Volkswagen, Suzuki: Joining forces

Volkswagen, Europe’s largest car maker, has bought 19.9 per cent stake in Suzuki Motor Corporation, Japan’s third largest carmaker, for $2.5 billion. Of course, Suzuki’s strength is in small cars and Volkswagen’s stated mission is to become the world’s largest car company, ahead of Toyota and General Motors. And that’s not possible unless you have a bevy of small cars in your portfolio. A full takeover would have given Volkswagen annual volumes of 4.4 million cars — way ahead of Toyota’s 3.5 million. At the moment, Volkswagen-Suzuki is merely an alliance.

Suzuki, on its part, will use half the money it gets to pay down debt and increase budgets for the development of low-cost, low-emission electric and hybrid cars. The other half will be spent on the purchase of Volkswagen shares. This will also give it access to Europe which is Volkswagen’s real strength — it gets almost 57 per cent of its business from there.

India will be a crucial element of the alliance. Suzuki owns 54 per cent of Maruti Suzuki, the country’s largest car maker. Volkswagen is well-established in China and is looking at growth in India — these two markets have recorded brisk sales, while the rest of the world market has been in pain for over a year now. It wants a 10 per cent share of the market by 2018 (its current share is negligible), and has brought in bestsellers like the Polo, Beetle, Jetta, Passat and Touareg. It has put up a production facility at Chakan near Pune which can produce up to 110,000 cars in a year.

But India is a small car market. This is where the Suzuki stake fits in. Clearly, Volkswagen has entered the alliance with an eye on India. After all, Maruti Suzuki is the crown jewel of Suzuki.

But what’s in it for Maruti Suzuki? While Suzuki has the technology for small and compact hatchbacks, Volkswagen will share its green expertise, which is being used to build hybrid cars, with Suzuki as part of the collaboration. “Volkswagen, which has a stronger dealership network in Europe compared to Suzuki, could source small cars from India and sell them under its own brand name,” Maruti Suzuki Chairman RC Bhargava told Business Standard a day after the deal was announced. Maruti Suzuki has a similar outsourcing deal with Nissan to produce 50,000 A-Stars for the European market (sold as Pixo by Nissan).

According to industry insiders, the deal also gives Maruti Suzuki access to Volkswagen’s diesel engines. It currently has diesel engines of up to 1.3 litres, while Volkswagen has the technology for diesel engines of higher displacement. “It is expensive to develop fresh technology and that’s what makes this deal a win-win situation,” says PricewaterhouseCoopers Leader (auto practice) Abdul Majeed. There are, it seems, no losers in this alliance.