BEIJING (Reuters) - Chinese EV maker BYD will showcase its premium brand's first sedan at the Beijing auto show from Thursday, in a challenge to the likes of Germany's Mercedes-Benz which three years ago pulled out of the brand's development citing slow sales.

The Denza Z9GT is the fruit of BYD founder Wang Chuanfu persisting with the brand after Mercedes-Benz effectively became a sleeping partner in their decade-old 50-50 premium EV venture by cutting its stake to 10%.

The car will complement Denza's N7 and N8 SUVs and D9 multipurpose vehicle, whose surging sales have contributed to BYD's EV domination at the expense of legacy foreign automakers.

"In the past, traditional luxury brands were defined by their logos. Today, luxury for new energy brands are defined by technology," Denza general manager Zhao Changjiang declared at an April 1 event.

However, the luxury vehicle will enter a saturated domestic market in the midst of a price war, while overseas, governments are looking at Chinese EVs with a critical eye while blaming what they call Chinese overcapacity for flooding markets.

Denza's success is central to BYD's goal of being a global major rivalling long-time leaders such as Toyota and Volkswagen with a stable of brands at different price points, shedding its image as a low-cost automaker.

The upmarket push is also needed to increase profitability while the price war squeezes margins of mainstream models.

Denza's D9 has become the group's most profitable model with annual sales of 119,000 units from which, on average, it pockets about a quarter of the roughly 400,000 yuan ($55,215) price, Denza managers said.

That is about 10 times as much as BYD's average profit per vehicle for January-September last year, analysts estimated.

BREAKTHROUGH

Storied automakers such as Porsche and Ferrari have dominated the luxury market supported by decades of development centred on traditional engines, whereas Chinese brands had neither the history nor technology to compete.

Early Chinese attempts, such as 2003 sports car Beauty Leopard from Geely Automobile, struggled to sell. BYD hoped to fare better under the halo of Mercedes-Benz.

The breakthrough came when EVs became feasible along with advancement in so-called intelligent technology, allowing small, nimble firms like Tesla to disrupt the industry.

A subsequent EV boom and BYD's decision to stop building petrol-only cars three years ago has seen the automaker grow rapidly, backed by technology developed in-house covering aspects as varied as battery, chassis and autonomous driving.

"The methodology for building a premium EV brand could be different from that for conventional gasoline cars as there have been some fundamental changes in the core capabilities of a car," said analyst Zhang Yichao at consultancy AlixPartners.

Last year, BYD added ultra luxury brand Yangwang to its stable with an SUV and sports car priced over 1 million yuan. It also launched off-road brand Fangchengbao with the first model priced above 289,800 yuan to rival Jeep, Jaguar Land Rover and Toyota's Land Cruiser.

For comparison, BYD's best-selling Dynasty and Ocean series of cars are priced at 69,800 to 331,800 yuan. They made up the bulk of sales in January-March whereas premium accounted for 6%.

CRYSTAL GEAR STICKS

BYD's premium vehicles boast nappa leather seats and crystal-embedded gear sticks, as well as technology such as an active suspension feature developed in-house and assisted driving features not available in its BYD-branded models.

They also feature designs led by Wolfgang Josef Egger, who has worked at European luxury brands such as Alfa Romeo, Audi and Lamborghini.

Drivers of the Denza N7 in China would enjoy such features at prices as much as five times lower than the Mercedes-Benz GLS, Porsche Cayenne and BMW X7, said Denza's Zhao.

A selling point of the Denza Z9GT is having the smallest turning circle of any other vehicle, which is useful when driving on narrow streets and in confined parking lots. Yangwang cars can float should an accident leave them in a body of water.

"Since cars are becoming electronic devices ... you no longer need to be shy about the idea of creating a premium EV without the bloodline or the history but simply by loading all types of advanced technology onto the car," said Yale Zhang, managing director at Shanghai-based consultancy Automotive Foresight.

"Such a strategy of new premium based on technology has proved to be working in China, even though their profit margins are not as fat as Ferrari or Porsche used to have."

LUKEWARM SALES

BYD's cost control is also a big strength as it allows more space for innovation than is the case for legacy automakers which are still struggling for EV profitability, said Automotive Foresight's Zhang.

That also allows BYD to lower prices even for new premium models to boost appeal, in contrast to major foreign brands that tend to discount only to boost sales of aging cars, Zhang said.

With the N7, Denza overestimated demand and underestimated competition when it launched to lukewarm sales, said Denza's Zhao. Within eight months, it launched a version with extra features such as air suspension at a 20% lower starting price.

That meant selling the new version at a loss in what Zhao called a strategic move for Denza to achieve 40% volume sales growth this year.

This is not the time to be creating classics like the Porshe 911, Zhang said. "We have to absolutely do whatever it takes to boost sales."

($1 = 7.2444 Chinese yuan renminbi)