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Volkswagen Is Gearing Up to Mass-Produce Electric Cars in China

VW's budd-e concept is a futuristic preview of a battery-electric vehicle similar to VW's iconic Microbus. Something similar could be headed into production soon -- in China. Image source: Volkswagen.

Volkswagen (NASDAQOTH: VLKAY) and Chinese automaker Anhui Jianghuai Automobile Company (JAC) said on Wednesday that they are working on a joint venture to make electric vehicles in China. 

It's the latest step in VW's aggressive push into battery-electric cars, a key to CEO Matthias Mueller's effort to move past the diesel-emissions cheating scandal.

What the companies said: A joint venture is planned

Nothing like this happens quickly in China. The companies said in a statement that they have signed a "memorandum of understanding for joint development of innovative battery-powered electric vehicles in China."

Their plan is to form a joint venture to produce electric cars for the Chinese market. In China, such a joint venture requires government approval, which can take several months. If it's approved, the companies will share equal ownership of the venture. The two said that they aim to have a formal agreement in place within five months.

China, where VW has a massive presence and where the government is increasingly concerned about air quality, is an important part of Mueller's goal to sell 1 million electric cars a year by 2025.  

VW China chief Jochem Heizmann and Anhui Jianghuai Automobile chairman An Jin began the process of forming a joint venture to build electric cars in China on Tuesday. Image source: Volkswagen.

"As we aim to be at the forefront of e-mobility, Volkswagen Group is looking forward to explore all options to set up a close and mutually beneficial partnership with JAC," Mueller said in a statement. "We believe this cooperation would not only benefit our two organizations, but would also be of great value to our customers, a sound environment and the Chinese society in general."

"Together, Volkswagen Group and JAC will thoroughly explore all options how to concentrate our resources, including existing and future model platforms, technologies and other expertise, to achieve a competitive product strategy as soon as possible," VW China chief Jochem Heizmann said. 

Where will they get the batteries?

That's the question that investors need to be asking when any company announces ambitious plans for electric cars. In this case, it's becoming clear that VW is in the process of creating a global battery supply chain that will support its ambitious sales target.

Earlier this year, VW was reportedly discussing a plan to build a massive battery factory in Germany. But Bloomberg reported on Wednesday that VW's supervisory board has more recently discussed a plan in which the company would build several major battery factories around the world. 

Each of those new factories would cost between 1.7 billion euros ($1.9 billion) and 2 billion euros, the report said, suggesting that the aggregate production from these factories could be greater than that from Tesla Motors' (NASDAQ: TSLA) vaunted (and huge) Gigafactory in Nevada.

At the same time, VW is exploring partnerships with electric-car battery makers including Panasonic (NASDAQOTH: PCRFY), Tesla's partner in the Gigafactory, and Korean battery giant LG Chem (NASDAQOTH: LGCLF). It's likely that VW's eventual battery factories will be built in partnership with one or both of the battery giants.

The upshot: This is the China portion of VW's electric-car plan

It was always clear that China was going to play a big role in Mueller's ambitious electric-vehicle plan. VW has a dominant position in China's huge new-vehicle market, where more than a third of its global sales are made. If this joint venture pans out, it seems likely to become a major part of VW's business in time.

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John Rosevear has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Tesla Motors. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.