The pact between the world's largest maker of premium cars and the world's largest automotive supplier forms a powerful counterweight to new auto industry players like ride-hailing firms Uber and Didi which are also working on self-driving cars.

Technology companies and carmakers are striving to adjust to a shifting landscape in the auto industry as consumers increasingly use smartphones to locate, hail and rent vehicles, rather than going out and buying cars.

The alliance not only marks an end to Daimler's efforts to develop an autonomous car largely on its own, but moves the auto industry's ambitions beyond simply developing prototype vehicles towards industrial-scale production of self-driving cars.

Financial terms were not disclosed of the deal between the two German companies, which was announced on Tuesday.

Bosch - which was founded in 1886, the same year that Mercedes founder Carl Benz patented the motorcar - will develop software and algorithms needed for autonomous driving together with the carmaker.

Bosch said Mercedes would be able to use the jointly developed system for two years before it could be offered to competitors.

The deal will help the automotive supplier make up ground in a competitive autonomous driving system sector where rivals Continental, Delphi, ZF [ZFF.UL] and others have also made heavy investments.

For Daimler and its Mercedes division, teaming up with Bosch helps them throw more engineering resources at autonomous cars, allowing them to speed up the process of creating a production-ready system for autonomous cars by several years.

The autonomous system will now be ready by the beginning of next decade, Daimler said, without disclosing when it had first envisaged the commercial launch of automated taxis, or robo-taxis.

"The prime objective of the project is to achieve the production-ready development of a driving system which will allow cars to drive fully autonomously in the city," Daimler said in a statement on Tuesday.

The company will continue to build and sell vehicles that can be manually operated by individual drivers.

CAR COMES TO DRIVER

The market for advanced driver assistance systems and autonomous vehicles is expected to grow from about $3 billion in 2015 to $96 billion in 2025 and $290 billion in 2035, Goldman Sachs said last year.

Daimler is focusing its efforts on the app-based car-sharing and ride-hailing sector dominated by China's Didi, and U.S.-based Uber [UBER.UL] and Lyft. Like autonomous cars, this market is a big global growth area and is expected to expand by 28 percent a year to 2030, according to consultancy McKinsey.

"Within a specified area of town, customers will be able to order an automated shared car via their smartphone. The vehicle will then make its way autonomously to the user," Daimler said. "The idea behind it is that the vehicle should come to the driver rather than the other way round."

The cutthroat competition to launch self-driven cars has forced carmakers to shift strategy from an evolutionary towards a revolutionary approach.

Instead of evolving driver assistance systems to achieve full autonomy, carmakers are now experimenting with radical car designs combined with software-driven development - which has led to alliances with technology companies.

Mercedes-Benz's arch rival BMW teamed up with Israeli autonomous vehicle tech company Mobileye and chip maker Intel last year to develop new technology that could put autonomous cars on the road by 2021.

Intel has since agreed to buy Mobileye for $15.3 billion, a deal which followed Qualcomm's $47 billion move to acquire Dutch automotive chip supplier NXP.

Before deciding to partner with Bosch, Mercedes-Benz had two engineering teams, totaling about 500 people, working on autonomous vehicles. One took an evolutionary approach, upgrading the capabilities of conventional vehicles, while the other team took a more radical approach to the car's design.

Bosch and Mercedes did not disclose how many additional engineers they would assign to the teams in Stuttgart and Silicon Valley.

"Cars which do not rely on any driver input have a different architecture and sensor setup, with more radar and cameras," Christoph von Hugo, a senior Mercedes-Benz safety manager, told Reuters at a recent event to present safety systems.

NO STEERING WHEEL NEEDED

The current Mercedes E-Class can cruise without driver input on highways, keeping the distance to the car in front and staying in lane using a system which has "level 2" autonomy.

Full autonomy - known as an "eyes off, brains off" or "level 5" system - does away with even the need for a steering wheel.

"We don't want to wait until level 3 has arrived before we start with level 4/5. That will be too late," von Hugo said, adding the prospect of new revenue streams from maintaining fleets of robo-taxis was a big motivating factor for doubling up the carmaker's R&D efforts.

Autonomous vehicles came closer to road-going reality after Google unveiled a prototype car which it developed with the help of Bosch back in 2012. Mercedes-Benz responded by developing an S-class limousine that drove 103 km (64 miles) between the German towns of Mannheim and Pforzheim a year later.

Real commercial applications for autonomous cars will start to take off between 2020 and 2025, Ola Kaellenius, Daimler board member and head of Group Research and Mercedes-Benz Cars development told Reuters last month.

"If you take the robo-taxi, you start perhaps in a city or several cities or areas of cities, and then you grow from there," he said. "The key is to get to something that you can commercialise, scale up."

Bosch is already one of the world's largest suppliers of advanced driver assistance systems (ADAS) and recently announced an alliance with U.S. tech firm Nvidia to develop a self-driving computer for production cars. Mercedes-Benz and auto supplier ZF also have separate alliances with Nvidia.

The Bosch-Daimler alliance will rely on high-definition mapping systems provided by HERE, the digital mapping firm owned by BMW, Mercedes, Audi and Intel.