The plan was endorsed by both SAIC and Volkswagen during SAIC Chairman Hu Maoyuan's visit in mid-April to Wolfsburg, VW's headquarters in Germany, SAIC said in a statement.

The car will be a mid-sized premium sedan targeting the Chinese market and it will be developed on VW's "most advanced platform and engine technology," SAIC said.

Additional details about the car have yet to be disclosed.

Aside from Shanghai Volkswagen, Volkswagen also has a joint venture with China FAW Group Corp., which is known as FAW-Volkswagen Automotive Co.

Shanghai Volkswagen currently builds the VW Polo, Touran, Santana, Lavida, Passat and Tiguan.

FAW-Volkswagen produces the Golf, Jetta, Sagitar, New Bora, Magotan and CC models. FAW also builds Volkswagen's Audi luxury sedans.

SAIC has long hoped that Shanghai Volkswagen could produce a luxury model similar to the Audi model lineup.

In the first three months of 2011, Shanghai Volkswagen sold 227,835 vehicles. Meanwhile, FAW Volkswagen 225,256 units including 42,667 Audi models.

While it sells about the same number of vehicles as FAW Volkswagen, Shanghai Volkswagen is less profitable than FAW Volkswagen because of its lack of a luxury brand.