The Chinese division of Volkswagen is planning to invest EUR500mn in the development of environment-friendly engines and gearboxes as well as to launch diesel engine production in the next few years.

A report in Handelsblatt cited remarks made by VW China CEO Winfried Vahland.

VW has already approved the investment in the further expansion of its existing engine and gearbox production in the Asian country by 2010, Vahland said.

In the summer of 2007, the German company will set up a five-year plan for its future growth strategy on the Chinese market.

VW's newly appointed CEO, Martin Winterkorn, has already visited the Chinese subsidiary and discussed its further development with the local management.

VW has recently put into operation a new engine plant in the northeastern Chinese city of Dalian, and it is currently considering whether to start producing automatic transmissions in China.

Diesel engine technology has a big potential on the local market, as it could lead to reduction of the air pollution in China in the next years, Vahland reportdely said.

According to a VW internal study, a total 5.0% of all passenger cars in China will have diesel engines by 2010 and by 2020 the number of diesel cars on the local market will stand at around one-third of all vehicles.

So far, there are almost no diesel light vehicles in China.

VW plans to boost its further expansion in the highly-competitive Chinese market through new, fuel-saving and environment-friendly models.

The report said that in 2007, VW will aim to grow along with the local market at 16-20%.

VW, which sold more than 200,000 cars in China in the first quarter of 2007, will aim at raising its sales on the local market to at least 850,000 vehicles by the end of the year.