Volkswagen AG (VOW.XE) said Thursday that it signed a letter of intent with Toshiba Corp. (6502.TO) to cooperate on the development of electric-drive units and related power electronics for the German automaker's upcoming New Small Family cars.

"I am convinced that this will be a major step forward towards the development of series production electric vehicles for our customers," Volkswagen chief executive Martin Winterkorn said in a statement.

"We look forward to building up a mutually beneficial partnership with Volkswagen, a clear leader in the automotive industry making strong initiatives in the development of environmentally friendly cars," said Toshiba chief executive Atsutoshi Nishida.

Volkswagen and Toshiba are also planning the joint development of battery systems with a high specific energy density for electric vehicles.

"A considerable amount of research and development work still has to be carried out until we can produce the electric vehicle, in the field of lithium-ion battery technology in particular," Winterkorn noted.

Europe's largest automaker by sales said it wants to be the first manufacturer of an "emissions-free, affordable and safe large-scale production electric vehicle."

Despite evaporating car sales due to lackluster consumer confidence and tight credit markets amid the financial crisis, global automakers and their suppliers are investing heavily in the next generation of efficient battery systems, which is a crucial component of future hybrid or electric vehicles.

The market for hybrid cars has so far been dominated by Japanese automakers such as Toyota Motor Corp (7203.TO). But as consumers became more and more interested in green technology and more environmentally friendly cars, other automakers have joined the race for reliable and safe technology for electric vehicles.

General Motors Corp. (GM) is planning to launch the battery-powered Chevrolet Volt in 2010.

Company Web site: www.volkswagen.com

Company Web site: www.toshiba.com

-By Christoph Rauwald, Dow Jones Newswires; +49 69 29 725 512; christoph.rauwald@dowjones.com