UpdateVolkswagen plans to use Jianghuai electric car plan to forge its third venture in China

Volkswagen AG said it signed an accord with Anhui Jianghuai Automobile to explore the feasibility of producing electric vehicles in China, forming a third partnership in the world’s largest vehicle market and challenging a regulation that limits the number of Chinese partners foreign carmaker can have.

The venture, which doesn’t contain any specific investments or production details, will conduct research and development, manufacture, market and sell vehicles and components in the country, according to a press statement by the German carmaker’s China office.

The two companies may use their existing and future model platforms, as well as technologies, for the venture, President and CEO of Volkswagen Group China Jochem Heizmann said in the statement. Earlier, people familiar with the matter told the South China Morning Post that the venture will assemble electric vehicles at Jianghuai’s Hefei factory in Anhui province, aimed at the middle-to-high end of China’s vehicle market.

“This new partnership again demonstrates the seriousness of the foreign player in the Chinese electric vehicle market, and also the importance of being local to gain local consumer and government acceptance” said Raymond Tsang, a partner with global consultancy Bain & Co. “A China-for-China product strategy would also be very critical to win the mainstream mass market, and will likely enjoy a more competitive cost structure and a more local supply infrastructure.”

Trading of Jianghuai’s shares was halted in Shanghai on Wednesday, pending an unspecified agreement “that will have a significant impact on the company,” according to an earlier statement by the Chinese carmaker. Jianghuai’s shares have risen almost 23 per cent this year.

The new alliance will bolster the prospects of both carmakers and help them tap into the increasing popularity of electric cars, responding to government subsidies to cut vehicle emissions and reduce air pollution.