Ford Motor Co
Ford and privately owned Geely did not disclose a possible sale price for Volvo but media reports have put it closer to $2 billion than the $6.45 billion Ford paid for Volvo in 1999.
The announcement moves the long-running sale, which began in December, closer to a conclusion. Intellectual property concerns, which last week threatened to derail any deal with Geely, may have been overcome.
But it could be months before a final agreement. Ford named Tata Motors
Ford said it will engage in detailed and focused negotiations with Geely, but there was no specific timeline to conclude negotiations. Ford will not retain a stake.
This sale is complicated because Volvo is closely woven into Ford's wider operations, undertaking much of the group's safety work, for example, and Ford said it would continue cooperating with Volvo.
Ford Chief Financial Officer Lewis Booth told a news conference at Volvo's Gothenburg head office that Ford and Volvo needed to make sure the deal contained appropriate safeguards and Geely had to undertake more due diligence.
But he said; We believe that (Geely) have the potential to be a very good owner of Volvo ... they take the heritage of Volvo and the brand of Volvo very seriously indeed.
Hangzhou-based Geely said its proposal, financed by Chinese banks, would enshrine management independence at Volvo while allowing the Swedish carmaker to source components and tap into sales networks in China.
Volvo would keep existing production and research and development facilities, union agreements and dealer networks, Geely said in a statement on Wednesday.
A Volvo union leader said he was unfamiliar with Geely and had asked to speak to its representatives as soon as possible.
Earlier, Geely had faced competition from rivals including a U.S.-led group including former Ford director Michael Dingman, dubbed the Crown consortium, and Beijing Automotive Industry Holding Corp (BAIC), sources familiar with the matter have said.
Geely is not the only Chinese automaker reaching overseas: the smaller Tenzhong aims to close that deal to buy General Motors's Hummer brand by early 2010.
Frankfurt-traded Ford shares
Wednesday's agreement is not with Geely's listed Hong Kong subsidiary Geely Automobile Holdings <0175.HK>.
Citigroup and JPMorgan are advising Ford, while Rothschild is advising Geely.
(Additional reporting by Victoria Klesty; Editing by Douwe Miedema and Marcel Michelson)