Europe's biggest carmaker told analysts its Chinese joint ventures with Shanghai Automotive and FAW would make the cuts by the end of next year to back car price cuts and defend market share.
"In future, price cuts will always be accompanied by cost cuts," VW said. "We will not accept lower margins."
Hans Dieter Poetsch, finance director, acknowledged that operating profits at the Chinese operations would decline from last year's €561m (£378m), but only because of a strong euro. "We are confident we can show a very impressive figure for 2004 and also for 2005," he says.
VW's market share in China has shrunk from 50% two years ago to 30% at the start of this year. The company could give no year-to-date figure.
In June, VW accounted for only 18% of sales, and lost market leadership for the month to General Motors' Shanghai joint venture. Cost cuts in July returned VW to the lead.
Operating profit from VW's China joint ventures was €251m (£170m) pro-rata for the first half, compared with €361m (£244m) a year earlier.
VW is also girding itself for a battle at home, with unions set to confirm a rumoured 4 per cent pay demand today. Bernd Pischetsrieder, chief executive, told analysts that VW's response to the demand would be robust.
"We have to structural improvements in personnel costs. 2011 is only six years away," he said, referring to the targeted 30% reduction in staff costs by that date.
VW, which is expected to press for longer working hours, yesterday said its pay deal would be multi-year.
It said a threatened strike at its plant in Mexico now "seems inevitable" after workers rejected a 4.45 per cent salary increase.