updated 12/13/2004 3:18:30 PM ET 2004-12-13T20:18:30

General Motors Corp. and DaimlerChrysler AG are teaming up to develop fuel-saving hybrid engines in hopes of cashing in on an expanding market already dominated by hybrid leaders Toyota Motor Corp. and Honda Motor Co.

Financial terms of the agreement between GM, the world’s largest automaker, and its German-American rival weren’t disclosed Monday, but Tom Stephens, GM’s group vice president for powertrains, said the collaboration likely will involve an investment of hundreds of millions of dollars.

The first of the vehicles is scheduled to debut in 2007 — when Toyota has said it hopes sales of its hybrid models total several hundred thousand worldwide.

Although hybrids overall make up only a minute percentage of global auto sales, Stephens noted that some analysts believe hybrids eventually could account for 5 percent to 15 percent of global volume.

GM, which has worked with DaimlerChrysler on transmissions, has also said it considers hybrids a bridge to longer-range hydrogen fuel cell vehicles, which require no fossil fuel and release no toxic emissions.

“Our planned cooperation will draw on the technical expertise of two of the largest auto companies in the world,” DaimlerChrysler board member Thomas Weber said.

Hybrids draw power from two energy sources, typically a gas or diesel engine combined with an electric motor. Demand has grown worldwide because of concerns about the dangers of global warming, decreasing natural fuel supplies and the rising cost of those fuels.

GM and Chrysler already sell hybrid pickups, but the systems are less advanced and fuel-efficient than those used on cars sold by Toyota and Honda and on Ford Motor Co.’s hybrid version of its Escape sport utility vehicle, the world’s first gas-electric hybrid SUV.

The announcement comes at a time when Japanese automakers and Ford., the other Big-Three U.S. automaker, are accelerating their efforts with hybrids.

Toyota, Japan’s No. 1 automaker, said in October it would double the allocation of Prius hybrid cars for the U.S. market in 2005, part of a companywide goal to sell 300,000 hybrid vehicles worldwide by the end of next year. More than 100,000 Priuses have already been sold in the United States since 2000.

Toyota also plans to begin selling hybrid versions of its Highlander and Lexus RX SUVs in the United States next year.

Honda last week began selling its third hybrid car in the United States, a high-performance version of its popular Accord sedan. Ford’s Escape hybrid went on sale this summer.

The GM and DaimlerChrysler jointly built hybrid system will be used in GM, Chrysler and Mercedes vehicles. Variants planned include rear- and front-wheel-drive versions for cars, trucks and other vehicles.

In a joint statement, GM and DaimlerChrysler touted its hybrid system as more flexible than the ones used by other automakers.

“We can go from sport utility vehicles and pickups trucks to compact cars without redesigning critical control functions,” Stephens said.

The companies said the project will be open to other partners and may result in GM and DaimlerChrysler licensing hybrid technology to rivals.

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