Volkswagen AG signed a preliminary deal with China’s Anhui Jianghuai Automobile (JAC Motor) to explore making electric vehicles in a new joint venture, the two automakers said on Wednesday.
The two sides are studying the feasibility of a joint venture and aiming to sign a formal agreement within five months, JAC Motor said in a stock exchange filing. Volkswagen (vlkay) confirmed the deal in a written statement.
China surpassed the United States last year to become the largest maker of pure electric cars thanks to a raft of government incentives to promote the switch from petrol to electricity as the country battles heavy pollution.
Sales of so-called new energy vehicles, as battery electric and plug-in hybrid cars are referred to in China, more than quadrupled last year with rapid growth continuing this year.
Volkswagen said in its statement that the main goal of the cooperation was developing “zero-emission mobility.” A company spokesman said the partnership will most likely focus on pure battery electric cars rather than hybrids.
The investment size and business model of the possible joint venture have not been finalized yet, JAC said.
The memorandum of understanding is not legally binding and a final agreement will be subject to approvals and filing procedures, it said.
JAC, China’s ninth largest automaker by group sales, halted trading of its shares ahead of the announcement.
Chinese financial news outlet Caixin was first to report the potential partnership, citing sources.
Volkswagen is locked in a dead heat with U.S. automaker General Motors (gm) for the title of largest automaker in China, the world’s biggest auto market, with GM’s primary joint ventures slightly edging out VW’s to sell the most cars in the market last year, according to automaker association data.
Global auto brands are only allowed to manufacture cars domestically in China through joint ventures with local partners, with automakers typically limited to two JV partners. Volkswagen already has joint ventures with SAIC Motor and China FAW Group.