DaimlerChrysler (Research) was in discussions with an existing Chinese partner, said Ruediger Grube, head of the car maker's Chinese business. He added that a final decision on whether to go ahead was due in the second half of this year.

If Daimler and the unspecified partner decide to proceed, the German-U.S. auto maker would be the first Western player to set up export-oriented factories in the Asian country. Japan's Honda Motor Co. has such a factory in China.

"We would like to establish here in China an export joint venture for Chrysler products," Grube told reporters on the sidelines of the Shanghai auto show. "Today we are not talking about Europe. We are talking about North America."

In an interview with Reuters, Grube declined to estimate the probability that the plan to make compact cars would go ahead.

"Exploring the idea and actually doing it are worlds apart," he said. "We are being very cautious on this because we see how quickly market conditions can change, in China as well."

Still, global car manufacturers worry that cheap made-in-China cars will someday swamp markets, especially with vehicle sales growth decelerating in the country and Beijing persisting in trying to curb easy auto loans.

The United States and other developed economies have complained that cheap Chinese goods are threatening U.S. industry and millions of manufacturing jobs.

Asked about a potential political backlash in the United States -- home to the Chrysler brand -- Grube said: "We're not talking about (making) current products. We are talking about a totally new segment."

Grube noted that Chinese car assembly workers cost around 1.50 euros ($1.96) an hour, a fraction of the 38 euros their German counterparts make and the 28 euros U.S. workers earn.

But Adam Jonas, a Morgan Stanley analyst in London, said the company may just be sending a warning shot across the bows of the United Auto Workers union in the United States.

"The costs of making a car in China today are still not competitive when factoring in logistics, the supply network and import tariffs, even though the labor costs are so low," he said.

DaimlerChrysler plans to invest 1.2 billion euros over the next five years to bolster vehicle manufacturing in China. Any investment in a Chrysler export venture would be a fresh investment and not part of that amount.

It undershot its Chinese car sales target last year amid Beijing's steps to cool demand, but sales -- including imports and local production with venture partners -- still rose by about a third to 44,900 units.

In the luxury car market, the company vies with BMW AG and Volkswagen AG's Audi AG unit to sell high-end vehicles to a populace whose wallets have been fattened by years of breakneck economic growth.

DaimlerChrysler's sales of premium Mercedes-Benz vehicles climbed just 3 percent in China in the 2005 first quarter, while Chrysler sales shot up 46 percent, Grube said.

Daimler's partners in China include Beijing Automotive Industry Holding Co., Fujian Motor Industry Group and China Motor Corp.

It has also agreed to establish a venture with Beiqi Foton to make trucks, engines and parts for the Chinese market.

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