Can Mercedes-Benz Pump Up Aston Martin?

The Aston Martin DB9 is arguably one of the world's best-looking cars, but its V12 engine, originally designed by Ford in the 1990s, is getting long in the tooth. Photo credit: Aston Martin.

This past week, German automaker Daimler (NASDAQOTH: DDAIF  ) announced a new deal with Aston Martin, the tiny British company famous for its line of sleek -- and expensive -- sports cars.

Under the deal, Daimler's Mercedes-AMG unit, which is the high-performance arm of Mercedes-Benz, will work with Aston to develop an all-new line of V8 engines for the next generation of Aston Martin cars.

Mercedes-AMG will also help Aston develop the electronic controls for those new cars, a critical -- and expensive -- part of making autos nowadays.

So what does this mean for James Bond's favorite carmaker? And what does it mean for Daimler and Mercedes?

A deal that Aston needs, badly
It's pretty clear what this means for Aston: survival.

Since Ford (NYSE: F  ) sold it to a group of private investors in 2007, famed British sports-car maker Aston Martin has had a somewhat rough time.

The economic crisis hit all of the high-end carmakers hard in 2008, but most of Aston's rivals are owned by major global carmakers, which gave them access to the resources needed to keep their products at the cutting edge. That has cost them: Aston's sales were down 10% last year, even as other luxury car brands saw sales increase.

But while Ford set Aston up with a new factory and some great engines a decade ago, the little British firm has had a hard time finding the resources to keep up with rivals such as Fiat's Ferrari and Volkswagen's Lamborghini.

Aston's recent models have all been visually stunning, and the interior trims have always been some of the nicest in the world -- an Aston Martin hallmark. But in terms of performance, the latest Astons are increasingly outclassed by the Ferraris and Lamborghinis that Aston Martin would like to be competing with.

The problem is Aston's engines, which are a series of V8 and V12 power plants that have their roots in old Ford designs dating back well over a decade. In fact, Ford still builds the engines for Aston, in a corner of a giant Ford engine plant in Germany, under a deal that was signed when Ford sold Aston.

They're nice engines, and Aston has updated them since parting ways with Ford, but they're not really competitive with the latest high-tech offerings from Ferrari and others. (They're arguably not even competitive with the engines that General Motors has been putting in its Chevy Corvettes lately.)

Aston's deal with Ford is expected to expire this year. And Aston, which once upon a time built its own engines by hand at great expense, isn't equipped to build -- much less to design -- a competitive modern high-performance engine that can comply with global emissions and safety regulations.

That's why Aston Martin needs Mercedes and AMG: It urgently needs new engines, and help developing new models.

But what does Daimler get out of this?

A marketing coup for Mercedes, and maybe more
Mercedes-AMG -- which car enthusiasts usually just call AMG -- was once an independent company that souped up Mercedes-Benz sedans, but nowadays it's the part of Mercedes that develops limited-run, high-performance models. It's roughly comparable to the "M" division at BMW.

What AMG gets out of this is a little bit of scale, and a little bit of prestige. Aston sells a few thousand cars a year, mostly to wealthy auto enthusiasts; having it known that those cars are powered by special engines cooked up for Aston by Mercedes won't hurt Mercedes' reputation with wealthy buyers one bit.

As part of the deal, Daimler will get an ownership stake in Aston, up to 5% as the deal progresses. These are said to be non-voting shares, but it's possible -- this wasn't announced -- that there's an option for Daimler to buy more (or even all) of Aston at some point down the road.

A good deal all around
It's looks like a good deal all around. Aston urgently needs a partner, and AMG, which has the technical savvy Aston needs along with the brand prestige that Aston's customers will want, seems like a fine choice.

For Daimler, it's the kind of deal that could yield some big marketing benefits at relatively small expense. And for car nerds around the world, it's going to be very interesting to see what these two old companies cook up together.

Aston Martin and Mercedes-Benz are both working hard to expand in China, where the auto market has been white-hot. But if you're looking for investment opportunities, a recent Motley Fool report, "2 Automakers to Buy for a Surging Chinese Market," names the two global giants that are best positioned to reap big gains as China's auto boom continues to unfold. You can read this report right now for free -- just click here for instant access.


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