By Rhys Jones
LONDON, July 25 (Reuters) - Luxury sports car maker Aston Martin is to team up with Daimler's high-performance Mercedes-AMG GmbH division to develop a new generation of bespoke V8 engines for the British firm, it said on Thursday.
Under the deal, which is due to be finalised before the end of the year, Daimler will take a non-voting stake of up to 5 percent in the 100-year-old British firm, which achieved its greatest fame with the 1963 launch of the DB5 sports car featured in early James Bond movies.
The agreement follows completion of the sale three months ago of a 37.5 percent stake in Aston Martin to Italian private equity group Investindustrial for $241 million via a capital increase agreed by the carmaker's majority owner Investment Dar and Kuwaiti compatriot Adeem Investment Co.
Aston Martin has said the investment by Investindustrial, which outbid Indian tractor maker Mahindra and Mahindra for the stake, would underpin a new product development programme worth more than 500 million pounds over the next five years.
The deals will help Aston Martin, the only global luxury carmaker not attached to a larger manufacturer, to better compete with the likes of Volkswagen's Bentley and Porsche units, as well as UK rival Jaguar Land Rover, which was bought by India's Tata Motors in 2008 and has since achieved huge sales growth, especially in China.
Under the latest agreement Daimler's Mercedes-AMG company will supply engines to Aston Martin, which will also receive electronic components from Daimler's Mercedes-Benz unit, the pair said.
"The opportunity to include content from Mercedes-AMG in our next generation sports cars is, clearly, good news," Ian Minards, Aston Martin's product development director, said in a statement. "This points to a very bright future for the company as it starts its second century in business," he added.
The Mercedes deal could eventually replace Aston Martin's current engine supply agreement with Ford, which owned Aston Martin until 2007. Ford makes V8 and V12 engines for the carmaker at its plant in Cologne, Germany.
Aston Martin declined to comment on British media reports last month that it recently extended the Ford supply deal for another five years.
"This is a great deal for Aston Martin, which needed a bigger partner, and will give it access to new engine technology and save it a fortune on the massive cost of developing powerful and fuel-efficient engines and electronic systems," said IHS Automotive research director Christoph Stürmer.
Conversely, should Aston Martin's professional investors ultimately want an exit, Daimler could put itself in pole position to turn its initial shareholding into a strategic controlling stake assuming the partnership proves successful.
"Daimler has many other problems they need to address at the moment. But if they succeed there, then it wouldn't hurt to have an Aston Martin in your portfolio," said Stefan Bratzel, the head of Germany's Centre for Automotive Management.
Mercedes-AMG has three families of engine Aston could choose from -- an in-line four cylinder unit, a V8 and a V12 but Thursday's announcement specified the agreement was for the development of V8 powertrains, with no mention of whether the company would develop a new generation of V12 engines.
Aston Martin has struggled for growth since the economic downturn in 2008 and reported a 9 percent fall in 2012 profits during which time it sold around 3,800 cars - around 10 percent fewer cars than a year earlier. Ratings agency Moody's put its non-investment grade B3 rating under review late last year.
Aston sells some 15 percent of its vehicles in Asia but wants to significantly boost its presence in emerging markets.
Aston Martin rival Jaguar Land Rover has spent some $800 million over the last five years on marketing and expanding its dealerships in China, which is now close to becoming JLR's largest single market.