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AUTO ALLIANCES: SUZUKI & VOLKSWAGEN
Why their marriage hit the rocks
Marriages between carmakers are not made in automotive heaven – the latest alliance to have soured is between Suzuki and Volkswagen. A formal divorce is awaited but Suzuki has already embarked on a new relationship with Fiat.
Issue Date - 13/10/2011
 
As Osamu Suzuki, Chairman & CEO, Suzuki Motor Corporation and Martin Winterkorn, CEO, Volkswagen AG, took the stage on December 9, 2009, industry watchers were all agog as they waited with bated breath for some game-changing announcement to be made. But nobody had a clue about what was to follow. Minutes later came the news that the German auto giant Volkswagen (VW) had bought a 20% stake in Japan’s Suzuki Motor Corporation, in a deal worth $2.5 billion. On the face of it the deal looked convincing and a winner for both the parties – Suzuki could get its hands on diesel technology from Volkswagen and in turn the German auto major could employ Suzuki’s small-car expertise to expand its presence in the Asian markets.

Cut to 2011 and both Suzuki and Volkswagen seem to have already given up on the deal. Much to the disappointment of both partners, nothing has moved over the past two years. Worse, relations between Suzuki and Volkswagen have begun fraying and trust between the parties has become the obvious casualty. In fact, in recent months the two players have even taken potshots at each other with Volkswagen claiming that Suzuki had breached a pact by agreeing to a diesel engine deal with Italy’s Fiat on September 11, 2011. That charge seems to have ruffled quite a few feathers in the Suzuki camp which, despite its conservative style, decided to hit back. Osamu Suzuki called a press conference on the next day itself to demand a “divorce” from VW. And the elderly chairman minced no words in giving vent to Suzuki’s concerns about becoming just another sub-brand in VW’s global empire. “I thought they understood that being a partnership of equals was important,” Suzuki remarked at the press conference, not without a hint of irony.

Industry sources believe that the alliance suffered a setback after Volkswagen referred to Suzuki to as an “associate” in its 2010 annual report released earlier this year. The report went on to add that Suzuki was an ‘associate over which Volkswagen has significant influence on financial and operating policy decisions.’ That definitely did not go down well with the Japanese automaker, which took it as an insult to its independent working culture. Recently, Suzuki sent a letter to Volkswagen setting September 30 as the deadline for the German automaker to revoke its statement about the breach of contract.

 
After Volkswagen bought out a debt-ridden Porsche in late 2009, many had expected the German automaker to go slow on M&As. But with its stated ambition to reach the No. 1 spot globally by 2018, Volkswagen wants to plug all the possible gaps in its strategy. But in the case of Suzuki, perhaps it could have done wth a bit more due diligence before pulling out the cheque book. “Co-operation never really got off the ground. Why? Not clear. Cultural issues, but probably also both partners want different things from each other. Clearly, VW saw itself in the leadership position which Suzuki did not want,” says Christian Breitsprecher, Equity Analyst, Macquarie Securities.

From hindsight it’s clear that the simmering differences between the two boiled over after Suzuki chose to opt for Fiat’s technology for its future product line-up. Industry experts contend that Suzuki took the right decision and that the Japanese carmaker’s interests will be better served through its technological tie-up with Fiat, at least till the time Suzuki does not come up with its own diesel technology. The question is: Will Fiat be a better partner for Suzuki than VW?

The problem with Suzuki-VW alliance is the size of the two organisations. With projected revenues of $148 billion in 2011, VW is a giant in the automotive universe, while Suzuki is just a small player with $18 billion in turnover. In fact, VW’s profits of $9.9 billion in 2010 were more than half of Suzuki’s entire turnover. Volkswagen has the resources to buy out Suzuki but considering the deepening rift between the two, that possibility appears remote at the moment. Volkswagen’s current 20% stake in Suzuki is not sufficient for attempting a buyout and it can increase its stake in Suzuki only if Osamu Suzuki wants to sell.

For now, selling Suzuki is not an option that the company is even thinking of. There are far more important issues for the Japanese carmaker to focus on. Apart from looking at a solution for the diesel technology, Suzuki needs a partner for developing modern drive trains that includes optimised internal combustion engines and electric mobility. Then there’s the question of succession plan for Suzuki. Considering the aging Osamu Suzuki, putting up a strong succession plan in place is the need of the hour for Suzuki Motor Corporation. The 81-year-old Suzuki has been heading the company that his wife’s grandfather founded for 32 long years now but says that his best days are ahead of him.

          

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