Volkswagen will cut investment plans at its biggest division by €1 billion euros a year and step up development of electric vehicles, it said yesterday as it battles to cope with the fallout from its cheating of diesel emissions tests.

The German company also said it would speed up cost-cutting at the VW division, its largest by revenues, and put only the latest and “best environmental technology” in diesel vehicles.

Europe’s largest carmaker is battling the biggest business crisis in its 78-year history after admitting last month it installed software in diesel vehicles to deceive US regulators about the true level of their toxic emissions.

The company has got a mountain to climb

The scandal has wiped about a quarter off its market value, forced out its long-time chief executive and rocked both the global car industry and the German economy. Germany's ZEW think tank said yesterday its economic sentiment index had plummeted to its lowest level in a year, in part because of the uncertainty surrounding the auto industry, which employs more than 750,000 people in the country.

Economy Minister Sigmar Gabriel said he did not think Volkswagen’s problems would do lasting damage to Europe's largest economy, however. Some analysts said a strategy more focused on electric vehicles and hybrids could eventually help sow the seeds of recovery for Volkswagen. “There is a real chance for VW to even extract something positive from the diesel fiasco,” said Stefan Bratzel, head of the Center of Automotive Management think tank. “Funnelling more resources into electric mobility gives them a credible future perspective to try to overcome this crisis.”

But the company has a mountain to climb.Volkswagen sources said it would probably slump to a loss this year because it was set to shoulder the bulk of costs related to the scandal.