A new joint venture between their parent companies will see Mercedes-Benz and Volvo Cars sharing hybrid powertrains. It is yet another strategic collaboration between global automotive players looking for cost savings in the face of ongoing industrial transformation, heavy investment demands and lost sales revenue caused by the Covid crisis.

Daimler and Geely Holding have announced plans to “collaborate on developing highly efficient powertrain systems for next generation hybrid vehicle applications”. The cooperation is expected to see the pair work together on hybrid powertrains to “enhance their global competitiveness and create true economies of scale”. Areas of potential cooperation include engineering, sourcing, ‘industrialisation’ and efficiency measures.

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The pressure is on the whole automotive industry to embrace electrification – including Daimler and Mercedes-Benz cars. By 2030 Mercedes wants more than half of its passenger car sales to be comprised of plug-in hybrids or purely electric vehicles. Speed is of the essence. Industrial strategies that bear down on high development costs are needed.

Daimler, in particular, is eyeing huge savings as it sources more hybrid system four-cylinder engines from China.

This collaboration will see both parties make savings in next generation hybrid development costs as well as exploit large scale economies in manufacturing. Daimler, in particular, is eyeing huge savings as it sources more hybrid system four-cylinder engines from China.

Both groups said they saw efficient drivetrain technologies as central to the ongoing transformation of the automotive industry, and will accelerate the transition to emission free driving. Both will use global R&D networks to work together on a next generation petrol engine specified for hybrid applications to be produced at their powertrain factories in Europe and China which “could be utilised by Mercedes-Benz together with its established partners in China as well as the wider Geely Holding Group portfolio of brands including Volvo Cars”.

Daimler will gradually retool European factories for electric powertrain systems and that makes sense as electric cars start to take a much higher share of the global car market in the second half of this decade, with Europe’s market leading the way. There could be uncomfortable consequences for the Unterturkheim and Kolleda plants in Germany that also make combustion engines but is likely to make far fewer in the future as Geely builds the vast majority of the four-cylinder hybrid system engines. Stuttgart will stress the long-term phased transition to electric (Unterturkheim will produce batteries for electric vehicles), but it could be a journey with bumps in the road.

The savings in cost, though, should be sizeable. Internal combustion engines can account for as much as 40% of the cost of a vehicle and producing a four-cylinder engine at high-volume at a plant in China allows unit costs to fall dramatically.

With this collaboration, Daimler can adjust its manufacturing and sourcing mix according to global demand by powertrain type to optimise on costs. We estimate that Daimler could achieve cost savings of up to EUR1,800 per vehicle on hybrid powertrains manufactured at very high volume and at low-cost in China.

Daimler investors will be cheered by the news, including Geely founder Li Shufu. When the bold entrepreneur took a 9.69% stake in Daimler in 2018, a few senior managers in Stuttgart were just a little rattled. Since then, China has consolidated its position as the global auto industry’s largest market (while leading this year’s post-Covid recovery) and Geely is a rapidly expanding star performer – not only in China, but with shrewd investments outside China, most notably in acquiring Volvo Cars. Geely is by far China’s top privately-held OEM.

In 2020, Daimler’s managers will be seeing Geely as a pretty good long-term strategic partner – especially for growth in China – as well as a convenient and low-cost manufacturing base for hybrid ICEs In short, Geely – whatever Li Shufu’s ambitions – is a dynamic partner for Daimler that will bring value creating opportunities to the table, like this hybrid engines project.

DaimlerChrysler’s bold formation and subsequent disintegration following a period of rising internal tensions between the respective merger partner factions seems a very long time ago. A lot has changed and even revered industrial elder giants such as Daimler cannot ignore that.

This article first appeared on GlobalData’s research platform, the Automotive Intelligence Center