Facing a drawn out battle to complete their long-planned integration, Volkswagen and Porsche will forge ahead with tighter manufacturing links that could deliver hundreds of millions of euros in annual savings.

Unresolved tax and legal issues since the companies pledged to merge almost three years ago shifted the focus to operational integration. Porsche will start building its revamped Boxster roadster at a VW factory in Osnabrueck, Germany, in September and add a new version of the hardtop Cayman to the plant next year - the first Porsche models to be fully assembled at VW.

Porsche started sending engineers to Osnabrueck from its traditional Zuffenhausen base in Stuttgart last autumn to train staff at the mass-market manufacturer on how to assemble luxury vehicles. The sports-car maker is widely known for lean production techniques that companies including aviation group Deutsche Lufthansa and steelmaker ThyssenKrupp seek to emulate.

Production of Porsche models at the Osnabrueck facility will be restricted to vehicles that cannot be made at the Zuffenhausen plant for capacity reasons.

Surging demand for the overhauled 911, which shares an assembly line with the Boxster and Cayman, is causing bottlenecks at Porsche's main factory, where capacity is limited to between 35,000 and 40,000 vehicles a year, Porsche sales chief Bernhard Maier told Reuters.

"We're reaching the limits of our capacity," Maier said. "We need to expand."

For VW, whose brands include luxury division Audi, operational integration doesn't stop at handling overflow production of Boxster and Cayman models. The Wolfsburg-based car manufacturer already makes the bodies for the Cayenne SUV and Panamera sedan, Porsche's two best-selling vehicles, at its plants in Bratislava and Hanover.

The Cayenne is based on the same technology platform as the VW Touareg and the Audi Q7, while Porsche's next model, the Macan compact SUV (to be sold from 2014), will share the same underbody as the Audi Q5.

"Joint production is part of VW's broader strategy to wring out more profit by sharing development, manufacturing and component costs across its multiple brands," said Christoph Stuermer, Frankfurt-based analyst at research firm IHS Automotive.

Manfred Titgemeyer, acting partner at Titgemeyer, an Osnabrueck-based company that makes fastening technology and body panels for companies including VW, said: "Porsche will be a boon to our business. The Boxster will be only the first of a number of new models here."

VW and Porsche agreed to merge in August 2009 after Porsche, which produces fewer cars in a year than VW does in a week, racked up more than 10 billion euros ($12.61 billion) of debt in a botched attempt to buy its larger competitor. VW then turned the tables, acquiring 49.9 percent of Porsche for 3.9 billion euros in December 2009.

Since the merger was dropped last year over pending legal risks from lawsuits by short sellers in the United States, relating to Porsche's attempted takeover, the companies have been seeking ways to avoid a tax bill as high as 1.5 billion euros, which would kick in if VW were to buy the second half of Porsche before August 2014.

A notification from regional tax authorities published this month suggests that VW would soon be able to complete the deal with zero costs thanks to a tax loophole. Critics are now urging the German government to scrap the tax break.

As Porsche keeps shouldering about 1.5 billion euros of debt, the car makers are keen to join forces as soon as possible because they are wasting around 700 million euros a year on idle synergies in purchasing and development, VW has said.

Osnabrueck, the second-smallest of VW's ten German plants and which currently builds the drop-top version of the best-selling Golf hatchback, faces booming demand for two-seater Porsche models.

However, building Porsche cars outside Porsche factories could be anathema to core customers, said Porsche's top labour representative Uwe Hueck, noting that the 911, the company's flagship model, will always stay in Zuffenhausen.

"We would have a problem if we were to change that," Hueck said. "You don't buy a diamond at (grocer discount chain) Aldi, and Zuffenhausen effectively is the jewellery store of Porsche."

VW's Audi division, the main challenger of BMW for the luxury-car crown, pools production of the three top-selling models A4, A6 and A3 at its two main Germany-based factories, said spokesman Joachim Cordshagen, stressing that Audi is able to adjust worker shifts rapidly if required. "Capacities always have their limits and flexibility is the name of the game," he said.

Meanwhile, VW supplier Bergmann, like Titgemeyer, expects higher orders to result from the VW-Porsche alliance. Bergmann, based in Meppen, 74km (46 miles) northwest of Osnabrueck, assembles engine parts for luxury auto makers.

"VW and Porsche offer tremendous business opportunities," said Hermann Jungsthoefel, the company's deputy managing director. "We can barely wait for them to complete their marriage." ($1 = 0.7889 euros) (Editing by David Goodman)