BMW AG and Daimler AG's Mercedes-Benz Cars division are in talks to explore teaming up in developing, producing and purchasing car components, according to people familiar with the matter.

The move marks a recognition by Germany's archrival luxury car makers that they may need bigger economies of scale to bolster profits.

Executives and engineers from the car divisions of BMW and Daimler "from the top, right down to the middle management" are discussing how the companies could jointly buy car parts, including seat frames and air-conditioning modules, said one person familiar with the talks.

The two sides are also exploring possible cooperation, on a project-by-project basis, in developing and producing components, including engines, according to another person familiar with the matter.

People familiar with the talks said the companies aren't under any short-term pressure to reach agreements.

The shift in strategy responds to difficulties the two midsize German auto makers face in maintaining their profit levels, now among the highest in the industry, in the face of a struggling U.S. economy, a strong euro, the rising price of raw materials such as steel, and growing technological demands created by new fuel-efficiency and emissions rules.

Spokesmen for both Daimler and BMW said the two companies are exploring further cooperation on components, but declined to reveal specifics.

Both car companies focus on making luxury sedans and sport-utility vehicles that often compete head to head, a factor that has inhibited collaboration in the past. The current talks seek to identify components and technologies where both companies could cooperate on lowering costs without diluting their brand values or conceding a competitive advantage, said one of the people familiar with the talks.

The shift toward increased cooperation has evolved following a strategic rethink at BMW initiated by Norbert Reithofer, who became chief executive in September 2006. A year after taking the helm, Mr. Reithofer set a goal of "establishing collaborations in the areas of components, drive systems and modules." Daimler Chief Executive Dieter Zetsche has also been repositioning his company after the sale of Chrysler last year.

Mr. Reithofer sees Daimler and BMW as "two midsize manufacturers," and believes there is potential for further cooperation between them, a spokesman for BMW said. Both Mr. Reithofer and Daimler's Mr. Zetsche have been encouraged by progress on an existing cooperation project between Daimler, BMW, General Motors Corp. and Chrysler LLC to develop expensive hybrid technologies.

Both Daimler and BMW in recent months have appointed key executives to head "profitability teams" to explore ways to increase their profits. Daimler appointed Jerome Guillen, a truck unit executive, to head up a "business innovation" team. BMW appointed a finance executive from its motorcycle division, Fritz Geri to perform a similar task at the auto maker.

Other high-end car makers face similar problems. But rivals such as Audi of Volkswagen AG, Ford Motor Co.'s Volvo and Lexus of Toyota Motor Corp. are able to leverage the resources and scale of larger parent companies. Sharing parts and research, plus making bulk purchases of raw materials such as steel allow them to squeeze costs. BMW and Daimler, in contrast, don't have larger parents.

Audi, for example, has been able to use VW's diesel-engine technology and is benefiting from VW's economies of scale in purchasing. VW makes more than six million vehicles a year, including more than 900,000 Audis. Lexus has been able to launch a hybrid luxury sedan thanks to hybrid technology pioneered for Toyota, which makes almost nine million vehicles a year.

Audi's operating margin rose to 8% last year, from 6.5% in 2006, according to analysts at Citigroup. BMW, by contrast, saw its margin on automobiles drop to 6% last year, from 6.3% in 2006, in part because of the cost of investments in green technologies. That's putting at risk BMW's target of 8%-10% operating margins by 2012.

BMW and Mercedes-Benz have been fierce competitors as far back as the 1930s. The rivalry became acute after 1959, when Stuttgart-based Daimler, which makes Mercedes-Benz cars, offered to buy its smaller rival, Munich-based BMW, and was rejected.

Both BMW and Daimler in recent years extricated themselves from disastrous mergers with mass-market brands that were made in earlier attempts to gain volume. BMW took a €3.15 billion charge at the time to sell off United Kingdom firm Rover in 2000, while Daimler effectively gave away an 80% stake in Chrysler in May 2007, after paying $36 billion in 1998.

wsj.com