By Trefor Moss and Martin Mou
SHANGHAI -- Volkswagen AG is investing EUR1 billion ($1.11 billion) in a Chinese auto maker and a further EUR1.1 billion in a local battery producer, in the German car maker's latest bet on the Chinese electric-vehicle sector.
Volkswagen is increasing its stake in an existing joint venture with JAC Motors to 75% from 50% through the acquisition of half of JAC's parent company, state-owned Anhui Jianghuai Automobile Group. The joint venture focuses on electric vehicles.
Separately, Volkswagen took a 26% stake in Guoxuan High-Tech Co., also known as Gotion High-Tech, becoming the Shenzhen-listed EV battery company's biggest shareholder. Both companies are based in the city of Hefei, 300 miles west of Shanghai.
"This shows once again that Volkswagen is confident in the development of the China market," said Stephan Wöllenstein, Volkswagen's China chief executive, at a news conference Friday.
China's EV market is experiencing a slump after several years of rapid growth. Sales declined 4% last year to 1.2 million vehicles, and then fell 43% on year in the first four months of 2020, accounting for just 3.5% of vehicles sold.
But Volkswagen and others remain convinced that China, followed by the rest of the world, will ultimately embrace EVs. VW has said it would launch 80 EVs globally by 2025, and offer electric versions of all 300 of its global models by 2030.
Despite waning demand, the Chinese government recently increased its own EV target: Instead of accounting for 20% of Chinese vehicle sales in 2025, the prospective share is now 25%, which would equate to sales of roughly six million to seven million vehicles.
Volkswagen aims to deliver 1.5 million EVs in China in 2025, the company said Friday -- an ambitious goal even for the country's bestselling auto maker.
"It's a signal to the industry and especially to Tesla of how determined they are," said Yale Zhang, managing director of Shanghai-based consulting firm Automotive Foresight. Electric-car maker Tesla Inc. started delivering vehicles from its new Shanghai plant in December, and eventually aims to produce 500,000 EVs there annually.
Volkswagen formed its joint venture with JAC in 2017 to build entry-level EVs. The venture has so far launched only one vehicle, but on Friday Volkswagen said it would produce five new models by 2025, as well as build an EV plant and a research-and-development center in Hefei.
Volkswagen has recently finished constructing two new EV plants with a combined capacity of 600,000 a year with its two main joint venture partners, state-owned auto makers FAW Group Corp. and SAIC Motor Corp.
In 2018, China liberalized its auto market, allowing foreign car makers to wholly own their Chinese ventures for the first time. They were previously limited to owning 50% of a local joint venture.
However, the German auto makers in particular have shown a preference for investing in their existing joint ventures or forming new ones. Mr. Wöllenstein stressed the benefits of having a Chinese partner with local connections and a deep understanding of the market. Tesla is the only foreign player that has so far chosen to operate in China without a local partner.
In 2018, BMW AG said it would take a majority stake in its joint venture with Brilliance China Automotive Holdings Ltd., upping its share to 75% at a cost of about $4.2 billion, and announced the formation of a new joint venture with Great Wall Motor Co. to build the electric Mini. In January, Mercedes-Benz maker Daimler AG announced a new joint venture with Zhejiang Geely Holding Group Co. to build electric Smart cars.
U.S. and Japanese auto makers are also pivoting to EVs in China. General Motors Co. has said it would release 20 electric models in China by 2023, while Ford Motor Co. has pledged to launch 15 EVs in the country by 2025.
The investment in Guoxuan -- China's third-largest EV battery maker after Contemporary Amperex Technology Ltd. and BYD -- should help guarantee battery supply as Volkswagen ramps up its electric-car output. In 2018, Volkswagen named CATL as one of three main global battery suppliers, alongside LG Chem Ltd. and Samsung SDI Co., which would together deliver $25 billion worth of batteries to the auto maker.
Buying into a battery maker like Guoxuan gives greater certainty than supply agreements, said Mr. Zhang of Automotive Foresight. "They want to control the battery supply -- that is the key for every EV maker."
Write to Trefor Moss at Trefor.Moss@wsj.com