Volkswagen-Volvo: The Next Big Deal?

It began with Volkswagen AG expressing interest in AB Volvo's commercial truck business, but discussions between the German and Swedish automakers have covered a broader range of possible cooperation, says Volvo CEO Leif Johansson.

Mr. Johansson and VW Chairman Ferdinand Piech "talked about different areas of cooperation." Hans-Juergen Uhl, managing director of the VW works council, says the VW supervisory board already has authorized Mr. Piech to expand into the medium and heavy-duty truck market. Mr. Piech would need additional approval to enter a more specific alliance or to make an acquisition.

Other meetings are scheduled between the companies, Mr. Johansson says, but Volvo likely will meet with other potential partners or buyers.

Separately, Volvo will expand its diesel engine collaboration with German engine manufacturer Deutz. Volvo will purchase a 10% stake in Deutz for about $72 million. They will collaborate on commercial vehicles.

Volvo reported its operating profits for the first half of 1998 increased to $582 million, up 19% from a year earlier. Mr. Johansson calls the performance "decent," but its return on sales actually slipped from 4.4% to 3.5%, well below his target of 5.7%.