Optimistic about the future of China's auto market, especially the premium compact segment, Daimler AG and its car unit Mercedes-Benz are pushing the accelerator for local R&D and production in the country.

The German automaker last week signed a strategic framework agreement with its Chinese partner Beijing Automotive Group Co Ltd to co-invest 2 billion euros ($2.88 billion) in local production of new models and engines as well as the establishment of an R&D center.

Daimler began to produce Mercedes-Benz cars in China five years ago at its joint venture Beijing Benz Automotive Co Ltd, which is now able to produce a combined 80,000 C-Class and E-Class sedans annually.

Under the framework agreement, the joint venture will build the GLK compact SUV later this year and three other compact models after 2013.

"As early as 2020, at least one in five premium compact cars is expected to be sold in China," Dieter Zetsche, chairman of the board of management of Daimler AG and head of Mercedes-Benz Cars, said in a statement.

"In the light of this enormous potential, we are resolutely switching to attack mode with the local production of our new compacts," he said.

The data offered by the company shows that 770,000 premium compact models were sold in China last year, and yearly sales of the segment is expected to grow to more than 2 million units by 2020.

Responding to the immense demand, Mercedes-Benz has imported its A-Class, B-Class, GLK and the smart in China. Combined delivery of the models and the C-Class now account for about 40 percent of Mercedes-Benz sales in the country, according to Ulrich Walker, chairman and CEO of Daimler Northeast Asia.

The new agreement also calls for investment in an engine plant and an R&D center. The engine plant, due to start production in 2013, has designed capacity of 250,000 gasoline engines that will be used in locally built Mercedes-Benz cars and vans.

Mercedes-Benz also makes vans at the joint venture between Daimler AG and Fujian Motor Industry Group Co Ltd in South China.

The agreement was signed in Berlin during Premier Wen Jiabao's recent visit to Germany, when a total of 14 deals that worth more than $15 billion were inked between the two countries.

Last year Mercedes-Benz moved a total of 148,000 vehicles in China, more than double the 2009 tally.

In the first five months this year, the carmaker delivered more than 75,800 vehicles in the nation, an increase of 62 percent compared with the same period last year.

Currently about one-third of Mercedes-Benz's China sales are locally produced models.

The company previously announced that it will greatly expand the Beijing joint venture's capacity to 200,000 units a year by 2015, when it expects to sell 300,000 vehicles a year in China.

The company also plans to add at least 30 new dealerships in China this year. It currently has more than 160 dealer outlets in the country.