A Memorandum of Understanding has been signed by the two for the new company, which will begin operations next year.
"Our intention is to provide a sustainable perspective for our joint hardware and software skills and activities, while military budgets are decreasing," said MTU Chief Executive Officer Egon Behle. "Together with Sagem, through its Safran Electronics Division, the JV can access a wider range of market segments and additional third-party business.
"The German-French joint venture facilitates an efficient and long-term safeguarding of contractual commitments and offers access to a variety of future development projects in the aerospace and defense industry."
MTU said safety-critical engine controls for programs such as TP400-D6 for the A400M military transport aircraft, controls for landing gear, braking and monitoring information systems will be among the products developed and manufactured.
MTU, an independent engine manufacturer, has headquarters in Munich. Nearly all engines used by German aircraft are manufactured by it.
The new company will be on its main campus.
Sagem, a member of the Safran group, is a leading producer of optronics, avionics, electronics and safety-critical software.