Volkswagen leaves door open to Fiat talks

Wolfsburg - Volkswagen

left the door open to potential tie-up talks with

Fiat Chrysler on Tuesday, as a drop in operating

profit at its biggest car brand showed the challenges it still

faces 18 months on from its emissions scandal.

The German company is likely to face 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 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 CEO Matthias Mueller

signalled on Tuesday he might be open to new partnerships.

"I never said that a liaison with any other partner is ruled

out once and for all, but I only said that there is no contact

at the moment between myself and Mr Marchionne," he told

reporters as VW presented its detailed 2016 results.

"It would be very helpful if Mr. Marchionne were to

communicate his considerations to me too and not just to you,"

he added.

Fiat Chrysler shares rose more than 2 percent following the

comments, while VW's were little changed.

VW brand struggles

VW said last month it made a record group operating profit

in 2016, excluding one-off items, helped by a strong performance

from its Porsche sports cars and a turnaround at its Scania

trucks business.

Breaking down the figures for the first time, the company

said on Tuesday underlying operating profit at its VW brand fell

10 percent to 1.9 billion euros ($2 billion), with the profit

margin slipping to 1.8 percent from 2 percent in 2015.

The group said a dip in revenues and higher marketing costs

as a result of the September 2015 admission that it cheated U.S.

emissions tests on diesel engines were factors in the declines.

Although the group as a whole has bounced back from the

scandal, and overtook Japan's Toyota last year to

become the world's biggest selling carmaker, analysts view a

turnaround at the VW brand as key to its prospects.

Read also:  Volkswagen's woes deepen

The brand accounted for almost half of 2016 group revenue,

but only just over 10 percent of underlying operating profit.

The brand struck a deal with unions in November to cut jobs

and target 3.7 billion euros of annual savings by 2020 in an

effort to lift the profit margin to 4 percent that year - still

below many major rivals.

But squabbles over implementation have sowed doubts among

some analysts about whether the targets will be achieved.

'Don't waste time'

"In times where most other car companies are improving

efficiency and shaping the industry, VW needs to be very mindful

not to waste any more time with internal power struggles,"

Evercore ISI analysts said in a research note to clients.

Mueller said VW was "back on track" after agreeing to spend

up to $25 billion in the United States to address claims from

owners, environmental regulators, states and dealers over its

emissions scandal.

"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 percent in

sales revenues this year and a group profit margin of 6-7

percent versus 6.7 percent in 2016, and said the group was

capable of shouldering its emissions scandal costs.

The company's annual report showed VW brand boss Herbert

Diess saw his total remuneration for 2016 drop to 3.93 million

euros from 7.13 million in 2015.

REUTERS