An auto alliance that finally makes sense

(Fortune) -- The joint announcement Wednesday by Daimler CEO Dieter Zetsche and Carlos Ghosn, CEO of Renault-Nissan that the three companies will cooperate on various technology and product initiatives opens the door to a whole new chapter in the history of the auto industry.

The old business model, in which companies could expect to compete effectively solely by using their own resources is under attack. The costs of developing new models, meeting exhaust emission and fuel economy regulations, and integrating new technologies has simply gotten too high. Automakers large and small in Western Europe and Japan, as well as China and India, are seeking creative ways to meet the demands of this capital-intensive business.

Mere size will no longer be the determining factor in success. Automakers will have to demonstrate their scale of technologies and expertise through alliances and agreements.

Carlos Ghosn is a past master at this, having created the alliance model in 1999 to join Renault and Nissan. Nissan has thrived under the deal, though Renault has been dragged down by the weak European market.

Dieter Zetsche is new to the game. But having lived through the disastrous merger of Daimler-Benz and Chrysler, he presumably has a few opinions about how auto companies should cooperate that don't involve the complete integration attempted by Stuttgart and Detroit.

Important details about the linkup among the three companies will emerge. But it is clear that there are abundant opportunities for cooperation.

Daimler badly needs engines and platforms for small cars so that it can meet EU CO2 requirements and CAFE regulations in the U.S. Nissan's battery technology, especially as found in the new Leaf, should be particularly welcome.

At the same time, Daimler can offer ideas from Mercedes about rear-wheel drive platforms and brand management to Renault-Nissan's struggling luxury car operations. And it can share knowledge about its world-class Blue-tec diesel engines.

Each company has tried other partnerships that failed to materialize. Renault-Nissan flirted with General Motors in 2006 but couldn't strike a deal. Daimler has talked with Peugeot Citroen and Fiat.

Wednesday's deal has already been preceded by a linkup between Volkswagen and Suzuki, and Fiat's assumption of an ownership stake in Chrysler. Innovative initiatives like Wednesday's three-way hookup will likely be followed by copy-cat deals, as automakers race to sign up partners before the music stops, like so many participants in a game of global musical chairs.

Meanwhile companies like Ford and Honda that make a virtue of their ability to focus on a single brand or develop their own technology will be tested in this new environment.

But arrangements that look good on paper don't always produce lasting results. Those with long memories will recall a partnership between Ford and Nissan from 1993 to 2002 to make mid-size minivans that were branded Mercury Villager and Nissan Quest at a Ford plant in Ohio. After two product generations, the arrangement was quietly terminated.

More recently, GM and Toyota dissolved their agreement of more than two decades to build compact cars at a plant in California known as NUMMI. A post-bankruptcy GM could no longer afford the cost premium that came from operating an assembly plant on the West Coast.

Both CEOs find themselves under stress. Zetsche will strive to protect the exclusivity of the Mercedes brand while Ghosn will be working to ensure that Renault-Nissan gets is fair share.

The real key to making this alliance work will be the sincerity of the participants and their ability to put aside old grievances. Each side taking a small equity position in the other will force them to put their money where their mouth is.