VW-Suzuki Alliance Unraveling Over Control of Driver Seat: Cars

A tiff that started over Volkswagen AG’s description of Suzuki Motor Corp. in its annual report has escalated into a spat threatening to unravel the two automakers’ planned alliance before the partnership ever gets going.

“Volkswagen is not talking to us,” Osamu Suzuki, the Hamamatsu City, Japan-based company’s chairman, said in an interview. “We have no plans to talk to them.”

The downward spiral began in March when VW said in the report that it could “significantly influence financial and operating policy decisions” at Suzuki, describing the Japanese company as an “associate.” That didn’t sit well with Suzuki.

The two since then have engaged in a public feud that has brought to a halt VW’s efforts to turn a 222.5 billion-yen ($2.9 billion) investment into an operational alliance. The partnership was meant to combine Suzuki’s leading position in India, Asia’s second-fastest growing major economy, with Volkswagen’s global reach as the world’s third-biggest carmaker.

When the deal was signed in December 2009, with VW taking a 20 percent Suzuki stake, the companies said they intended to cooperate on technology, including hybrids and electric cars, and expansion in emerging markets. Almost two years later, no joint projects have begun.

VW, which forecasts deliveries will rise 5 percent this year after selling 7.2 million vehicles in 2010, aims to surpass Toyota Motor Corp. and General Motors Co. as the world’s largest carmaker by 2018 and is targeting India as an expanding market to boost sales. Suzuki, which sold 2.64 million cars in its last fiscal year, delivered 1.13 million of those vehicles in India. VW sold 53,300 cars in the country in 2010.

Partners Needed

“Suzuki really needs a big manufacturer behind it, so the effect of a withdrawal would be far worse for them,” said Aleksej Wunrau, a Frankfurt-based BHF Bank AG analyst. “Volkswagen could very well step back from Suzuki and either seek another partner or start afresh on their own in Japan and India, which would of course be a lot more expensive.”

VW shares have gained 64 percent since the partnership was announced on Dec. 9, 2009, valuing the Wolfsburg, Germany-based carmaker at 46.1 billion euros ($65 billion). Suzuki has dropped 33 percent, giving Japanese company a market capitalization of 860 billion yen ($11.2 billion).

Osamu Suzuki hasn’t found any VW technologies he’d like to adopt following an extensive review of what they have to offer, he wrote in a Nikkei newspaper column in July. Instead, he decided in June to buy diesel engines from Italy’s Fiat SpA for cars built in Hungary. Suzuki in July also said the automaker was open to forming alliances with others.

Fiat Snub

The moves have left VW baffled, with the carmaker now of the opinion that Suzuki has rolled back the partnership to square one by keeping its German ally in the dark about the Fiat plans and its intentions to seek alliances with rivals, according to a person familiar with VW’s thinking, who declined to be identified discussing private matters. VW Chief Financial Officer Hans Dieter Poetsch on a July 28 conference call said the partnership is under “review.”

“VW and Suzuki still are, and will continue to be, two independent companies with different business models from different cultural environments,” Hans Demant, VW’s coordinator for international projects, said in an e-mailed statement. “The cooperation is marked by highest respect and acceptance.”

A successful relationship depends on an understanding that the two are equal partners, according to two Suzuki executives, who declined to be publicly identified discussing the matter. The company is aiming to clarify what direction it wants to take with the partnership by October, one of the executives said.

Indian Attraction

“Volkswagen keeps talking to the media, but not to us directly,” Chairman Suzuki said in the Aug. 10 interview.

Volkswagen Chief Executive Officer Martin Winterkorn said in May the automaker planned to target the small-car segment in India as a potential joint project with Suzuki, as well as parts procurement and development of alternative-drive technologies.

While Suzuki has a dominant position in India, where its Maruti Suzuki India Ltd. unit is the market leader, increasing competition means holding onto the top spot will become harder. VW’s global reach and product portfolio, with more than 60 models at the namesake brand alone, could help.

Maruti Suzuki will sell 36 percent of the 3.07 million vehicles delivered in India in 2011, IHS Automotive estimates. Overall sales in the market will climb 76 percent to 5.41 million in 2016, with Maruti Suzuki nabbing 25 percent, according to IHS forecasts.

GM Alliance

The German automaker remains convinced of business opportunities for both sides, according to the person familiar with VW’s thinking. A report by German newsletter Platow Brief on Aug. 5 that VW and Suzuki will terminate the alliance “is nonsense,” VW spokesman Michael Brendel said. Suzuki’s intention is also to salvage the relationship, said one of its executives who declined to be identified.

Suzuki previously had a 27-year equity alliance with GM, which resulted in joint product development and global purchasing. The partnership ended as GM headed toward bankruptcy. The Detroit-based carmaker sold a 17 percent stake in 2006 to raise $2 billion and strengthen its balance sheet. It unwound its remaining 3 percent stake in 2008.

The lack of progress in the new cooperation with Volkswagen contrasts with what Mitsubishi Motors Corp. and PSA Peugeot Citroen have achieved, said Masatoshi Nishimoto, a Tokyo-based IHS auto analyst.

Starting Over?

Mitsubishi and Peugeot began a partnership in 2005 when the Japanese carmaker began supplying a car based on its Outlander sport-utility vehicle to its French partner. Since then, they’ve built a factory together in Russia that started operating last September, and Peugeot in 2010 announced it would sell electric cars supplied by Mitsubishi.

“That partnership has resulted in many joint models; it’s been working very well,” Nishimoto said. For Suzuki and VW, “the alliance hasn’t benefited either company in any significant way so far.”

Volkswagen and Suzuki originally planned to work together to develop hybrid and electric cars to sell under both car brands, and set up offices at each other’s headquarters. Before any of that can happen, they need to figure out whether they still want to work together.

“The question is whether they can really start again with a clean slate,” Wunrau said. “Can they start over?”

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