The investment, announced Friday, will be used to develop new products and increase production capacity over the next two years.

Volkswagen's factory in Nanjing will roll out three new models, and its Chengdu factory will begin producing two more. Output at those two facilities will double to between 300,000 and 350,000 units per year.

"China is one of Volkswagen's most important markets worldwide," Chief Executive Martin Winterkorn said.

China is VW's biggest growth market

Volkswagen already sells a wider range of products in China than any other carmaker, and has introduced three new models there this year. It sold more cars in China than it did in Germany during the month of July.

Sales there grew 12.5 percent in 2008, as they were falling 3.9 percent in Western Europe, 5.2 percent in North America, and 8.7 percent in Japan.

"We expect to achieve double-digit growth in China this year and to secure our market leadership going forward," Volkswagen China chief Winfried Vahland said. He added that he expects the company to meet its goal of doubling annual unit sales to two million before its 2018 target date.

The Wolfsburg-based company's share price on the Frankfurt stock exchange rose 4.35 percent in response to the investment news, closing at 127.83 euros ($186.55).

But Volkswagen is far from the only game in town. According to US analyst firm JD Power, more than 90 Chinese and foreign car brands operate in China, including Toyota, Ford and Peugeot Citroen.

Only 20 people out of every 1,000 in China own a car, according to market researchers TNS, compared to 700 per 1,000 in the United States.

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Editor: Sonia Phalnikar