Volkswagen CEO Matthias Mueller addressed the company's annual news conference in Wolfsburg on March 14. Picture: Fabian Bimmer / Reuters.

Wolfsburg - Volkswagen left the door open to potential tie-up talks with Fiat Chrysler on Tuesday, as a drop in operating profit at its core brand showed the challenges it still faces 18 months on from its emissions scandal.

The German carmaker is likely to face heightened competition in Europe after Peugeot-maker PSA recently agreed to buy General Motors' European division (Opel and Vauxhall) to create a stronger second player in the region behind VW.

Fiat Chrysler boss Sergio Marchionne said last week that the deal might eventually persuade VW to seek a tie-up with his own company, a suggestion that was swiftly rejected by VW.

But in an apparent change of tone, VW CEO Matthias Mueller on Tuesday hinted that he might be open to new partnerships.

"I never said that a liaison with any other partner is ruled out once and for all, but I only said that there is no contact at the moment between myself and Mr Marchionne," he told reporters as VW presented its detailed 2016 results.

"It would be very helpful if Mr Marchionne were to communicate his considerations to me too and not just to you," he added.

VW brand struggles

VW said last month that it made a record group operating profit in 2016, excluding one-off items, helped by a strong performance from its Porsche sports cars and a turnaround at its Scania trucks business.

Breaking down the figures for the first time, the company said on Tuesday underlying operating profit at its VW brand fell 10 percent, with the profit margin slipping to 1.8 percent from 2 percent in 2015.

The group said a dip in revenues and higher marketing costs as a result of the September 2015 admission that it cheated US emissions tests on diesel engines were factors in the declines.

Although the group as a whole has bounced back from the scandal, and overtook Japan's Toyota last year to become the world's biggest selling carmaker, analysts view a turnaround at the VW brand as key to its prospects.

The brand accounted for almost half of 2016 group revenue, but only just over 10 percent of underlying operating profit.

'Don't waste time'

"In times where most other car companies are improving efficiency and shaping the industry, VW needs to be very mindful not to waste any more time with internal power struggles," Evercore ISI analysts said in a research note to clients.

Mueller said VW was "back on track" after agreeing to spend up to $25 billion (R327bn) in the United States to address claims from owners, environmental regulators, states and dealers over its emissions scandal.

"You can rest assured that we will do everything in our power to make 2017 an even better year than 2016," he said at the 12-brand group's annual news conference.

He reiterated forecasts for a rise of up to 4 percent in sales revenues this year and a group profit margin of 6-7 percent versus 6.7 percent in 2016, and said the group was capable of shouldering its emissions scandal costs.