Chinese carmaker BAIC Motor Corp and Daimler AG are planning to expand localized production of Mercedes-Benz cars, including new energy ones, at their joint venture in China, to tap into the potential of the world's largest car market.

The two will invest at least 11.9 billion yuan ($1.88 billion) to build a new production site in Beijing so that their partnership, Beijing Benz Automotive Co, can manufacture models that better meet the demand of the Chinese market, said BAIC Motor in a filing to the Hong Kong stock exchange on Sunday.

The move is a follow-up to their framework agreement last July that they will produce electric cars by 2020 in China, and to provide the necessary infrastructure for battery localization using Chinese cells, as well as research and development capacities.

"By 2025, the Chinese market will have a substantial share in global sales of Mercedes-Benz electric vehicles," said Hubertus Troska, a board member at Daimler AG, in an earlier statement.

"Therefore, local production will be key to the success of our electric vehicle portfolio, and crucial in flexibly serving local demand for electric vehicles. "

Electric vehicles have become a new battle ground in China, which is already the world's biggest market for electric vehicles, and a region Daimler has targeted for growth.

Li Shufu, who has recently become Daimler's largest shareholder, hopes to negotiate cooperation between the German carmaker and his Zhejiang Geely Holding Group in electro-mobility.

Daimler has also been producing electric cars with China's leading new energy car maker BYD Co, under the name Denza, but its sales have been lackluster.

John Zeng, managing director of LMC Automotive Shanghai, said BAIC-Daimler business will not be affected in the short and medium term.

"Even if Geely and Daimler reaches cooperation deals, they will take a long time to gain regulatory approval. Also, Daimler will tread carefully when it deals with partners, as Audi's attempt to find a second partner in China resulted in protests and hurt its sales."

China has been Daimler's largest market worldwide, where it sold more than 600,000 cars last year, winning the sales champion for the first time in the country's premium car segment.