Mercedes on a charge to take on luxury rival

Daimler AG's Mercedes-Benz unit, the world's second-largest maker of luxury cars, will almost double investment on "green" technologies to take on BMW in the race to offer electric vehicles.

Mercedes intends to spend €1 billion ($2 billion) in each of the next two years to develop batteries and fuel-saving engines, Thomas Weber, Daimler's development chief, said. Annual spending averaged €567 million over the past three years.

"We're continuing to give gas," said Weber, 55. "It shows that we have the commitment, not just to build show cars, but to bring hybrids, electric vehicles into large-scale production."

Daimler is focusing on developing batteries that can last at least 10 years and handle the demands of driving in extreme conditions, Weber said. The spending in 2010 and 2011 is part of Daimler's plans to increase its overall research budget, which amounted to €4.2 billion in 2009.

The company said this week it will develop electric cars for China with BYD, the carmaker backed by billionaire Warren Buffett. Daimler also plans to start producing its own lithium-ion batteries by 2012.

Batteries, not engines, will be the "heart" of future cars, Weber said.

Daimler's approach differs from that of luxury-leader BMW, which plans to roll out an electric-powered urban vehicle by 2015.

Unlike General Motors, which will produce its own batteries for the Chevrolet Volt, BMW doesn't plan to enter the battery industry, and will instead purchase components from German supplier Bosch and Korea's Samsung. "We have two strong partners," chief executive Norbert Reithofer said.

"We expect that the battery-cell technology will become a commodity."

Daimler sees more strategic importance in batteries because cars are becoming increasingly electrified, starting with hybrids, which will make their way into all Mercedes vehicles.

"Mercedes wants to be there first" with electric-powered vehicles, said Weber.

"We're attacking; we want to be on the top position and can't wait until someone delivers a commodity.

"Whoever has the better battery has the better car."

Since batteries that meet the requirements don't yet exist, "it would be fatal to wait until somebody comes along that can make this battery: that would mean we would be last."

Batteries are "strategically very important" for carmakers and the lack of in-house technology could be a "risk" for companies like BMW and Volkswagen, said Ferdinand Dudenhoeffer, director of the Centre for Automotive Research at the University of Duisburg-Essen. "The question for Daimler is whether they can support the strategy on their own."

Daimler is open to supplying batteries to other carmakers, Herbert Kohler, Daimler's chief environment officer, said.

The co-operation with BYD, which last year explored a partnership with Volkswagen, represents "enormous" potential for Daimler, because the Chinese Government is promoting electric vehicles to stave off an energy shortage, Weber said.

Daimler and BYD plan to establish a development centre to combine the German carmaker's expertise in engineering with BYD's battery and low-cost production know-how. The companies aim to create a new brand that will be positioned between BYD and Mercedes models. Development may take three years, Weber said.

"China has the potential to be among the world's largest markets for zero-emission vehicles," said Tim Urquhart, an analyst with IHS Global Insight. "This new alliance is a huge opportunity for both companies."

- BLOOMBERG