(Yicai Global) July 27 -- Xpeng Motors’ stock skyrocketed after saying Volkswagen Group will invest USD700 million for a 5 percent stake in the Chinese electric vehicle startup and they work together to develop new models with smart connectivity.

Xpeng [HKG: 9868] finished 34 percent up at HKD80 (USD10.20) a share in Hong Kong today, after its New York-traded stock [NYSE: XPEV] surged 26.7 percent yesterday to USD19.46, the highest in almost a year.

Volkswagen will pay USD15 for each newly issued share, or about a 2.3 percent discount on the USD15.36 closing price of Xpeng’s American depositary shares on July 25 when the deal was inked. The stock soared about 94 percent from June 1 to the signing date, but despite that, Volkswagen set the price at the top end, demonstrating its optimism.

Volkswagen will also get an observer board seat at Guangzhou-based Xpeng.

In the early stage of the tie-up, the pair plan to jointly develop two new VW-branded EV models for the Chinese market for mid-sized cars, debuting them in 2026, and also jointly develop a new localization platform for the next generation of intelligent connected vehicles, Volkswagen said.

Volkswagen and Xpeng had been negotiating a deal since the fourth quarter of last year, people familiar with the matter told Yicai Global. The first collaborative model will be based on the development platform and software of the Xpeng G9 EV, with the Chinese firm providing the platform, smart cockpit, and intelligent driving system, while Volkswagen will contribute world-leading engineering and supply chain capabilities, they noted.

The newly established Volkswagen China Technology, Volkswagen's largest research and development base after its Wolfsburg plant, will be Xpeng's development partner, the German carmaker said. More than 2,000 R&D and procurement experts will work on the new ICVs at Volkswagen China.

The partnership will be a win-win for Volkswagen and Xpeng, a manager from another automaker told Yicai Global. Although Volkswagen has invested tens of billions of euros in the development of electrification technology, its EV sales in China have not reached the expected level due to its limited capabilities in smart cockpit and high-end smart driving, the person said.

Its cooperation with Xpeng can make up for the shortcomings and may revitalize Volkswagen's projects in various Chinese regions, the source said.

In a separate announcement yesterday, Volkswagen also said that its luxury car brand Audi and its Chinese partner SAIC Motor have recently inked a deal to jointly develop and expand the ICV product mix in the high-end market quickly and efficiently.

Editors: Tang Shihua, Martin Kadiev