Aug. 7 (Bloomberg) -- Continental AG, Europe’s second- largest vehicle-parts maker, is in discussions with Magna International Inc. over a venture to make turbochargers to tap growth in demand for more fuel-efficient cars, four people familiar with the situation said.

Magna, Canada’s largest auto components maker, and Hanover, Germany-based Continental would each contribute half of about 150 million euros ($215 million) in investments, said two of the people, who asked not to be identified because the negotiations are private.

Progress on the discussions has been hampered by Schaeffler Group, Continental’s biggest shareholder, which is seeking to become a partner without contributing capital, three of the people said. Relations between the two companies were already strained after Schaeffler tried and failed to oust Continental Chief Executive Officer Karl-Thomas Neumann last week.

Schaeffler, the second-biggest ball-bearing maker, wants to merge with Continental after its purchase of a 90.2 percent stake last year left the closely held company with 11 billion euros in debt. A Continental supervisory board meeting on July 30, which CEO Neumann had said would be devoted to business strategy, ended up dominated by disputes over his future.

The 20-member board is scheduled to convene again Aug. 12 to discuss Neumann’s role. The CEO advocates the turbocharger venture, and negotiations may be halted if he is removed next week, said two of the people.

Hannes Boekhoff, a Continental spokesman, declined to comment. So did spokesmen for Magna and Schaeffler.

Air Compression

The market for turbochargers, which compress air that’s fed into the cylinders to increase fuel efficiency, is growing three times as fast as the overall auto market, according to Alex Ismail, head of the Honeywell International Inc. division that makes the technology. The biggest makers of turbochargers are Honeywell, BorgWarner Inc. and Mitsubishi Heavy Industries Ltd.

“Continental is investing in a market with an enormous growth potential and in a product with a large profit margin,” said Aleksej Wunrau, an analyst at ING BHF-Bank AG in Frankfurt with a “strong buy” recommendation on the stock. Wunrau estimated that the global share of vehicles featuring turbochargers will expand to 70 percent to 80 percent within 10 years from 20 percent currently.

Herzogenaurach, Germany-based Schaeffler hasn’t developed its own turbocharger. It makes a so-called “variable valve- timing” technique that allows fuel reduction and would complement turbocharger solutions, one of the people said.

Technology Investment

Continental has already invested 50 million euros in developing turbocharger technologies as part of its 75 million- euro share in the venture, two of the people said.

It would work with the Magna Steyr unit of Aurora, Ontario- based Magna, one of the people said. The division, which has its headquarters in Oberwaltersdorf, Austria, builds specialty vehicles for carmakers including Bayerische Motoren Werke AG, Daimler AG and General Motors Co.’s Saab Automobile brand, in addition to making components.

Magna is one of the two remaining bidders for GM’s Opel division in Europe. The partsmaker’s 500 million-euro bid is financed by Russia’s OAO Sberbank and competes with an offer by Brussels-based investor RHJ International SA.

The Canadian company said today that it had a $205 million loss in the second quarter, compared with profit of $227 million a year earlier, as sales fell 45 percent to $3.71 billion.

Continental dropped 27 cents, or 1.2 percent, to 23.03 euros at the close of trading in Frankfurt, giving the company a market value of 3.9 billion euros. Magna lost 0.6 percent to C$51.06 at 11:52 a.m. in Toronto, valuing the manufacturer at C$5.8 billion ($5.4 billion).

To contact the reporter on this story: Cornelius Rahn in Frankfurt at crahn2@bloomberg.net; Andreas Cremer in Berlin at acremer@bloomberg.net.

Last Updated: August 7, 2009 11:53 EDT