Autos: Why Japan's B-Team Is Hot

Tokyo - This has been a tough year for Japan's automakers. Hobbled by the supercharged yen and weak global sales, most top manufacturers have lost money. Domestic sales, meanwhile, are off by 12%, the sixth straight year of contraction. Now Japan has suddenly become the epicenter of auto-industry dealmaking.

On Dec. 9, Volkswagen (VLKAY) said it will spend $2.5 billion for 19.9% of Suzuki. Six days earlier, PSA Peugeot Citroën (PEUGY) said it was looking into a partnership with Mitsubishi Motors. Many pundits think Mazda Motor could also be in play given that its longtime partner, Ford (F), has cut its stake to 11%, from 34%. Mazda says it hasn't made any decision on alliances.

The industry's real growth is likely to come from Asia's emerging giants, China and India. But Japan's second-tier players all have valuable production and research knowhow that is attractive to potential buyers. Unlike the Japanese, says Andrew Phillips, an analyst at KBC Securities in Tokyo, "a lot of Chinese companies are still at the stage where they are copying things."

While skeptics fret that Peugeot may overpay for Mitsubishi, the Japanese company has substantial expertise in electric vehicles; this year it became the first major automaker to introduce an electric car—its i-MiEV. Successful new Ford models such as the Fiesta, Focus, and Fusion were developed jointly with Mazda. And its factories, which can build many different-size models on a single production line, are among the most flexible in the industry.

The Japanese second string also comes with sales networks that could complement larger partners' weaknesses. Mazda has 859 dealers in North America and more than 2,300 in Europe. Mitsubishi, which makes the zippy Lancer EVO, has 400 U.S. dealerships and a loyal following among sports car buffs. And it would take years for Volkswagen to match Suzuki's 50% market share in India, where the German company has sold just 16,000 cars this year. "The point of partnering with Suzuki is to grab India," says Koji Endo, an analyst at Advanced Research Japan.

Few Chinese and Indian carmakers want or need strategic partners. Most of China's big state-owned automakers already have joint ventures with foreigners, and investors have bid up prices of private companies. "In the current environment, it is more likely that Indian and Chinese companies would buy Western companies than the other way round," says Ashvin Chotai, managing director of consultancy Automotive Intelligence Asia.

Both buyers and sellers should be wary, given that a previous round of dealmaking mostly foundered. General Motors (GM) in 2005 and 2006 sold stakes in Isuzu, Suzuki, and Subaru's (FUJHY) parent, and Daimler (DAI) sold a stake in Mitsubishi in 2005. But don't expect that to dissuade acquisitive auto chiefs. "Alliances are at the top of the agenda," said Volkswagen Chief Executive Martin Winterhorn in Tokyo on Dec 9. "And they are indispensable for competition."

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