Mercedes has committed to working with Build Your Dreams (BYD) to develop electric vehicles specifically for the Chinese market.
BYD is developing a burgeoning reputation for electric vehicle technologies - it started as a battery manufacturer before making cars - and Mercedes is said to be keen to harness its local knowlede in China.
As part of the deal between Mercedes parent Daimler and BYD, the two firms will create a new brand to sell a vehicle designed for the Chinese market.
"Daimler's know-how in electric vehicle architecture and BYD's excellence in battery technology and e-drive systems are a perfect match," said Mercedes chief Dr Dieter Zetsche.
"We are very excited about this opportunity to work together with Daimler, the inventor of the automobile," said BYD chairman Wang Chuanfu.
Daimler and BYD have also agreed to develop a technology centre in China as part of the agreement - but no dates have been issued for the facility's completion, or the launch of the new brand.
BYD's share price rose by five per cent after the tie-up was announced.
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Re: Merc to build car with BYD
Daimler are shrewd. Once upon a time they pioneed pretty much everything, only have their ideas copied and improved by others. Now they sit back and let the likes of Toyota and the Chinese develop the new powertrain technologies and then when they come to market with their own it will no doubt be market leading.
The ultimate car of the future is a Mercedes full of style, quality and safety, powered by a state of the art drive train that will cost next to nothing to run. The whole car will made out of recycled materials and also be 100% recaimable at the end of its life. May sound like a dream, but other than the batteries it is all possible today.