The venture aims to design and commercialize a "closed life cycle loop" to give vehicle batteries a second life as storage products before recycling the raw materials, the companies said.
European governments want to encourage the domestic battery industry to combat Asian rivals such as BYD, CATL, Samsung and LG Chem, which are building a dominant position in what's expected to be a $290 billion market for EV batteries.
BMW, which has supply deals with Samsung and CATL, said it could source batteries from Northvolt in future but said it was too early to sign any deal with the firm, which is building a plant that aims to produce 32 gigawatt hours (GWh) of battery capacity a year by 2023.
"We have this consortium because we see great potential, and Northvolt could be another supplier of battery cells for us," BMW spokesman Niklas Drechsler said.
He said Northvolt had to "build up and ramp up their battery cell production" before any supply deal could be reached.
Northvolt, which has to raise 1.2 billion to 1.5 billion euros ($1.4 billion to $1.7 billion) in debt and equity this year to build an initial 8 GWh of capacity, wants to deepen its relationship with BMW.
"We obviously hope this is the first step of a long partnership," Northvolt spokesman Jesper Wigardt said, adding that Northvolt has applied to one of its existing financiers, the European Investment Bank, for a loan of 400 million euros.
In its recycling venture with Northvolt and Umicore, BMW said it had made an initial investment of an undisclosed amount and would provide its expertise in battery cell development.
Umicore will be responsible for active anode and cathode materials development and recycling.
($1 = 0.8628 euros)
Reporting by Esha Vaish