German carmaker Volkswagen (VOWG_p.DE) is considering cooperating with China's Great Wall (601633.SS) on a new budget model, Germany's Manager Magazin reported on Wednesday, citing company sources.

Volkswagen's China chief Jochem Heizmann had said on Sunday the company was considering developing budget sport-utility vehicles (SUVs) and multi-purpose vehicles (MPVs) in China to keep up with shifts in the market.

Manager Magazin said one option that had been discussed in talks with Great Wall was Volkswagen taking a stake in the Chinese carmaker.

Volkswagen declined to comment on the report. A spokeswoman for Great Wall said the company was not aware of the issue.

Volkswagen, Europe's biggest carmaker, has struggled to develop a budget car for emerging markets, a key part of its drive to become the world's biggest automaker, because it found it difficult to keep costs for the vehicle low enough.

"VW has a proven inability to engineer and build low-cost cars," Singapore-based Bernstein analyst‎ Max Warburton said in a report published on Wednesday. "VW doesn't know how to do cheap and cheerful, a company like Great Wall does."

Retail sales of SUVs in China soared more than a third last year to 3.82 million, and have more than doubled since 2012, rapidly outpacing growth in other segments, according to the China Passenger Car Association (CPCA).