By Dominic Chopping and Sherry Qin

Volkswagen's first electric vehicle to hit the road under its partnership with XPeng will be an SUV in 2026, firming up plans outlined last year when the German automaker took a stake in the Chinese EV manufacturer.

Volkswagen paid $700 million for a 5% stake in XPeng last July and flagged its intention to jointly develop two new EV models under the Volkswagen brand for China, the world's largest car market.

Under an extended agreement signed Thursday, the carmakers will also collaborate on software and sourcing, building on their existing partnership to expedite vehicle development, leverage supply chains, and reduce costs.

Volkswagen said vehicle development time could be slashed by 30% by jointly purchasing things such as common vehicle parts and technological innovations for design and engineering.

"In the world's largest and fastest growing EV market, speed is fundamental," said Ralf Brandstaetter, board member of Volkswagen for China.

"Through the partnership with Xpeng, we are not only accelerating development times, but also boosting efficiency and optimizing cost structures. This increases the economic competitiveness in a highly price sensitive market environment significantly."

Competition in China's car market has been rising, with homegrown EV manufacturer BYD recently slashing prices and starting to undercut the prices of some internal combustion engine-based vehicles.

After years of explosive growth--one in three cars sold in China is now an EV--the market is starting to slow. In January, sales of new energy vehicles including plug-in hybrids fell 39% from the previous month--although that still marks a 79% increase from a year earlier, according to the China Association of Automobile Manufacturers.

However, XPeng reported a 58% on-year increase in January sales and last week the company's chief executive said it plans to hire 4,000 new people while investing 3.5 billion Chinese yuan ($486.3 million) in artificial-intelligence technology, according to business channel CNBC. XPeng didn't immediately respond to a request for comment by Dow Jones Newswires.

Volkswagen's hold on China, its largest single market, has eroded in recent years, as consumers increasingly shift their purchases to EVs and plug-in hybrids from conventional gasoline sedans.

To combat this, it is working through a "in China, for China" strategy that seeks to focus on specific needs of Chinese consumers and pursue localization in development and procurement for its China-specific electric platform. To speed up decision-making and development in the region, it is strengthening its local capacities for e-mobility as well as digitalization and autonomous driving.

The company is developing a new China-specific electric-vehicle platform for entry-level cars and is expanding its Hefei site in east China's Anhui Province into a production, development, and innovation hub while focusing on partnerships with local high-tech companies.

Write to Dominic Chopping at and Sherry Qin at

(END) Dow Jones Newswires

02-29-24 0713ET