German carmaker Volkswagen said on Friday it had signed a memorandum of understanding to explore a partnership with India's Tata Motors to jointly develop auto components and vehicles for the Indian subcontinent and beyond.
The announcement, which confirms a Reuters story from Thursday, comes as both automakers look to hit the reset button in India after falling behind more nimble rivals such as Maruti Suzuki and Hyundai Motor Co <005380.KS>.
Goldman Sachs analyst Pramod Kumar said in a note on Thursday a tie-up could be "mutually beneficial" as the engine offerings of both companies complement each other and would help the alliance match up to competition.
Volkswagen (VW) said its Skoda unit would lead the project.
"The first step will address topics such as the application of specific market knowledge as well as local development expertise," VW said in its statement.
For VW, the tie-up would provide an opportunity to make more headway into India, which analysts say is expected to become the world's third-largest auto market behind the United States and leader China by 2020.
"By offering the appropriate products we intend to achieve sustainable and profitable growth in very different parts of the world," VW CEO Matthias M��ller said in the statement.
India has proven to be a tough market to crack for many foreign automakers, given different demand trends across the country and rapid changes in customer preferences.
Besides VW, foreign automakers including General Motors and Ford Motor Co have struggled to ramp up sales in India, and are now pushing exports from the country to use idle manufacturing capacity.
Even domestic players such as Tata have struggled to quickly adapt to changing demand trends in India, where Maruti Suzuki and Hyundai control two-thirds of the market.
The partnership comes as Tata Motors tries to turnaround its loss-making domestic business by launching more modern vehicles, improving efficiencies and streamlining its organization.
"This is in alignment with Tata Motors' efforts to make itself 'FutuReady' by embracing new technologies, fostering higher platform efficiency and offering solutions that connect with the aspirations of our customers," managing director Guenter Butschek said in a separate statement on Friday.
Following a definitive agreement, the two companies plan to begin joint development work and, based on this, Tata Motors said it intended to launch products from the partnership in the Indian market starting in 2019.
(Writing by Promit Mukherjee and Euan Rocha; Editing by Christoph Steitz and Mark Potter)