Volkswagen is actively seeking to establish a local assembly plant in south east Asia, possibly Malaysia.

Malaysian newspaper The Star quoted VW Group Malaysia managing director Axel Barth as saying that ongoing talks were taking place for local assembly in the region.

It has already been widely reported that Volkswagen has been talking to Proton about a potential alliance. Proton has also been talking to PSA Peugeot Citroen and China's Chery, but no deal has been struck yet.

Volkswagen broke off talks with Proton about an alliance in January 2006 - but is thought to have re-entered talks after Malaysian prime minister Abdullah Ahmad Badawi last month confirmed the government would now consider letting Volkswagen own 51% of Proton's manufacturing operations.

Volkswagen will have to compete with PSA, which has signed a loose Letter of Intent (LoI) with Proton, with a view to investigating collaboration and will report back before the end of the year.

Barth was speaking at the opening of Volkswagen's first authorised showroom in Malaysia, the automaker having recently re-entered the market there.

Volumes are still too low to support local assembly, but the threshold for contract CKD assembly in Malaysia could be just 1,000 cars a year. Currently the company has orders for just 30-40 cars. A first shipment of around 20 cars has arrived and a further 200 are expected early next year. VW Cars executive chairman Datuk IIyas Mohamed said the company would be investing RM40m in five showrooms up to end-2007.