VW mulling merger with FCA on Dieselgate fallout

Volkswagen has left the door open to a potential tie-up with Fiat Chrysler or another rival, as a drop in operating profit showed the challenges it still faces 18 months on from its emissions scandal.

The carmaker is likely to see heightened competition in Europe after Peugeot maker PSA Group agreed this month to buy General Motors’ Opel business to create a stronger second player in the region behind VW.

Fiat Chrysler Automobiles (FCA) boss Sergio Marchionne said last week that the deal might eventually persuade VW to seek a tie-up with his own company, a suggestion that was swiftly rejected by VW.

But in an apparent change of tone, VW chief executive officer, Matthias Mueller, has signalled he might be interested in partnerships.

“We are more open on that account than we used to be previously,” he told Reuters, adding this had “nothing to do with FCA specifically.”

“It would be very helpful if Mr Marchionne were to communicate his considerations to me too and not just to you,” he told reporters at VW’s annual results news conference.

A combination of VW and FCA could in theory create a European market giant with a share of around 30%, give VW a strong foothold in North America through FCA’s Chrysler operations and fix FCA’s lack of scale in Asia.

But any tie-up would also likely mean thousands of job losses that unions and politicians in Italy and Germany would strongly oppose.

VW said on Tuesday underlying operating profit at its VW brand fell 10% to 1.9 billion euros (A$2.6 billion), with the profit margin slipping to 1.8% from 2% in 2015.

The group said a dip in revenues and higher marketing costs as a result of the September 2015 admission that it cheated US emissions tests on diesel engines were factors in the declines.

“You can rest assured that we will do everything in our power to make 2017 an even better year than 2016,” he said at the 12-brand group’s annual news conference.

He reiterated forecasts for a rise of up to 4% in sales revenues this year and a group profit margin of 6-7% versus 6.7% in 2016, and said the group was capable of shouldering its emissions scandal costs.