Volkswagen fails to strike UAE deal (page 2 of 2)

As well, in these instances it is the distributor who is putting up the investment and running the plants. Recently, Land Rover entered a deal with its Jordan distributor for a facility in that country. Again, the high import tariffs have been a major factor behind the decision.

"Egypt, and to an extent Jordan, are exceptions. But for markets where the import duty is five percent, and in such a highly cyclical industry, manufacturing bases are just not required," said the official with the German make.

So what explains Volkswagen's newfound interest in the region? And with the plan to allow Abu Dhabi to acquire 10 percent on the rocks, why is Volkswagen carrying on with the talks?

There is, of course, the joint venture with Abu Dhabi government-owned Mubadala Development Co. and Saudi Arabia's Olayan Group to acquire VW's auto leasing entity LeasePlan. Under the terms of the agreement, VW will hold a 50 percent share, while the two Gulf-based entities have an equal share of the rest.

Regulatory approval for the estimated 2 billion euro deal is currently pending. Today, Abu Dhabi is negotiating from a position of strength: it needs Volkswagen less than Volkswagen needs the emirate. The German automaker continues to struggle against leaner competition and has seen its earnings take a beating recently, especially in the US market.

The naming of Wolfgang Bernhard - a former DaimlerChrysler executive known for his cost-cutting - as the future boss of the company eased fears in the investment community about the long-term outlook, but serious doubts persist.

Bernhard will likely find cutting costs at VW an extraordinary challenge. The company is currently demanding a two-year freeze in wage negotiations, and says it must achieve 30 percent cuts in production costs by 2011. Volkswagen has enjoyed cordial relations with its unionised workforce in the past, but analysts say its production costs remain too high.

VW remains eager to get a cash injection; Abu Dhabi, it was hoped, would provide the medicine. If the deal does ultimately fall through, the German automaker will surely turn elsewhere - and sooner rather than later. The company's very future depends on it.