BEIJING - Citing the added cost of new tariffs and delays in negotiations, Mercedes-Benz AG appears to be walking away from its proposed $1 billion minivan project in south China.
In a letter to German suppliers who planned to follow Mercedes into China, the company said it now intended 'to recheck the feasibility of the project.'
The letter, a copy of which was obtained by Automotive News, dryly notes that the decision will '... inevitably extend the time for the realization of the project.'
Sources close to the company said the letter signals that the project is dead, but a Mercedes spokeswoman held the door open to a possible restart.
'We are still interested in realizing the project if the originally planned volume is still feasible and if the Chinese side provides the necessary basis for a commercially viable project,' said Karin Malmstrom, spokesperson for Mercedes-Benz China.
Ironically, Mercedes won approval to bid for the project after Chrysler Corp. walked away from it. Chrysler withdrew after two years of negotiations failed to produce an agreement on issues of cost and technology transfer.
The Mercedes venture, which was announced with great fanfare during the 1995 state visit of Chinese President Jiang Zemin to Germany, called for Mercedes to build 60,000 V-class minivans and 100,000 engines a year at plants in Guangdong province near Hong Kong and on Hainan Island in the South China Sea.
Mercedes was to own 45 percent of the project, with South China Motor Corp. holding the balance.
But in its letter, Mercedes said, 'New customs and value added tax regulations ... would burden the joint venture ... making it uneconomical.'
China last year canceled a key tax break for foreign joint ventures: the right to import heavy equipment without paying tariffs. The prospect of paying duties on paint-shop, welding and other equipment sharply raised Mercedes' cost of setting up an auto plant.
The letter also noted that Mercedes had realized that '... there must be appropriate compensation from the Chinese (government) to guarantee profitability' of the venture.
At the moment, Mercedes said, it could not determine what level of compensation it needed.
Sources said Mercedes' enthusiasm for the project also was wrung dry by two years of tough negotiations with the Guangdong and Hainan provincial governments. The two governments failed to take a joint approach to the project and tried to milk concessions from Mercedes at every step of the process, the sources said.
Mercedes also has been concerned about the current and future state of China's car industry. For more than a year, car sales have languished as the government has pursued a tight-money policy to fight inflation.
At the same time, the central government appears to be downgrading the industry's status in the official economic scheme.
That debate has led to conflicting statements as to whether the auto sector is still a 'pillar industry' in China's economic modernization, a status that gives industries a priority claim on resources and makes them eligible for various economic incentives.-
The withdrawal of Mercedes from the minivan project would be a major setback for the Guangdong government and its declared aim of attracting high-tech industry to the province.
Guangzhou, the provincial capital, also is the site of a Peugeot car joint-venture plant that is close to shutdown.
The province is trying to draw a second wave of advanced industries in order to change the industrial landscape of south China, which now relies heavily on labor-intensive industries such as garment making and toy manufacturing.