Volkswagen, currently the third largest automobile maker in the world and the largest in Europe, is expected to partner with Chinese electric car and battery maker BYD for making hybrids and electric cars run by lithium-ion batteries.

Volkswagen chairman Dr Martin Winterkorn and BYD CEO Wang Chuan-Fu, are reported to have signed a memorandum of understanding last week that was announced yesterday, about exploring the possibility of co-operation between the two companies on electric cars using lithium-ion battery technology.

In a brief statement released today, Volkswagen said that it has signed a memorandum of understanding with BYD to explore the possibility of collaborating in the field of electric vehicles and batteries.

With China being Volkswagen's second-largest market after Germany, Ulrich Hackenberg, head of research and development at Volkswagen, said that companies like BYD could support the German carmaker's expansion into the Chinese market.

A statement from Volkswagen quoting Dr Winterkorn, said, "Particularly for the Chinese market, potential partners such as BYD could support us in quickly expanding our activities."

If the partnership goes through, then Lower Saxony, Germany-based Volkswagen will be the first major car manufacturer to forge a partnership with the world's second-largest producer of lithium-ion batteries.

Volkswagen also said in the statement that it has shown an electric car prototype to BYD, which could possibly indicate that the German carmaker would either build or buy an inexpensive assembly plant in China to build the electric car, which could be later showcased in this year's motor show in Frankfurt.

Volkswagen has earlier signed a letter of intent with Sanyo to make battery packs for electric vehicles, but with BYD's expertise in lithium-ion batteries, the European carmaker now wants to make batteries for cars that will run for 120 miles on a single charge.

Based in the southern Chinese city of Shenzhen, BYD has risen from humble origins to become the world's biggest producer of rechargeable batteries for cellular handsets and is also a producer of lithium-ion batteries for vehicles as well as manufactures hybrid and electric cars. 

In October, the BYD sedan F3 became the bestselling sedan in China, beating well-established and well-known brands like the Volkswagen Jetta and Toyota Corolla, although it has only five year's of car manufacturing experience. (View picture gallery)

BYD, which is a late entrant in car manufacturing industry, has also manufactured a plug-in electric car, which has a petrol back-up and goes 62 miles on a single charge, thus beating long-established  players like GM, Nissan, and Toyota.

The company caught the attention of the automotive world last September, when US billionaire investor Warren Buffett through his investment company Berkshire Hathaway acquired 10 per cent of BYD for $230 million. (See: Warren Buffett moves into electric car market with $231 million investment in Chinese firm BYD)

Buffett is reported to have initially wanted to acquire a 25-per cent of BYD, but Wang is said to have turned it down, even though  he was keen on Buffett as an investor as it would be an endorsement for BYD in the competitive US alternative fuel car market.

BYD, started in 1995 in Shenzhen, makes about 80 per cent of Motorola's RAZR handsets. It also makes batteries for iPods and iPhones and low-cost computers.

In five years, BYD has become the world's biggest producer of rechargeable batteries for cellular handsets. It then went miles ahead of its rivals by now designing and manufacturing mobile-phone handsets and parts for Nokia, Motorola, Sony Ericsson, and Samsung.

One analyst, seeing the stupendous growth of the company in a short span and seeing US car makers and investors wanting to jump on the BYD bandwagon, joked that the initials BYD should be changed from 'Build Your Dreams' to 'Bring Your Dollars.'

After Volkswagen's announcement of exploring the possibility of cooperation with BYD for electric cars using lithium-ion battery technology, BYD jumped nearly 5 per cent to a record high today on the Hang Seng Index.