* Mass-market failure opens door for luxury e-car
* Denza model an appeal to brand-concious owners
* Younger generation key to e-car future - designer
BEIJING May 17 (Reuters) - The failure of China's mass-market electric car producers to meet government sales goals is prompting one major carmaking partnership to change tack and develop a "luxury" e-car for the world's largest auto market where upscale brands trump environmental concerns.
Daimler AG and its local partner, BYD Co. , hope to convince Chinese buyers that their Denza concept car, the first pure all-electric luxury car in China, will put owners in the same league as a BMW, Audi or Mercedes.
The car is the result of a two-year effort by Daimler and BYD to marry Mercedes Benz design and technology with BYD's lower-cost batteries. BYD, which also makes cars, is partly owned by American investor Warren Buffett.
Daimler and BYD exhibited a Denza concept model at the recent Beijing autoshow and said final versions could hit showrooms in 2013 as a China-only auto not for export.
The two companies have filled the electric-blue concept car with futuristic bells and whistles that include an illuminated jade key, an animated dashboard and three "T-Pads," which the two companies say are key features of the car. The T-Pads function similarly to iPads and are removable.
In addition to functions like GPS, Internet and video, the T-Pads have built-in cameras that can replace the traditional vanity mirror. It has not been decided which features will be included in the production model.
Electric car sales in China, the world's biggest emitter of greenhouse gases, have fallen far short of the government's ambitious goal of 500,000 battery cars on the road by 2015, rising to more than 5 million by 2020. Last year, a mere 8,159 were sold despite state subsidies and pilot programs for e-taxis and e-buses.
Companies involved in producing electric cars in China include SAIC Motor and Dongfeng Motor Group Co , which have pledged to invest $1.9 billion and $441 million, respectively, in green vehicles. BMW and Nissan are working with local governments to roll out their E-Mini and Leaf cars. BYD also produces electric vehicles including a plug-in hybrid called the F3DM and the all-electric battery e6 car apart from the Denza.
The reason for the poor showing, experts say, is the electric cars are either too expensive for mainstream buyers or too practical and odd-looking for the Lamborghini-loving super-rich.
But Olivier Boulay, Daimler AG's 54 year-old French-born design chief in Beijing, believes Daimler and BYD can change all that with the Denza.
"It's funny...every time we talk about electric cars, we think about a cheap commuter," Boulay said in his stylish office inside Mercedes-Benz's Beijing design studio. "But they're still expensive for the masses."
Boulay said it's better to suggest electric cars offer "a new lifestyle" than to tout them as an expensive practical solution for the environment, which so far has failed to lure buyers.
"We have to inspire people with something more exciting," Boulay said.
As a sign of the promise of Daimler and BYD's approach, Boulay points to the upscale Lexus gasoline-electric hybrid car model called CT200h. Despite starting at about 280,000 yuan ($44,300), the car outsold the Prius, which is about 50,000 yuan cheaper. Sales of the Lexus hybrid totaled 3,900 cars for the three months ended April 30, compared with the 450 Prius cars that Toyota sold during the same period.
While there is promise in the long run, Boulay concedes "the business model (of selling a practical green car) is not doing well" in China and there is room for a luxury green car instead, especially in China's jam-packed urban areas.
Mercedes-Benz and BYD aren't necessarily blazing an upscale e-car trail with the Denza. In the United States, closely held startup Fisker Automotive Inc. and publicly traded Tesla Motors Inc., both based in California, helped pioneered the luxury green car business model. Tesla, which went public in 2010, says its battery-powered Model S sedan is likely to start at about $60,000.
Skeptics say China's affluent car buyers place more of a premium on brands and not on the environment and say Denza's brand proposition represents a risk.
Yale Zhang, head of the Shanghai-based consulting firm, Automotive Foresight, says the idea to market Denza green cars as luxury vehicles is "reasonable". But are Chinese consumers going to accept Denza as a premium brand?
"It's a brand-new name and everybody knows BYD is behind it," Zhang says, citing BYD's imprint as a low-cost manufacturer.
China's commitment to energy-saving cars was highlighted on Thursday when the government announced it will allocate 6 billion yuan ($949 million) to subsidize fuel-saving cars, specifying for the first time the total amount of handouts for such vehicles.
In line with the country's emphasis on fuel-efficient cars, Boulay expects electric cars to become the dominant model of transportation in urban areas over time.
"The whole game at this point is to inspire this young generation," Boulay says. "The young generation is the most receptive to electric cars."
$1 = 6.3222 Chinese yuan Reporting by Beijing newsroom; Editing by Ken Wills and Matt Driskill