Volkswagen AG is growing increasingly focused on the competitive challenges posed by Tesla Inc., as the German automaker seeks to close its rival's lead in software and connectivity features.

CEO Herbert Diess said the company is "openly" benchmarking itself against Tesla in its strategic decisions as it revealed an updated five-year, €73 billion investment plan in which funding for digitization will double. Introducing over-the-air software updates, a feature Tesla is famous for, is a particular priority, as well as increasing the proportion of in-house software used in its vehicles from 10% to 60%.

"I think the quite remarkable point is now that this planning round contains all the investments necessary to really strive for technology leadership against Tesla," Diess said. "We are benchmarking Tesla very openly also on the supervisory board level. And we know where Tesla is strong and where they are heading and they're going. And we know what to do ourselves ... Our way to compete with the new competitors, Tesla, is clearer than a year ago."

Regarded as the mass-market manufacturer with the most aggressive plan for a transition to electric cars, Volkswagen's launch of the ID.4 at the end of 2020, after the recent ID.3 hatchback launch, will increase competition in the EV sector significantly. The ID.4's SUV body style has been the fastest-growing format in the car industry in the last few years at the expense of the sedan.

Volkswagen expects the share of battery-electric vehicles to account for between 6% and 8% of its total in 2021. This is expected to reach 20% by 2025 and over 30% by 2030.

Diess said Volkswagen is likely to miss its EU-mandated target for a reduction to average CO2 emissions from new cars by about 1 gram, following warnings in late October from the company that it was unsure whether it could achieve its target. The company would have to pay a fine of €95 for each car sold per gram of CO2 in excess.

With broad global exposure, Diess said the group is still struggling to fulfill orders for some cars as safety measures to reduce the risk of coronavirus spread within plants continue to hamper productivity. The company expects to come close to 2019 sales volumes by 2022 and possibly exceed them in 2023, group head of sales Christian Dahlheim said.

Volkswagen is also grappling with the challenge of cutting fixed costs, which Diess recognized as uncompetitive. In one attempt to address this, the company is moving production of the Passat sedan to Bratislava, Slovakia, where it makes the Skoda Superb on the same platform. This decision is also part of a plan to gradually repurpose more German plants to produce electric cars, Diess said.