SHANGHAI (Reuters) -Nio has held exploratory talks with Mercedes-Benz for a tie-up that would see the German automaker invest in the Chinese electric vehicle startup in exchange for technology, two people with direct knowledge of the matter said.

Nio's founder and chief executive William Li discussed the potential collaboration with Mercedes CEO Ola Kaellenius earlier this year, seeking an investment from the latter in exchange for loss-making Nio sharing its research and development capabilities with Mercedes, said the sources.

The talks did not get as far as discussion on details on the technology to be transferred and the potential financial investment, they said.

One of the sources said Nio approached Mercedes with the tie-up proposal, but said it faced resistance within the German company that discussed it internally in recent weeks, and that it was highly likely it would not proceed.

It was unclear by when a decision on the tie-up would be reached.

Nio, when contacted, denied it talked to Mercedes on a collaboration, calling it "untrue", without elaborating.

Mercedes said in a separate response that while there were no collaboration plans with Nio, "Ola Kaellenius is in an ongoing regular dialogue with various industry leaders and peers, including William Li".

The sources did not wish to be named as the matter is private.

The Nio-Mercedes talks align with a trend of closer collaboration between legacy automakers and new players as Chinese EV companies, lacking cash, seek to survive a consolidating domestic industry by trying to sell innovations to established automakers.

Chinese EV companies may also be able to navigate possible trade barriers more easily by forging such tie-ups.

Many of incumbents are seeking to reposition to catch up with Tesla and Chinese companies as EV adoption scales up rapidly in markets globally.

Volkswagen has been a first mover, striking deals in July that would enable it to jointly develop new models for China, the world's biggest auto market, based on Xpeng's EV platforms and leverage SAIC Motor Corp's technologies for Audi.

And China's Leapmotor has approached foreign companies, including India's steel-to-energy JSW Group, VW's Jetta brand and Stellantis, according to media reports and people familiar with the matter, after saying it would like to license out its EV platforms, battery and motor technology. Leapmotor has declined to comment on the matter.

By seeking tie-ups and investment from established automakers, China's EV startups are following a playbook from Tesla when the EV industry leader was struggling to ramp up production. Elon Musk has credited a $50 million investment from the Mercedes group with saving Tesla in 2009.

Nio, whose investors include Chinese tech giant Tencent Holdings, has publicly called for more such tie-ups with established automakers. It currently does not have any.

"They [the legacy brands] have been too successful so that they are not agile in smart EV development. This is a challenge for any CEO who runs a company with hundreds of thousands of employees," Nio's Li told reporters at an event in September showcasing its self-developed technologies from batteries and chips to autonomous driving and smart manufacturing.

"Rather than spending so much money and time on your own, isn't it better to seek win-win via partnerships with EV startups?" he added.

FRICTION

Resistance at Mercedes, however, reflects ongoing friction in the adjustment to the EV shift.

The source said Mercedes' R&D and strategy teams were largely against the proposals, citing concerns that such a tech tie-up could undermine Mercedes' brand image. Another worry was that as Chinese auto sector entities were the two biggest single shareholders of Mercedes, it could upset shareholder harmony.

Mercedes has had a patchy sales record in China but is planning further investments in the market to expand its R&D team and accelerate innovations in electrification and digitalisation.

Nio, which ranks No.9 among manufacturers of electric and hybrid cars in China, has, in turn, increased investment in self-developed technologies for components such as chips and batteries.

But its foray into areas such as smartphones has fueled concern among some investors that the automaker, which has seen its losses widen amid a fierce price war in China, is taking on too much.

Nio's net loss more than doubled to 6.12 billion yuan ($839.51 million) in the three months ended June. It had cash and equivalents totalling 31.5 billion yuan as of June 30, declining from 42.3 billion at the end of 2022.

($1 = 7.3127 Chinese yuan renminbi)

(Reporting by Zhang Yan and Brenda Goh; Additional reporting by Ilona Wissenbach in Frankfurt; Editing by Muralikumar Anantharaman and Barbara Lewis)