The latest extraordinary twist in the battle between Volkswagen and BMW for control of Rolls-Royce has provoked a torrent of speculation about a major shake-up in the German motor industry and a new wave of large-scale mergers.

Under the deal, agreed at the 19th hole of a Bavarian golf course, VW may only produce Rolls-Royce cars until 2003 - despite the fact that the company paid DM1.44 billion for Rolls-Royce Motor Cars earlier this year.

Analysts were puzzled when VW outbid BMW for the British company, not least because VW has no experience in the luxury car market. More crucially, BMW currently supplies 30 per cent of the parts for new Rolls-Royce and Bentley models - a contract BMW boss Mr Bernd Pischetsrieder threatened to cancel as soon as VW took over.

Moreover, the Rolls-Royce brand name is owned, not by Rolls-Royce Motor Cars but by Rolls-Royce Plc., the aircraft engine manufacturer that split off in 1971 and has important links with BMW.

VW boss Mr Ferdinand Piech anticipated little difficulty in buying the rights to the brand name from Rolls-Royce Plc. and he dismissed Mr Pischetsrieder's threats as sabrerattling.

However, the aircraft engine company refused to sell and BMW cancelled its contract with Rolls-Royce with effect from July 1999. It would be impossible for VW to find an alternative source of parts within a year, making the closure of the Rolls-Royce factory in Crewe inevitable.

Mr Piech was forced to face the reality that he had spent a vast sum of VW's cash on an antiquated British factory, land-locked by housing estates, which could close within a year.

According to last week's agreement, VW can produce Rolls-Royce and Bentley cars until the end of 2002, using the Rolls-Royce brand name free of charge and supplied with parts by BMW. From 2003, VW may only produce Bentley cars, while BMW takes over production of Rolls-Royce cars at a new green field site in Britain.

Mr Piech sought to put a brave face on the deal, hinting that it could mean the start of much closer co-operation between VW and BMW.

"You may speculate about a merger," he told the German newspaper Die Welt.

BMW sources dismissed the remarks as an attempt to distract from Mr Piech's humiliation at being so thoroughly outmanoevred by Mr Pischetsrieder.

A VW-BMW merger may be unlikely but there is little doubt that the car industry worldwide is undergoing a profound structural change. The number of independent manufacturers has slumped from 52 in 1964 to 18 today.

The biggest merger of all took place earlier this year between Daimler-Benz and Chrysler, creating the third biggest carmaker in the world - after General Motors and Ford.

"We are creating the leading automobile company in the 21st century," declared Daimler-Benz's chairman Mr Juergen Schrempp.

Daimler-Benz and Chrysler have already identified joint projects that will cut costs by billions, conquer new markets and boost the profits of their already successful companies.

For example, Chrysler will soon stop developing diesel engines and instead take advantage of the German firm's superiority in this field. Mercedes will use a Chrysler plant in Austria to produce one of its models and Chrysler will supply low-price cars to Asia using Mercedes' highly developed distribution network in the region.

Within the next year, Daimler-Chrysler expects to save DM2.5 billion by jointly buying materials and parts, with savings rising to DM5 billion in the medium term.

Such figures ought to gladden the hearts of shareholders in the new company, if it were not for one more statistic - more than 70 per cent of mergers fail to achieve their objectives.

Some fail on account of power struggles at the top, a problem Daimler-Chrysler hopes it has solved by sharing control for three years before Mr Schrempp takes over as sole chairman. A bigger problem could lie in the conflict between Daimler's commitment to high quality and Chrysler's to low prices.

Mercedes developers may want to equip Chrysler models with their own, matchless technology but cost-conscious American customers could be unwilling to pay the price for such an improvement. Similarly, Chrysler managers will seek to use cheaper suppliers for Mercedes parts, a development that could damage the German brand's image of excellence.

"It will be damned difficult to bring them both together," warns BMW's Mr Pischetsrieder.

He argues that size alone is no match for strength and good economic sense and points out that larger companies are more difficult to steer out of a crisis.

Mr Pischetsrieder's cool head and clever diplomacy have won the coveted Rolls-Royce brand for his company at a fraction of the price he originally bid. BMW promises to increase production of the car dramatically from its present 2,000 a year, while VW hopes to produce 9,000 Bentley models a year by 2002.

Meanwhile, Daimler-Chrysler is developing its own luxury model called the Maybach, of which the company hopes to sell at least 1,000 each year.

The only blot on the luxury car landscape is a predicted down-turn in car sales towards the end of next year as the Asian crisis continues to bite and the United States' economy slows down.

This could mean a new millennium dawning on a lot of gleaming, luxurious machines in search of an owner with DM500,000 to spare.