* To invest 4 bln eur in new products, output in China

* On track to sell 2 mln cars in China before 2018

* Proton deal would be 2nd step this year for VW in ASEAN

* Market of 570 mln inhabitants offers enormous potential

German carmaker Volkswagen (VOWG.DE) is bolstering its presence in Asia after approving 4 billion euros ($5.84 billion) in new investments for China and mounting another effort to build cars in Malaysia.

In a statement on Friday, Volkswagen said the funds would be used through 2011 to develop new products and expand production capacity by another 100,000 units in China, VW's most important foreign market.

We will grow in China at a considerable double-digit rate in 2009 and in the future continue to secure market leadership, Winfried Vahland, VW's China president, said.

The Volkswagen Group China is on track to reach the Strategy 2018 target of doubling our (annual) sales to 2 million vehicles earlier than planned, he added.

Roughly 1.3 billion euros of the planned investments would be used in part to raise output capacity in Nanjing and Chengdum by 50,000 units to 350,000 each over the next two years.

Starting in 2012, Nanjing would build three new models in addition to the Jetta and in Chengdu two new models on top of the Santana Vista. VW also builds cars in Shanghai and Changchun.

The four billion euros in total investments will be financed from the cash flow of its two Chinese joint ventures, Volkswagen said.

Last year, Volkswagen sold 1.02 million vehicles in China between its VW, Audi and Skoda brands -- nearly as many as the group sold in Germany.

Separately, a VW spokesman confirmed a report that VW was exploring the possibility of building cars in Malaysia with local automaker Proton Holdings (PROT.KL).

In May, Volkswagen agreed to assemble vehicles with a local partner in Indonesia in what was a first step to expand our activities in the ASEAN market, a VW spokesman said on Friday.

HIGH ENTRY BARRIERS

Over the long term, these investments in Indonesia are not sufficient to serve the entire ASEAN market. Local production in Malaysia is therefore a further option in this strategy.

The spokesman said no decision had been taken.

Proton was not available for comment.

Malaysian newspaper Star reported the partnership talks were not expected to see VW take a stake in Proton, a move it tried before. Instead, the two are considering assembling cars for VW at Proton's plant in Tanjung Malim in northeastern Perak state.

Proton shares have risen 17 percent in the past week on speculation the company, whose market share has fallen in recent years, was close to securing a foreign partner.

VW, which believes the 10-member ASEAN region offers enormous growth potential, attempted twice to form a strategic alliance with Proton as early as 2004 only to see talks break down in November 2007.

Seeking another way to get a foothold in the region, VW decided to begin building Tourans in Indonesia after teaming up with Indomobil Group, the country's largest auto company and parent to Volkswagen's exclusive Indonesian distributor PT Garuda Mataram Motor. [ID:nLB708523]

Efforts to serve the ASEAN market are complicated by big differences between markets, with Thais mainly buying pick-ups, while multipurpose vehicles (MPV) are popular in Indonesia and motorbikes in Vietnam. [ID:nL4690280]

Furthermore, import duties of up to 100 percent for vehicles coming from the EU allow sustained growth only through local assembly.

Rewards for successful entry into the market could be significant, with 570 million people living in the ASEAN realm where car ownership is a fraction of that in western nations.

Instead of the 500 cars per 1,000 inhabitants in countries like Germany, there are only 49 in Indonesia or 146 in Thailand by comparison, an industry body said last month. ($1=.6847 Euro) (Reporting by Soo Ai Peng, Jan Schwartz in Hamburg and Christiaan Hetzner in Frankfurt; Editing by Liau Y-Sing, Dan Lalor and Simon Jessop)

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