Now Volkswagen Takes Nearly 20% of Suzuki

Less than a week after PSA Peugeot Citroen and Mitsubishi Motors confirmed that they are exploring deeper ties, another European automaker is teaming up with a Japanese partner. At a press conference in Tokyo on Dec. 9, Volkswagen (VOW:GR) and Suzuki announced a deal of their own which will see the German automaker take a 19.9% stake in Suzuki, paying $2.54 billion. In return, Suzuki will take a 1.3% share of Volkswagen in the transaction, which is slated to take place in January. The numbers involved are smaller than those believed to be under discussion at Peugeot and Mitsubishi, but industry watchers reckon the deal is more of a game changer. Suzuki could help Volkswagen close the gap on Toyota, the world's largest automaker: In 2008, Suzuki sold 2.36 million vehicles, making it the world's ninth-largest automaker, and Volkswagen, ranked third, sold 6.23 million vehicles. Toyota's sales were 8.97 million. "Suzuki and Volkswagen combined would have a significant impact on the industry," says Yoshiaki Kawano, an analyst at auto consulting company CSM Worldwide in Tokyo. Perhaps more important, while many have criticized the proposed tie-up between Peugeot and Mitsubishi, complaining that Mitsubishi is too expensive and lacking in share in important markets, analysts broadly welcome the alliance between Volkswagen and Suzuki. From Volkswagen's perspective, the deal has plenty to offer. Proponents point to Suzuki's market leadership in India, where the German carmaker remains a small player and where most major automakers are scrambling to ramp up production. Suzuki's Maruti Suzuki unit has been making cars there since 1983 and controls about half of the market. By contrast, Volkswagen sold only 16,000 vehicles in India from January to October. Meanwhile, in China, the world's largest auto market, Suzuki is relatively weak, while Volkswagen is the market leader. "In a partnership with Suzuki, Volkswagen can take a big step forward in emerging markets," VW chairman Martin Winterkorn told reporters at a press conference in Tokyo. A big cash influx for SuzukiThen there is Suzuki's small-car know-how. While small cars are generally less profitable, Suzuki has years of experience in the Japanese minicar segment, where it vies with Toyota unit Daihatsu for first place. "Our style is to make small cars while lowering costs, and I have confidence in that ability," Osamu Suzuki said at the press briefing in Tokyo. Indeed, thanks in part to its recent introduction of the Indian-made subcompact A-Star, Suzuki has doubled its European sales this year, to 91,000. That know-how in turning a profit from small vehicles has helped Suzuki's growth in India; it could now help Volkswagen as the German company seeks growth in other emerging markets. "The most attractive thing about them is their Indian franchise," says Chris Richter, an analyst at CLSA in Tokyo. "If they didn't have that, I don't think anybody would be busting down doors to get to them." The prospect of Volkswagen taking a near-20% stake in Suzuki will appeal greatly to the Japanese automaker. For one thing, because Volkswagen is buying the shares from Suzuki, the latter will receive a fresh influx of funds. Suzuki says it will spend about $1.1 billion on reducing debt and a further $1.3 billion on research and development. Another positive factor is that Volkswagen's presence will fend off unwelcome approaches from other automakers while Suzuki maintains a degree of independence. Volkswagen would need to take a 34% stake to wield a veto over Suzuki management decisions. By taking a noncontrolling stake, VW would have an alliance similar to that maintained between Suzuki and General Motors until 2006, when GM held a 20% Suzuki stake. "I don't think Suzuki wants to be a subsidiary of Volkswagen," says Tatsuo Yoshida, an analyst at UBS (UBS) in Tokyo. Suzuki CEO Osamu Suzuki "cleverly used GM," says Yoshida. "I expect him to repeat the same thing with VW." Further automotive deals ahead?One concern not addressed by the deal is Suzuki's weakness in hybrids and electric cars—an area where Volkswagen also lacks strength. Yoshida adds, however, that Volkswagen's technological prowess at making diesel engines is a significant benefit. "Overall, the deal is positive for Suzuki," he says. Another worry Suzuki and Volkswagen must address is what will happen when Suzuki's 79-year old boss, who once said he would "die in battle," decides to step down. Few auto executives are more committed. Currently in his second stint as President, Osamu Suzuki has spent over 50 years at the company and is married to the granddaughter of its founder. He even changed his family name from Matsuda to Suzuki. After the recent flurry of activity in Asia—as well as the two Japan deals, Shanghai Automotive and GM announced on Dec. 8 a plan to team up in India. Do additional deals lie ahead? In Japan, one possibility is Mazda (MZDAF). While Ford (F) remains a shareholder in the Hiroshima-based company, it cut its stake from 33% to 13% in November of last year. That led to several Japan-based Ford executives returning home as the U.S. automaker made it known that Mazda didn't figure prominently in its plans. "For a lot of designing and engineering, we're going to be focused on Ford," Mark Fields, Ford's president for the Americas, told Bloomberg News on the sidelines of the Los Angeles Auto Show on Dec. 3. "Our efforts will be focused on the Ford system, as opposed to relying on others such as Mazda." Even before the latest deals, many people in the industry considered Mazda too small to remain independent. Now that VW has followed Peugeot in announcing its Japanese partner, Mazda could be next in line. —With Makiko Kitamura and Yuki Hagiwara in Tokyo

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