In June, DaimlerChrysler finally received permission to assemble Mercedes-Benz cars from kits in Beijing.
But it was a mixed blessing. In March, the Chinese government decreed that cars assembled from kits would be taxed at the same rate as imported cars. That rate next year will be 25 percent of the value of the car, up from 15 percent.
The only way D/C can lower the tax rate is to buy parts locally - and that will take time.
BMW, which opened its China plant in 2003 to make 3- and 5-series sedans, has a two-year head start over its archrival. About 20 percent of its parts are locally sourced, a supplier says.
Volkswagen's Santana and Citroen's Fukang sedans, both of which have been assembled in China for several decades, have close to 90 percent local content.
The tax bite is just another price D/C is paying for its cautious approach to China. In the world's fastest growing automotive market, speed is a must despite the risks. Companies must grasp opportunities early, then trust in a local team to succeed.
Company and supplier sources say the centralized culture at D/C slows decision-making. And the company's operations in China have been troubled by friction between German and US managers.
D/C continues to make important decisions in Germany, suppliers say. VW made the same mistake. That's one reason VW's share of the 2.5 million new-car and light-vehicle market has fallen to less than 25 percent, down from 59 percent in 1998.
The result for both companies has been slow introduction of new products in a market that demands speed. General Motors launched two Chevrolet models and the Cadillac SRX in February. GM China now has a lineup of nine domestically assembled cars, including luxury and mid-priced sedans, small-segment cars and a van.
Daimler vs. Chrysler
D/C has only five models: three Jeep-badged SUVs and two Mitsubishi-badged SUVs.
The company needs "to have a strong local team that can make decisions," says a D/C supplier in Shanghai. "They are kind of slow to make decisions on new products. They are even kind of slow in reacting to this new [import tax] policy."
By contrast, GM gave its local team a lot of decision-making power, one of the factors in the carmaker's success in China. Former GM China CEO Phil Murtaugh could decide which models would be assembled here, and Shanghai General Motors could decide which parts to source locally.
Trevor Hale, D/C's spokesman in China, says local managers can react quickly.
"While DaimlerChrysler's dual headquarters in Stuttgart and Auburn Hills, Michigan, are responsible for major strategic decisions regarding its business units and vehicle brands, local operations have the flexibility and freedom to lead their operations based on the needs the market," he says.
Another roadblock to speedy decision-making: D/C's German and US management have trouble agreeing on China strategy, suppliers say.
"They have internal issues between Europe and American management that prevent them from solidifying plans," says an executive at a North American supplier in Shanghai.
Hale says that every D/C business unit has a representative on the China Executive Board, which was formed last October. He cites the Chinese government's approval to set up a financing arm in China. Also, the company established a China global procurement and supply office. The head of the global procurement office is from Auburn Hills.
But the friction is evident at the new Beijing Benz-DaimlerChrysler Automotive auto assembly complex on the outskirts of Beijing. The site includes a line to assemble Mercedes-brand cars and a line to assemble Chrysler-brand cars - in separate buildings. The two operations are not coordinating logistics, a supplier in Beijing says.
The two brands will share a paint shop, already completed on an adjacent lot. But the collegiality ends there. "We will paint their cars," says one Chrysler manager.
Management turnover has plagued D/C in China recently, too. Joe Chao was named CEO of Beijing Benz-DaimlerChrysler Automotive, a holding company set up in December. A few months later, Jürgen Ziegler replaced Chao.
"Joe helped set up the new joint venture and has now returned to the US," D/C spokesman Hale says.
Wei Ming Soh, head of sales and marketing for Beijing Jeep, left a few months ago to take a similar position at Volkswagen China. Li Bing, head of Chrysler imports, also made a lateral move to a job at VW China.
Beijing Jeep is another missed opportunity. It began losing money in 1998, the year Daimler-Benz acquired Chrysler, because Beijing Jeep had failed to bring in new models. It turned profitable last year, helped by the introduction of two Mitsubishi SUV models in 2003. The Mitsubishi Outlander is Beijing Jeep's best-seller.
But sales plummeted 67 percent to 4,021 units in the first four months of 2005. For that period, its market share declined to 0.5 percent, down from 1.3 percent at the end of 2004, according to Automotive Resources Asia, a Shanghai-based consulting firm.
The problem? Competitors such as Honda and Chery introduced new SUVs. The Honda CR-V was launched in May 2004, and the Chery Tiggo arrived in April 2005.
Meanwhile, DaimlerChrysler's relationship with Mitsubishi foundered. And no new domestically assembled Jeep or Chrysler models were launched in China last year.