UPDATE 1-Volkswagen and Bosch team up on automated driving software

* Bosch, VW to build Level 2 and 3 software for VW fleet

* First functions to be deployed from 2023

* Bosch can later take software to outside market (Adds details from press call, background)

By Victoria Waldersee

BERLIN, Jan 25(Reuters) - Volkswagen's software subsidiary Cariad and autos supplier Bosch are teaming up to develop software for automated driving to use in Volkswagen's cars, the companies said in a joint statement on Tuesday.

Using data from Volkswagen's fleet, the partners will develop so-called Level 2 autonomous driving software - enabling hands-free driving in cities, rural areas and on the motorway - as well as a Level 3 system that takes over all driving functions on the motorway.

They expect to implement Level 2 software in Volkswagen vehicles from 2023.

After an undefined lead time, Bosch will take the technology to the outside market, its software chief Matthias Pillin said on a press call.

"Partnerships in software development are not unusual... once you have generated the relevant IP you can pursue your own paths," Cariad CEO Dirk Hilgenberg said.

The partnership is the second announced this year by the companies, which last week said they would set up a joint venture to equip battery cell factories with machinery.

They did not disclose how much they would invest in either deal.

Both Volkswagen and Bosch have bundled their software operations into single divisions to strengthen their offering in the face of competition primarily from Tesla, as well as companies like Alphabet increasingly venturing into the autos sector.

Volkswagen aims for Cariad to supply 60% of software in Volkswagen vehicles by 2025, up from 10% when the unit was founded in 2020.

But competition for talent is fierce, and the high upfront investment of developing software capabilities from scratch, when many carmakers also need funds for electrification and battery development, means some are forming partnerships.

Volkswagen has invested $2.6 billion in self-driving startup Argo AI https://www.reuters.com/article/us-volkswagen-argo-idUSKBN2390E6, which is developing Level 4 vehicles - where the car can control most situations independently but drivers can request control - for shared fleets.

Bosch and Daimler announced plans in 2017 to build a joint 'robo-taxi' automated driving fleet - but the partnership was cancelled in 2021, months after Daimler's CEO highlighted the high costs and risks involved.

Daimler was the first to secure regulatory approval for its hands-free driving system https://www.reuters.com/business/autos-transportation/mercedes-benzs-hands-free-drive-system-clears-german-authority-2021-12-09 in December.

Volkswagen and Bosch do not yet have this approval, Hilgenberg said. (Reporting by Victoria Waldersee Editing by Mark Potter)