Volkswagen AG signed a memorandum of understanding last week with the Chinese firm BYD to consider options for a partnership in the area of hybrids and electric vehicles powered by lithium batteries.

The firms are exploring the possibility that BYD supplies its lithium-ion battery technology to Volkswagen, people familiar with the negotiations said according to the Wall Street Journal.

Volkswagen will consistently expand its successful 'BlueMotionTechnologies. Hybrids and electric vehicles will play an increasingly important role, of course. Particularly for the Chinese market, potential partners such as BYD could support us in quickly expanding our activities, said Dr Ulrich Hackenberg, the Member of the Board for Technical Development at Volkswagen in a statement.

BYD which stands for Build Your Dreams is led by Wang Chuan-Fu. The company is expected to be a key competitor in the all electric vehicles market. Billionaire investor Warren Buffett's Berkshire Hathaway bought a 10 percent stake in the firm worth $230 million.

BYD began as a manufacturer of cell phone batteries. However it launched a plug-in car last December.

BYD is also in similar negotiation talks with Ford Motor Co. and other European auto makers, according to the Wall Street Journal citing people familiar with the issue.

Volkswagen