By Julie Zhu and Zhuzhu Cui

HONG KONG/SHANGHAI Huawei Technologies' new smart car software and components firm is set for a valuation of up to 250 billion yuan ($34.67 billion) after it sells stakes to investors including Changan Auto, three people with knowledge of the matter said.

The Chinese company said on Sunday it will spin off its four-year-old Intelligent Automotive Solution (IAS) business unit - which aimed to become the equivalent of German automotive supplier Bosch of the intelligent electric vehicle (EV) era - into a new company which will receive the unit's core technologies and resources.

Main auto partner Chongqing Changan Automobile and relevant parties will own up to 40% of the new firm, a Changan Auto statement showed on Sunday. Neither Changan Auto nor Huawei disclosed financial details.

Changan Auto and its ultimate parent, state-owned China Ordnance Equipment Group - also known as China South Industries Group - are considering acquiring about 35% and 5% respectively of the new firm, which could be valued at 200 billion to 250 billion yuan, two of the people said.

Potential minority shareholders include state-owned automakers FAW Group and Dongfeng Motor Group, which are also in advanced talks with Huawei to acquire up to 5% each, said the three people.

Huawei will likely remain the single largest shareholder with 40% to 50% for at least the next two-to-three years, said two of the people.

Deal details - notably the ownership split and valuation - have not been finalised and are subject to change, the three people said. The transaction will also be subject to regulatory approval, said one of the people as well as a fourth person with knowledge of the matter.

The people declined to be identified as the matter is private.

Changan Auto referred Reuters to its Sunday statement and declined to comment further. Huawei and other companies involved did not immediately respond to requests for comment.

The spin-off is rare for Huawei whose businesses including telecommunications and consumer electronics have been owned by founder Ren Zhengfei and close to 100,000 shareholding employees since the firm's 1987 founding. In 2020, a year after it was subjected to U.S. sanctions on security grounds, it sold budget smartphone brand Honor to keep the brand alive.

Three of the people said one reason for the planned sale is that Huawei has struggled to grow the smart car business and needs to recoup capital to cover research and development (R&D) spending.

Huawei senior executives including Ren initially pinned high hopes on the unit to be a new growth driver, said the people.

It has invested $3 billion in the unit since its inception and grown its R&D team to 7,000 people, showed the company's 2022 annual report.

Ren did not immediately respond to a Reuters query via the company.

But it was the only money-losing unit among Huawei's main six and brought in one billion yuan revenue in the first half of 2023, a fraction of the company's 310.9 billion yuan total, Huawei said in August.

Huawei has partnerships with other auto companies, including Seres Group and Jianghuai Automobile, as well as with Changan Auto involving EV brands Avatr and Deepal.

The new firm - which Huawei has said will engage in R&D, production, sales and service of intelligent automotive systems and component solutions - will also absorb the group's other auto-related assets and resources outside the IAS business unit, said one of the three people.

Huawei is considering locating the new firm's headquarters in Chongqing, a sprawling southwestern municipality where Changan is based, said two of the people. The unit is currently headquartered in Shanghai.

The proposed deal will also smooth the way for the business' listing, as Huawei had planned, said two of the people.

Richard Yu, head of Huawei's consumer business and who has overseen the smart car unit for years, is unlikely to lead the new firm, one of the people said without elaborating.

($1 = 7.2111 Chinese yuan renminbi)

(Reporting by Julie Zhu and Zhuzhu Cui; Additional reporting by David Kirton; Editing by Brenda Goh and Christopher Cushing)