The two firms signed a cooperation agreement on 11 November to explore the collaboration, SAIC said in a statement. Reuters first reported discussions were in the works on Saturday, to pave the way for the joint venture to make Audi brand cars.
The Shanghai-based company already has a joint venture with Volkswagen making VW and Skoda cars. This will make SAIC Audi's second partner in China: it currently makes and sells cars in the country through a three-party joint venture with Volkswagen and China's FAW Group Corp.
Chinese regulations state foreign car firms must collaborate with domestic manufacturers in order to build vehicles there. And the German company is seeking to strengthen its position at the top of China's luxury-vehicle market.
It's currently the best-selling premium car brand and was an early entrant into the Chinese market, but Audi has been losing ground to newer models from Daimler's Mercedes-Benz, General Motor's Cadillac and Toyota's Lexus.
Volkswagen will get a larger proportion of proceeds from this new 50-50 tie-up with SAIC, than it does from the 40 per cent stake in the venture with FAW.
FAW's own brands have been battling falling sales. It has also been tied up in a series of corruption scandals over the past couple of years. In March last year, the chairman of FAW was placed under investigation, by the Communist Party's corruption body, before he was expelled from the Communist Part of China in August.
But Audi also reaffirmed its commitment to the company in its statement announcing the talks with SAIC. It said it had growth plans plotted out with FAW for the next 10 years including making green energy sport utility vehicles and sedans in every major segment.
"With this 10-year plan, everything is set for future growth together with FAW, including the dealership investors," an Audi spokesperson said.