Volvo, which is owned by Ford, is planning to start making cars in China later this year.
It says it will build 10,000 of its S40 model each year at a factory owned by Ford’s Chinese joint venture partners Changan.
Up until now the Swedish-based company has only exported cars to China.
Changan, one of China’s major carmakers, will build the vehicles while Volvo will provide engineers and experts to ensure they are of the same standard as those made by Volvo in Europe.
Volvo is coming late to the game, and will have to play catch-up as Volkswagen and BMW already have plants in China, while DaimlerChrysler makes Mercedes there.
VW last year had 15.3% of the Chinese car market and General Motors 11.3%.
But competition is increasing, with new players appearing regularly.
VW’s share of the market has fallen from 26% in 2004.
China is now the world’s fourth largest economy, with a growing number of cash-rich middle-class buyers for more expensive cars and Western car firms are increasingly targeting the country.
Volvo’s Chief Executive Frederik Arp said the decision to start manufacturing locally was made because of “significant growth in the overall market.”
By 2010 China is expected to have 250 million consumers who can afford luxury products.