Volkswagen AG plans to invest 3.4 billion euros ($4.4 billion) in upgrading its model lineup and factories in Brazil as part of its goal to become the world's biggest carmaker by 2018.

"Brazil is very much a cornerstone of our Strategy 2018," Chief Executive Officer Martin Winterkorn said yesterday ahead of the Sao Paulo motor show.

VW's investment plan in Brazil runs through 2016 and includes spending 126 million euros at its component plant in Sao Carlos to expand production to 4,800 engines a day from 3,800 now.

Volkswagen, Europe's largest carmaker, is looking to Brazil to help offset declining demand in its home region. The Wolfsburg, Germany-based carmaker's goals in the South American country are being challenged by U.S. and Asian carmakers, which are likewise expanding in Brazil. While demand in Europe is headed for its biggest drop in 19 years, car sales in the Latin American country are forecast to grow 8.6 percent to 3.28 million vehicles in 2012, according to IHS Automotive.

A temporary tax reduction has helped lift industrywide sales this year. Allowing that incentive to lapse will cause demand to drop, VW's Klingler said.

"The ending of incentives in Brazil will make car sales shrink for six to eight months," he said.

VW's shares fell as much as 1.55 euros to 148.35 euros and were down 15 cents at 1:52 p.m. in Frankfurt trading. The stock has climbed 29 percent this year, valuing the company at 66.4 billion euros.

Still, with a young population and about 40 percent of the country with the potential to become first-time car buyers, the German carmaker sees further growth potential in Brazil, which ranks as VW's third-largest market. VW today presented a two- door version of the best-selling Gol hatchback as a new entry- level offering in the market.

Its investment in the country will include standardizing factories and installing technology to manufacture cars based on the company's MQB platform, which is the basis for the VW Golf and other models, Michael Macht, VW production chief, said at the VW presentation.

"I see enormous potential in Brazil just from the systemic implementation?of parts sharing," he said. (Bloomberg)