The Volkswagen brand will partner with Xpeng Inc to produce two models targeting the middle-class segment which will carry the VW logo but feature Xpeng know-how on software and autonomous driving, a win for the EV startup that is less than a decade old.
The new models, to be rolled out from 2026, will plug a gap in Volkswagen's product lineup in China, where the market for so-called "new energy vehicles" has grown faster than expected and Volkswagen lags local competitors and Tesla.
The carmaker is coming under heavy investor pressure over its China presence, both in terms of boosting EV sales and ensuring its slate is clean on labour rights issues in the Xinjiang region where it co-owns a plant with SAIC.
Volkswagen's China chief Ralf Brandstaetter recently criticised the market in China for electric, plug-in and fuel cell vehicles as becoming too crowded and lacking funding for long-term development.
The carmaker said it will invest around US$700 million in Xpeng and buy a 4.99% stake in the company.
Brandstaetter has long said that Volkswagen's China strategy rests on collaborating with local actors, with Xpeng the latest in a string of partnerships with Chinese firms that have included battery-maker Gotion and technology firm Horizon Robotics.
For Xpeng, one of the smaller players in China's EV sector, the partnership offers leverage of Volkswagen's supply chain and sourcing capabilities as well as a boost to the reputation of its platform and technology, Daniel Roeska of Bernstein Research said in a note.
Volkswagen also announced plans of further cooperation between its subsidiary Audi and Chinese heavyweight SAIC, but did not specify which models the two companies would develop together or when a joint platform could emerge.
The models would be in a segment Audi has yet to broach in China, the company said, as the premium brand plays catch-up in the Chinese electric vehicle market, where its performance has so far been weak.
