Volkswagen is ramping up its investments in electric vehicles, committing €180bn over the next five years to manufacture its own batteries and expand in the world’s biggest markets in the US and China.

It is a 13 per cent increase on last year’s pledge of €159bn with just over two-thirds of the money set aside for the transition to electric vehicles and software as the car increasingly becomes a connected device, where the smartphone links with the functions in the vehicle.

Chief executive Oliver Blume said the world’s second-largest carmaker by volume would use the investment to target growth in “key markets”, adding that 2023 would be a “decisive year” for the group.

Despite pressure to diversify both supply chains and sales away from China following rising geopolitical tensions, VW aims to use investments to strengthen its position in the country, where it makes half its profits.

It has taken the view that China is unlikely to invade Taiwan in the short term because of the shock this would cause to its own economy, according to one person who has been part of internal discussions.

Blume said that VW had to “listen to the Chinese customer more strongly”, adding that in-car karaoke machines and the ability to craft avatars were among trends its China-based software division Cariad was developing.

An in-car avatar would be like a passenger that could be used to visually give the driver guidance and assistance on directions and hazards.

The German carmaker’s announcement comes as the industry steps up the switch from combustion engines to battery-powered vehicles.

VW has gone further than rivals with plans to not only assemble batteries but also manufacture cells.

It recently announced plans to build an electric vehicle plant in the US and a supporting battery factory in Canada, lured by US president Joe Biden’s $369bn package of subsidies and tax incentives for green energy in the Inflation Reduction Act.

Blume said on Tuesday that he had hashed out plans with Canadian prime minister Justin Trudeau, welcoming the country’s approach to investment “risk sharing” as it agreed to offer VW tax incentives based on sales.

The owner of brands such as Porsche, Škoda and Audi also revealed it had taken a €2bn hit related to the sale of its business in Russia.