Mercedes-Benz owner Daimler is nearing a deal to sell a 50 per cent stake in its small-car brand to China’s Geely, according to three people familiar with the plan.

The sale of the stake in its Smart division will be confirmed before the Shanghai Auto Show in April, said one of the people.

The move by Geely, which became Daimler’s largest shareholder last year, may be to help out the German group as it struggles to carry the lossmaking Smart brand, which sells only 130,000 cars a year — a fraction of the 2.25m cars Mercedes-Benz sells.

Daimler and Geely have become closer in the past year. In October, they announced a joint-business to offer ride-hailing services in China.

Daimler said the group had been speaking with “several possible co-operation partners” as it worked on the next generation of Smart products. 

A spokesman for Geely declined to comment.

Geely has rapidly expanded in the past few years. It owns Volvo Cars, British sports car brand Lotus and Malaysia’s Proton and holds a stake in truckmaker Volvo Group.

The future of Smart under Daimler has been in doubt ever since the Mercedes-Benz owner announced last year that chief executive Dieter Zetsche would step down in May, ending a 13-year tenure. 

Mr Zetsche had been a cheerleader for the compact car brand but his successor, Ola Kallenius, is thought to have less enthusiasm for the microcar arm, particularly as the German group’s profit margins have come under pressure in the past year.

Daimler does not break out earnings for Smart, but analysts think the brand has failed to generate profits since its founding 21 years ago. According to estimates from Evercore ISI, Smart loses between €500m and €700m each year.

However, a partial sale to Geely could face political opposition in Berlin, according to a banker close to Daimler, as Germany has recently voiced its concerns about the growing influence of Chinese companies on business in Europe’s largest economy. 

When Geely purchased a 9.7 per cent stake in Daimler a year ago, Berlin was taken by surprise. One MP said at the time: “Geely just crept up on Daimler out of nowhere.”

A draft law was then approved last year to give the German government the right to block investments above 15 per cent by non-EU companies in sensitive industries, ranging from defence to energy. 

Several European capitals are concerned that Chinese companies are acquiring assets in the EU to later transfer the technology back to China. 

However, the potential of Smart, which aims to become 100 per cent battery-powered by 2020, is likely to be in China, the world leader for all-electric cars with a burgeoning market for compact models.

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