BERLIN (Reuters) – German carmaker Daimler DAIGn.DE will cooperate with China’s Geely [GEELY.UL] to build a next-generation combustion engine for use in hybrid vehicles, it said on Tuesday.

FILE PHOTO: The Daimler logo is seen before the Daimler annual shareholder meeting in Berlin, Germany, April 5, 2018. REUTERS/Hannibal Hanschke/File Photo

Efforts to share development costs between the Chinese and the German groups come as the growth potential for combustion engines faces the twin threat of the COVID-19 crisis and a regulatory clampdown on vehicle emissions.

“The companies plan to develop a highly efficient modular engine,” a spokesman for Daimler said, adding that it would be used in hybrid drivetrains and manufactured in Europe and China.

German factories will be retooled gradually to build electric drivetrains while the manufacture of combustion engines will continue in Germany, Daimler said.

News of the alliance was a surprise to Daimler’s works council at its factory in Untertuerkheim, which specialises in electric and gasoline powertrain assembly.

“We are speechless. There was not even a discussion about potential alternative manufacturing locations,” said Michael Haeberle, the works council chief for Untertuerkheim.

“We have the ability to build four cylinder engines in Untertuerkheim but there were not talks about it.”

The alliance was first reported by German business daily Handelsblatt on Tuesday, citing company and industry sources.

Most of the engines will be made in China, Handelsblatt said. The alliance with Geely, which owns a 9.69% stake in Stuttgart-based Daimler, means that parts of an existing partnership with Renault RENA.PA will be pared back.

A Renault source told Reuters that the Daimler-Geely project does not mean an end of cooperation between Daimler and Renault RENA.PA.

Citing Daimler sources, Handelsblatt said the Daimler-Geely pact would save the German carmaker a “triple-digit million sum” – implying an amount above 100 million euros ($119 million) and less than 1 billion euros.

Via Reuters Finance