According to the Reuters news agency, Volkswagen is teaming up with a Chinese partner to invest €240 million ($US278.6 million) in an engine-making venture in Shanghai, as part of efforts to expand in the country.

The report said the venture with Shanghai Automotive Industry Corp. will be designed to crank out 180,000 engines a year at first and 300,000 eventually, as Volkswagen strives to maintain a huge market lead and hike capacity to 1.6 million vehicles in five years.

Volkswagen spokesman Michael Wilkes told reporters on Tuesday that high-grade engines should start rolling off production lines from March 2005.

Reuters said Volkswagen now has capacity to make about 750,000 engines per year – roughly equivalent to its current car production capacity in China, its largest market outside Germany.

“China is the only car market in the world which is growing, and this has given us a great opportunity,” Folker Weissgerber, board member for China, said according to Reuters, adding: “To keep up with demand we must continue adding capacity, bring in the latest technology and increase local content.”

Europe’s biggest car maker now controls 38% of China’s booming car market and the new plant is meant to ensure a steady stream of performance engines as it revs up car sales, Reuters noted.

Wilkes told the news agency the new engines also would help to improve China’s environment, as they would meet stringent Euro IV emission standards, which are due to become law in China in the next few years.

Reuters said engines from the new plant — just a stone’s throw from a Volkswagen car factory in Shanghai– would be used mainly in the Polo family car.

Wilkes declined to tell the news agency how the investment would be split between the partners, though he did not rule out a third investor, possibly Volkswagen’s other strategic partner in China, First Automotive Works.

“There are different scenarios possible,” Wilkes reportedly said, adding: “We’re still in negotiations.”

Though analysts have raised fears of a margin-sapping glut due to overseas makers increasing Chinese production capacity, VW‘s Weissgerber told Reuters he was not worried about the market getting too crowded.

“We believe the overall automotive policy of the Chinese government is right and our investment decisions will follow accordingly,” the executive reportedly said on the sidelines of a cornerstone-laying event.

“At the same time, we believe the Chinese market is different from other markets, so there is not that kind of threat,” Weissgerber added without elaborating, according to Reuters.

The news agency noted that China’s 14 largest car makers, which have almost doubled production this year, were sitting on 22 billion yuan ($2.66 billion) of unsold vehicles at the end of July and that the government in Beijing is trying to encourage consolidation in the industry.

The country is home to more than 120 vehicle makers but only two — FAW and SAIC – build more than 500,000 vehicles annually while about three-quarters failed to make even 10,000 units in 2002, Reuters said.