Volkswagen reported stronger-than-expected net profit for the third quarter of this year, but the company's chief financial officer told CNBC Tuesday that challenges will only intensify as the market demands more innovation.

"There is a very challenging transition ahead of the entire industry and us certainly as well, which means that even more ambitious CO2 fleet targets we have to meet, this is only to be achieved if you electrify your fleet to a certain extent," said Frank Witter, speaking to the "Squawk Box Europe."

Volkswagen's liquidity was impacted in the latest numbers, as research and development (R&D) costs clocked 9.9 billion euros ($11.25 billion). The CFO stressed this was critical if the company aimed to compete in a fast-evolving auto market.

"We have for the longest time been rightly criticized for overspending," Witter said, confirming guidance for capital expenditure and R&D, each in the range of 6.5 to 7 percent. "We rightly prepare to market for an uplift this year in order to be ready for CO2 compliance by 2020 but also for the continued electrification and digitization of our offering, which is critical to meet those targets."