Volkswagen will invest more than 10 billion euros ($12 billion) along with its partners in China to build new energy vehicles in the country, the company said on Wednesday.
Volkswagen is also establishing a new joint venture with state-owned JAC Motors to make electric vehicles, with an aim to get the first electric car to market by next year, the company said in a press release on the eve of the Guangzhou Auto Show.
The move comes as China has put in place a series of carrots and sticks to compel carmakers to produce more fuel efficient and eventually petrol-free cars.
Volkswagen has been a laggard in the area so far, selling just a few hundred "green" cars among sales of four million vehicles in China last year.
The investment and partnership will help the German manufacturer reach its goal of introducing dozens of new energy models and delivering 1.5 million new energy vehicles in the country by 2025.
"China is leading the way to the final breakthrough in the adoption of e-mobility and Volkswagen Group China is determined to be at the forefront," said Jochem Heizmann, president and chief executive of Volkswagen Group China.
China will implement a complex quota system in 2019 requiring automakers to produce a minimum number of electric cars.
Beijing originally wanted to start enforcing the rule in 2018, but it delayed it by a year after Germany and some foreign firms raised concerns.
For electric car buyers, China has introduced subsidies and in some cities like Beijing, where getting a valid license plate is near impossible, authorities have allocated thousands of plates for electric cars.
Beijing has plans to phase out petrol vehicles entirely, though it has yet to set a date for the ban.
Volkswagen now faces one of the biggest challenges for electric carmakers -- batteries -- and it said it was looking for partners to ramp up battery production capacity for its vehicles.
Other foreign automakers are also stepping up efforts to produce green cars in China.
US car giant Ford envisages that 70 per cent of all Ford cars available in China will have electric options by 2025. Last week it announced a $756 million investment with its Chinese joint venture to produce electric cars.
Volvo plans to introduce its first 100-per cent electric car in China in 2019.