The Shenzhen-based joint venture between PSA Peugeot Citroen and China Changan Automobile Group has said it plans to contest the premium car market in China.

This comes as Peugeot struggles in its home market, warning last month its core car making business would barely make money this year and announcing 6,000 layoffs across Europe, including 1,000 manufacturing jobs and 2,500 contractor positions.

“The European situation is a bit uncertain for the time being,” Peugeot’s chief executive Philippe Varin told Reuters on the sidelines of a launch ceremony for the venture in Shenzhen, a booming city in China’s south.

“This makes a point that to be in China as a big player, it is very important for us because there is growth. There is a win-win spirit with our partners,” said Varin, who is also the chairman of the managing board of PSA Peugeot Citroen.

With an initial investment of CNY8.4bn (US$1.3b), the 50-50 Changan PSA Automobiles JV said it would set up a research and development centre to develop its own brand, as well as the Peugeot and Changan brands.

The joint venture is allowed to set up an overseas production base and export multiple brands but will focus on China.

“There is a very rapid growth of the Chinese market so all of our efforts are going to be focused on taking a strong Chinese position,” said Gregoire Olivier, PSA’s CEO of Asia operations.

Changan PSA will import Citroen’s DS4 and DS5 vehicles for sale in the first half of 2012 and add the DS3, also imported, in the second half of next year, Ying Zhanwang, Changan PSA’s vice president, said.

Changan is China’s fourth largest automaker and the state-owned parent of Chongqing Changan Automobile. It is close to the third largest carmaker, Dongfeng Motor, that produces Peugeot 408 and Citroen C5 sedans but trails General Motors and Volkswagen, which are performing strongly in China, Reuters noted.

Olivier said China’s car sales may rise 4-5% this year and 6-7% in 2012 after rising 33% in 2010. The drop is due to the ending of government subsidies on some models and restrictions on car ownership in the largest cities.

“But the long-term prospect is excellent. Don’t believe what you have seen in Shanghai and Beijing,” Oliver said, adding there were a lot of opportunities in small cities with 1-2m people.

“These small cities have entrepreneurs who like distinctive cars, like DS cars,” Olivier said.

PSA’s goal for the long term is to take about an 8% share of the China market, he said.

Changan PSA aims to start production of the DS5 in the joint venture in 2013 and its environment-friendly hybrid model later. It did not give a timetable.

The venture company will have initial annual production capacity of 200,000 vehicles and engines and will gradually expand according to market demand.

Covering an area of about 1.3m sq m, it will have two vehicle plants and one engine plant. A research and development centre costing CNY500m is being built simultaneously.

The partner companies said the joint venture would hire about 2,000 employees in China by the end of 2012, even as Peugeot union officials said on Nov. 15 the company was preparing plans to cut 5,000 jobs in France.

Varin said “it is clear” the company “must make savings because the European markets are under pressure”, even though French President Nicolas Sarkozy said on Thursday Peugeot had pledged not to go ahead with the plan to lay off workers in France.