Operating profit at the German group's main VW brand, which provides almost a third of group earnings, fell 4.1 percent last year to 3.64 billion euros ($4.7 billion), the company said in its annual report.

The VW brand's German-market deliveries slumped 9.4 percent in the first two months of this year, highlighting the company's exposure to a flagging European economy.

"We have to really put our shoulders to the wheel and give our very best," Chief Executive Martin Winterkorn said at VW's base in Wolfsburg. "The environment is definitely a tough challenge, especially for European car makers."

Expanding its global network, VW will set up a new assembly factory in southern China, adding to the dozen component, engine and production plants VW already has in its biggest market, the CEO said.

With three new assembly plants and two component facilities starting operations in 2013, VW aims to almost double capacity in China to over 4 million vehicles by 2018 when the group aims to snatch the global sales crown from Toyota Motor Corp .

"VW's future is increasingly being decided in China, Russia, India, the Americas and Southeast Asia," Winterkorn said. "The relative importance of the markets is shifting."

Two-month global sales rose 8.3 percent to about 1.4 million vehicles, he added, without being more specific. The multi-brand group has a goal to beat last year's record 9.1 million deliveries.

VW, which released 2012 results on February 22, said operating profit at Czech division Skoda fell 4.2 percent to 712 million euros, while the loss at Spanish brand Seat shrank by a third to 156 million euros.

($1 = 0.7722 euros)

(Reporting by Andreas Cremer; Editing by Mark Potter)