MILAN (Reuters) - Automaker Fiat Chrysler plans to set up a joint venture with the parent of iPhone assembler Foxconn to build electric cars and develop internet-connected vehicles in China, as it looks to make up ground in electric mobility.

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Fiat Chrysler (FCA) - which is set to launch its first full-electric model, the 500 small car, this year - last month reached a binding agreement for a $50 billion tie-up with France’s PSA to create the world’s No. 4 carmaker.

The merger with PSA would help the Italian-American automaker to strengthen resources to meet tough new emissions rules and investments in electric mobility, where it has so far lagged its main competitors.

FCA confirmed on Friday it was in talks with Hon Hai on the potential creation of a 50-50 joint venture to develop new generation battery electric vehicles and engage in the IoV, or ‘Internet of Vehicles’, business, with an initial focus on the Chinese market.

FCA’s statement came after Taiwan’s Hon Hai - the parent of Foxconn - announced the potential joint venture in a separate statement.

It “would enable the parties to bring together the capabilities of two established global leaders across the spectrum of automobile design, engineering and manufacturing and mobile software technology to focus on the growing battery electric vehicle market,” FCA said.

Intesa Sanpaolo analyst Monica Bosio described the possible deal as “positive”, though it was not expected to have a significant impact on FCA fundamentals in 2020 and 2021.

“It should help FCA and the future combined entity FCA-PSA to shorten its gap in the electric vehicles and in Asia,” Bosio said.

In further evidence of how traditional carmakers are accelerating their electric push into the world's largest auto market, Germany's Volkswagen VOWG_p.DE is set to take a 20% stake in Chinese electric vehicle battery maker Guoxuan High-tech Co, two sources told Reuters.

FCA said it was in the process of signing a preliminary agreement with Hon Hai, aiming to reach final binding agreements in the next few months.

However, it added there was no assurance that final binding agreements would be reached or would be completed in that timeframe.

With a share of China’s passenger car market of around 0.35%, FCA currently operates in the country through a loss-making joint venture with Guangzhou Automobile Group (GAC).

However, the joint venture does not produce electric models, raising doubts it could meet China’s tough emissions rules and green car quotas.

FCA Chief Executive Mike Manley last year said the group had “streamlined” the structure of its Chinese partnership and appointed a new leadership to improve its competitiveness.

Foxconn has been investing heavily in a variety of future transport ventures for several years, including Didi Chuxing, the Chinese ride services giant, and Chinese electric vehicle start-ups Byton and Xpeng.

Foxconn also has invested in Chinese battery giant CATL and a variety of other mostly Chinese transportation tech start-ups.