Volkswagen (VW) is the world’s fourth-largest carmaker, a multi-brand colossus with a third of a million employees building nearly six million cars each year in factories from Brazil to China. Porsche is ranked 37th; its 12,000 employees build around 100,000 cars annually. Yet by the end of this year, Porsche is likely to take control of VW in the industrial coup of the decade.

To those outside the car industry, it must seem a baffling deal. There is financial and industrial logic to it, but like so many other dramatic developments in the European car industry it’s as much to do with personalities as it is to do with profit and loss. In this case we’re talking about some of the strongest personalities this industry has ever seen, and the realisation after 80 years of the dream of Porsche’s greatest dynasty.

The only obstacle to Porsche taking a 51% stake in VW is Germany’s “Volkswagen law”. Passed in 1947, it caps the voting rights of any single shareholder at 20% and gives a veto to any shareholder with a 20% stake. The law has helped to preserve VW’s status as a welfare state on wheels. Until now the largest shareholder has been the German state of Lower Saxony, where VW is based, with just over 20%. The Volkswagen law meant that the generous pay and conditions deals given to employees working at the firm’s vast Wolfsburg plant couldn’t be threatened by corporate raiders, for whom the group’s famous but often sluggish and underperforming brands would otherwise have been very attractive.

The European Commission has made it clear that it considers the Volkswagen law to be at odds with EU law, and the legislation is likely to be struck down by the European Court of Justice by the end of the year. Porsche has already increased its stake to 31% in advance of the judgement; acting together with Lower Saxony, it will be able to protect VW from a private equity takeover when the Volkswagen law falls. But Porsche itself is expected to move quickly to take a majority stake in VW; it is believed to hold options that will give it a 51% stake if exercised, and some analysts believe it will buy up to 70%.

But how did Porsche come to be able to afford VW, and why does it want its vast German neighbour? When Porsche made Wendelin Wiedeking its CEO in 1993 – he was just 41 years old at the time – it was losing €150m each year and building just 14,000 cars annually, a third of its output at the peak of the mid-1980s boom. Wiedeking transformed the company, managing to slash costs and dramatically increase output but without sacrificing the quality for which Porsche is famous. Under his leadership, Porsche has posted 13 years of record profits and become the world’s most profitable carmaker by volume. It now makes around 100,000 cars each year and is expected to report a profit of around €3.5bn for the year to 31 July, up two thirds on last year.

While Porsche is plainly on a roll, VW was on the slide in 2005 when the sports car firm began building its stake. Declining profits, flat demand in its home European markets, heavy losses in America and a series of lurid scandals in which union leaders were alleged to have been bribed with prostitutes, Viagra and nights at the George V in Paris had depressed VW’s share price. Wiedeking’s stated reason for buying into the company is that it is a major supplier to Porsche and cooperates with it on some new models and technologies; officially, Porsche wants to protect an important supplier from takeover and deepen cooperation between the two firms.

There is some logic to this; Porsche’s Cayenne off-roader was developed alongside the VW Touareg, with VW absorbing the bulk of the development costs, radically increasing Porsche’s profit margin on its version. Premium Porsches can’t be seen to be too similar to proletarian Volkswagens, but with “invisible” electronic systems accounting for up to 40% of the value of a new car, cooperation can bring huge economies of scale without customers ever knowing.