Volkswagen AG said on Wednesday it is codeveloping an electrical/electronic architecture with Chinese startup Xpeng in an effort to improve its competitive edge in China's heated EV market.

The architecture, which will be available in 2026, will ensure the rapid expansion of digital services in the Volkswagen brand's China-specific vehicles, thus improving the allure of the German carmaker's products.

Currently, China's popular new energy vehicle models come from primarily local Chinese marques, including BYD as well as startups including Nio and Xpeng.

Ralf Brandstaetter, member of the board of management of Volkswagen AG for China, said: "This (partnership) increases efficiency, optimises cost structures and accelerates the speed of development.

"High cost-effectiveness and a fast pace of development are crucial for our competitiveness in China's dynamic market environment," he said.

The announcement of the new collaboration with Xpeng follows an investment of 2.5 billion euros ($2.67 billion) in China last week.

The investment will be spent on expanding its production and innovation hub in Hefei, Anhui province, said Volkswagen.

It said new production and development hub in Hefei will bring technologies to market around 30 percent faster in the future.

"This additional investment in the site underlines our ambition to quickly expand our local innovative strength," said Brandstaetter.

The investment is also to be spent on preparing the production of two models codeveloped with Xpeng, as part of a deal the two inked in 2023.

The first model will be a mid-size SUV, whose production is scheduled to start in 2026 at Volkswagen Anhui, one of the carmaker's latest Chinese joint ventures.