to cut costs.
The localization of the GLE will set the stage for Mercedes-Benz’s entire product lineup in China. This will be a powerful tool for boosting both sales and profitability.
To achieve these cost reductions, local suppliers will play a crucial role. Their enthusiasm for partnering with Mercedes-Benz stems not only from the company’s impressive sales volumes but also from the chance to upgrade their own brands and join the global supply chain.
In September 2024, Mercedes-Benz chairman and CEO Ola Kallenius visited China for the fourth time this year. According to insiders, one of the key reasons for his visit was a meeting with the Shanghai government.
Currently, Mercedes-Benz operates a digital R&D center in Shanghai, focusing on smart driving and intelligent cockpits. Its vehicle R&D and production facilities are located in Beijing. In the past, poor sales of its EVs caused Mercedes-Benz’s partners to lose confidence in its electric strategy.
In July, Shanghai government officials also met with Toyota to discuss the potential establishment of a Lexus EV plant in the city.
So, will Mercedes-Benz’s RMB 14 billion investment and Kallenius’s latest trip to Shanghai bring new hope for the company? The entire industry is watching closely.
KrASIA Connection features translated and adapted content that was originally published by 36Kr. This article was written by Xu Caiyu for 36Kr.