Volkswagen AG's (VOWG_p.DE) growth in China is expected to slow to around 10 percent this year from 16 percent in 2013 due to a conservative strategy that has limited its production capacity, the head of its Chinese operations said on Tuesday.

A shortage in capacity is the only reason Volkswagen's growth rate has lagged overall growth in China's vehicle market recently, Volkswagen China President Jochem Heizmann told reporters in Guangzhou, ahead of an annual auto show that will open on Thursday in the southern Chinese city.

The German car maker plans to step up investment in manufacturing so that this is no longer an impediment, he said.

Heizmann said he expected Volkswagen Group, whose brands include Audi, Skoda and Porsche, to deliver a total of 3.6 million vehicles in China this year, which amounts to an annual increase of around 10 percent. That's a slowdown from last year's 16 percent growth.

Volkswagen said in late 2013 it planned to invest 18.2 billion euros ($22.8 billion) from 2014 to 2018 to increase annual production capacity to around 4 million vehicles.

That plan was based on an average annual sales growth estimate of around 5 percent, which Heizmann said was "a very conservative planning base. This is why we have a lack of capacity. We're clearly going beyond this 4 million issue."

Volkswagen also plans to significantly extend its product portfolio to better compete with General Motors (GM.N) for the top spot in China.

It is "making very good progress" towards launching a budget car in China and is also developing a China-only luxury sedan "to show the customers that the Volkswagen brand is not just a volume brand in China", Heizmann said.

The company also aims to launch more than 20 electric or plug-in hybrid models in China by 2018.

"There is still potential in China's passenger car market, especially in tier three, four or five cities," Heizmann said, brushing aside concerns of a drastic slowdown in the world's biggest auto market.

Even as growth in China's overall car market is expected to slow to single-digit pace over the next five years, it will still be "tremendous growth ... much higher than any other relevant market in the world", he said.

Separately, Heizmann said that plans to raise Volkswagen's current 40 percent stake in its joint venture with Chinese partner FAW Group Corp would likely take time. 

"This is a process which is not just done in weeks," Heizmann said, adding that the two companies had held talks earlier and agreed to go to the next step.

Company sources told Reuters last week that Volkswagen's bid to increase its stake in a joint venture with Chinese partner FAW Group Corp [SASACJ.UL] to about 50 percent from 40 percent currently had stalled after more than a year of talks.

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