The move comes as the company looks to find more potential in new segments of the world's biggest automobile market, said the company's China head.

"The Chinese government has been promoting Chinese brands for some time. We are currently in talks with our Chinese partners," Karl-Thomas Neumann, chief executive officer of Volkswagen Group China, said in an e-mailed statement.

"In general, we see a local brand as an opportunity to enter new market segments, especially those we have not been able to get into so far," he told China Daily. However, the company declined to provide further details of which of its partners - SAIC Motor Corp and China FAW Group Corp - it will work with on the venture, or the segment it intends to target.

Volkswagen's move is part of a growing trend among foreign manufacturers and their partners to develop new brands for the competitive domestic market.

General Motors will start selling its Baojun passenger car brand in the first half of this year. The vehicle has been co-developed by the US automaker and its local venture, SAIC-GM-Wuling, as a cutting-edge product to compete in the low-end car sector.

The Japanese automaker Honda and its local partner, Guangzhou Automobile Group, will start a new brand called Everus, and intends to launch the first sedan model sometime in the first half of the year.

Nissan also plans to introduce a new car, called the Venucia, in early 2012, in cooperation with its Chinese partner, Dongfeng Motor Group.

Meanwhile, the German automaker Daimler signed an agreement with China's battery and electric car maker BYD Co last March to form a 600-million yuan ($91 million) joint venture, which will produce an electric vehicle under a new name created especially for the Chinese market, and with a planned release date of 2013.

Analysts said that as the Chinese government has made great efforts in recent years to encourage the use of smaller cars, focusing on fuel efficiency and environmental protection, all the automakers should establish a presence in the fiercely competitive smaller and low-price car segments to ensure a promising and sustainable future.

Volkswagen entered China in 1984, and the Europe's biggest automaker has invested more than 6 billion euros ($8 billion) in the country to produce cars, transmission systems and parts with its local partners.

The company's 2010 sales on the Chinese mainland and in Hong Kong registered robust growth of 37 percent, compared with the previous year, to 1.92 million units.

That strong performance helped Volkswagen keep its two-decade crown as the top carmaker in the nation in terms of sales.

Volkswagen announced in Beijing earlier this month that it plans to invest another 10.6 billion euros during the next five years - the biggest-ever investment in China by a carmaker - to consolidate and further expand its dominant position.

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