REFILE-UPDATE 2-BMW, Hyundai in talks on engine alliance - source
* BMW, Hyundai may share engine development costs - source
* Hyundai denies holding cooperation talks
* Carmakers face enormous R&D costs to fulfil emission norms
By Hyunjoo Jin and Christiaan Hetzner
SEOUL/FRANKFURT, May 4 (Reuters) - German premium carmaker BMW and South Korean group Hyundai Motor are discussing a possible tie-up in engine development and other areas, a source with direct knowledge of the matter told Reuters.
"The talks are at early stages," the source said on condition of anonymity because the talks were confidential.
Another source told Reuters the two companies had discussed a comprehensive alliance, including jointly developing an engine and sharing development costs equally. He said he had no knowledge of whether the talks were still under way.
German industry publication Automobil Produktion reported on Thursday that Hyundai Motor Group chairman Chung Mong-koo's son and heir apparent, Chung Eui-sun, met top BMW managers in Munich to discuss sharing 1-2 billion euros ($1.3-$2.6 billion) engine development costs.
Neither carmaker would seem to need a deal - a recent global auto industry benchmarking study by Ernst & Young said Hyundai's 10.4 percent operating margin last year was only topped by the 11.7 percent earned at BMW.
BMW, developing a single engine architecture for all three, four and six-cylinder engines, has dismissed speculation it might look to add another technology partner beyond Peugeot , Toyota and possibly General Motors.
"Further co-operation partners are currently not foreseen," chief executive Norbert Reithofer told reporters on Thursday.
A spokesman for Hyundai Motor denied there were alliance talks or meetings between senior company officials, saying: "It is groundless".
Munich-based BMW would not comment on Friday.
The company has openly looked to sell BMW-built engines to rival carmakers and has a history of striking targeted, project-by-project cooperation deals that do not threaten its independence.
Analysts said some form of tie-up with Hyundai would yield benefits, since BMW's 1.6 million vehicle sales base means it lacks the scale effects of an Audi, which can share development costs with parent Volkswagen.
Developing a new generation of conventional and alternative propulsion systems that fulfil stricter EU carbon emission norms in 2020 and beyond are forcing carmakers to spend billions of euros on research and development.
"Even in the premium car industry you will find increased competition over costs. Enormous investments are required and BMW as a small carmaker relative to Volkswagen will be compelled to cooperate simply to save money," said Stefan Bratzel, Director of the Center of Automotive Management in Bergisch Gladbach, Germany.
"Hyundai is one of the most agile and dangerous competitors in the global mass market car industry today. But any strategic alliance with the Koreans would be tantamount to an earthquake since the Rover disaster still haunts BMW," he said, referring to the 1990s acquisition of the loss-making British carmaker that almost threatened BMW's very existence.
Last February, BMW agreed to expand its long-standing engine partnership with French mass market carmaker Peugeot beyond joint development of small four-cylinder petrol engines to include hybrid electric components.
But Peugeot has been struggling heavily to compete against the likes of Hyundai, losing money and burning billions in cash last year. It chose recently to enter an alliance with rival Opel's parent in the hopes of lowering costs.
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