Volkswagen Group has signed an agreement with DRB Hicom for Passat models to be assembled in Malaysia from the end of 2011 with more models to be added from about a year later.

“Developing the market potential of the ASEAN region is of major significance for theVolkswagen Group’s long-term growth strategy,” VW sales and marketing head Christian Klingler said at the signing in Kuala Lumpur. He added that Malaysia in particular, where more than 570,000 vehicles were sold in 2010, played an important role in the group’s strategic planning.

“We will be using existing structures and capacities at the DRB Hicom plant in Pekan to systematically extend our presence in the Malaysian market of the future,” Klingler added, according to a VW statement.

Citing state news agency Bernama, Reuters said the assembly deal was worth 1bn ringgit (US$318m) and was a boost for the country struggling to attract foreign investment.

Full scale local production is planned in a second phase from the end of 2012. Initial CKD kit assembly will have an initial annual capacity of several thousand vehicles and will be successively increased.

Bernama quoted Prime Minister Najib Razak as saying that the investment may transform Malaysia into regional automobile manufacturing hub for Volkswagen.

Local media reported that a new factory will be located in the Prime Minister's home state of Pahang in central Malaysia.

VW Group said it had earlier signed a memorandum of understating to investigate local vehicle production DRB Hicom in August 2010.

The Malaysian partner has the largest automotive production network in Malaysia and builds passenger cars and commercial vehicles at plants in Pekan and Melaka. With a nationwide sales network, it is also a prominent dealer and importer.

Malaysia has become increasingly unpopular as an investment destination, Reuters noted. Foreign direct investment fell to just 3.8% of the total flowing into Southeast Asia in 2009, down from almost 40% in the early 1990s, according to United Nations data.

Malaysia's unattractiveness stems from its slow pace of economic and market reforms with investors diverting their cash to other faster growing countries in emerging Asia, the news agency added.