You said it yourself, economic of scale. VAG manufacturing an electric hybrid system will install it in a wide range of cars across the entire concern and have spread the R&D costs. Very similar to what Toyota has done offering 4 hybrid(LS, GS, Prius and RX).
I do agree that MB and BMW have to form some sort of alliance or out source their hybrid technologies to some company that can supply to both of them.
The entire point of hybrids is to lower consumption and in that way cut down on fuel costs. So ask yourself this: Who is lower fuel consumption most relevant to an accounting assistant earning €40 000 per year driving a Audi 1.8 or an executive with an annual income of €260 000 who has a fully loaded S400 Hybrid on order?
Regardless of how innovative the S400 and the F01 hybrid are they are NOT fuel efficient car. No one who cares about fuel consumption would buy a car of that size with such an engine in the first place. People who don't life with excessive amount of disposable income buy small cars with engines of max 2.5L. Finally a hybrid concept that makes sense. This is the epitome of a fuel efficient car, a small four door hatch with a full hybrid engine. Like I've said in the past an SUV or S-class hybrid is like a Big Mac meal that come with a Diet Coke. The meal is less unhealthy but nonetheless miles away from healthy.
Can it be profitable? You can bet your ass it can. Just look at how many Golfs, Mini Coopers, A-classes and Honda Civics are sold. Stuff a hybrid under the bonnet of either and people would flock. In VAGs case it's even more interesting since there are about 4-5 cars in the concern that can make use of this engine.