Renault merger with Volvo likely in next few days: David Bowen on the final moves to create the world's second-biggest truck maker

TWO of the great names in the European motor industry, Renault and Volvo, are on the point of merging. French industry sources say the two companies' lawyers are working flat out to complete the paperwork, and that the long-awaited announcement could be made in the next few days.

The merger will create a group employing 100,000 people, and producing 2 million cars and 80,000 lorries a year. It will be the second-biggest truck maker in the world, still behind Daimler-Benz but well ahead of any others, and the fourth-biggest car maker in Europe. Most important, it should give the two companies a much better chance of surviving in the great motor industry shake-out that experts are forecasting for the second half of the decade.

Although Volvo and Renault have had a 20 per cent cross-shareholding since 1990, they have been working steadily towards a full merger. The main obstacle, a 25 per cent limit on foreign ownership of state-owned firms in France, has just been lifted. The right-wing French government is keen to see the deal go ahead as quickly as possible so that it can privatise Renault next year.

The merger is expected to leave 30 per cent of the group in Volvo's hands. The privatisation is likely to place another 40 per cent in the hands of French institutions and industrial groupings, to ensure it is takeover-proof, with the remainder floated on the Paris Bourse.

Renault, which made its first cars in 1899, was nationalised after the Second World War following the jailing of its founder, Louis Renault, on charges of collaboration. Although famed for its advanced designs, such as the R16, its costs ran out of control and by the end of the Eighties it was so heavily indebted that the government decided drastic action was needed. Tens of thousands of jobs were cut and this, combined with the introduction of successful new models such as the Clio, brought a profit of pounds 615m in 1992 - though the continental recession cut its first-half pre-tax profits for this year by 87 per cent to pounds 83m.

Volvo started making cars and trucks in 1915, and grew to become Scandinavia's biggest industrial group. It is now one of the largest heavy lorry makers in the world, with its European production boosted by a joint venture with General Motors in the US.

Like Renault, its car operations ran into trouble in the Eighties. Safety, its main selling point, became less of an advantage as other manufacturers produced cars that were arguably just as safe, and the company failed to tackle its increasingly extravagant costs. Although Volvo was a leader in many of the social experiments for which Sweden was famous, a plunge into losses in 1990 forced it to consider the unthinkable. It is closing two of its three Swedish assembly plants and has reduced its workforce by a quarter in the past three years. The benefits of that action showed through on Thursday, when it announced a pounds 32m profit, compared with the pounds 25m loss the market had been expecting.

The two companies hope that by sharing development and component costs, they will be in a better position to survive in the increasingly competitive market. Their success seems assured in trucks, where they will be a strong number two worldwide, though the bets are more open on cars.

Mergers have not always proved successful - witness General Motors' ignominious exit from Lotus on Friday, after seven years of ownership - but industry watchers agree that they will be increasingly necessary. They feel it is unlikely that all six of Europe's volume manufacturers - Renault, Volkswagen, PSA (Peugeot-Citroen), Fiat, General Motors and Ford - will still be operating independently by the turn of the century. The catalyst for change, they say, will be the arrival of the Japanese en masse, as import restrictions are lifted and production in European factories rises.

But Keith Hayes, an analyst for Merrill Lynch, believes Renault at least has done enough to protect its position. 'Five years ago, most analysts would have said it was the company that would not survive,' he said. 'Now they would not.'

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