BEIJING, May 28 -- Daimler AG, the world's second-largest manufacturer of luxury cars, and BYD Co, the Chinese automaker backed by billionaire Warren Buffett, have set up a 50-50 joint venture to develop electric cars in China.

"Our new joint venture is well positioned to make the most of the vast potential of electric mobility in China," Daimler Chief Executive Officer Dieter Zetsche said in an e-mailed statement on Thursday. Daimler and BYD plan to invest 600 million yuan ($88 million) in the venture.

Daimler is entering electric-vehicle production as part of a challenge to Bayerische Motoren Werke AG (BMW) for leadership in the luxury segment. BMW will introduce an electric-powered city car by 2013 and is working with partner Brilliance China Automotive Holdings Ltd on battery-powered models for the country, which became the world's biggest auto market last year.

China's government may announce subsidies this year to encourage the use of cleaner vehicles. The country is likely to account for at least 25 percent of global demand for battery-powered models in 2015, according to a forecast by JD Power & Associates.

"China is seeking to make itself a global leader with this technology," Ben Asher, an analyst with JD Power in Bangkok, said before Daimler and BYD's announcement. "Other countries don't have the ability to strong-arm volumes like China."

Part-owned by Buffett's Omaha, Nebraska-based Berkshire Hathaway Inc, BYD began mass production of the world's first plug-in, gasoline-electric hybrid vehicle in 2008. The manufacturer, which has its headquarters in the southern Chinese city of Shenzhen, signed an agreement with Volkswagen AG in 2009 to explore cooperation in areas including hybrid cars and lithium-battery electric models.

E6 electric car

BYD plans to start selling the E6 electric car in the United States this year and in Europe next year.

The company said on May 20 that it has an agreement to deliver at least 560 E6s to a taxi operator in Shenzhen this year, with 40 of the cars already in use as taxis in the city, as part of an effort to encourage individual purchases.

Daimler's electric-vehicle strategy includes large-scale production of a battery-powered version of its Smart minicar starting in 2012.