VW to Acquire 19.9% Suzuki Stake

Volkswagen (VW) has confirmed that it is in talks with Suzuki to acquire a 19.9% stake the Japanese carmaker, which specialises in small passenger cars and "kei-class" minivehicles in the Japanese market. A Financial Times (FT) report stated that VW had agreed to work towards forming a "comprehensive partnership" as both companies had decided that their strengths made them a perfect fit. Reuters reported that VW has agreed to pay Suzuki ¥225.5 billion (US$2.5 billion) for the stake. The companies' chief executives Osamu Suzuki and Martin Winterkorn are set to brief the press on the deal in Tokyo this morning. Meanwhile VW released a press statement in which Winterkorn was quoted as saying, "Two of the world's leading carmakers are joining forces and preparing to meet the growing challenges that lie ahead. Together we can maximize our opportunities for growth." Suzuki will sell the 19.9% stake to VW and will then use half the proceeds to buy shares in VW in a cleverly structured deal which should cement the symbiotic ties between the two carmakers and underpin the stock market value of both companies

It is somewhat surprising that a deal has been reached so quickly between VW and Suzuki and Martin Winterkorn denied initial reports of a collaboration between the two companies first reported by IHS Global Insight back in June. (see Germany - Japan: 26 June 2009: VW Considering City Car Project with Suzuki and Acquiring 10% Stake in Japanese OEM—Report) The transaction is now expected to be finalised by January 2010. VW outlined the rationale behind the acquisition in its statement, which said, "As demand continues to rise for smaller cars and for powertrains with higher fuel efficiency and lower CO2 output, Volkswagen and Suzuki will offer a compelling solution for customers in emerging markets buying a car for the first time and also for customers in advanced economies seeking to lower their CO2 footprint while still enjoying the freedom of transport offered by an exciting range of cars." The deal follows on from last week's announcement of talks between Mitsubishi and PSA Peugeot-Citroën over the possibility of cementing a global alliance, although this deal remains at the discussion stage (see Japan - France: 3 December 2009: PSA Peugeot-Citroën, Mitsubishi in Strategic Partnership Talks). It appears that this round of merger talks and cross holdings means that there is still significant scope for consolidation in the global automotive industry and that the smaller players in Asia are understanding the need to secure their future through a significant alliance with another major OEM.

Outlook and Implications

There is little doubt that VW is looking to address one of its few remaining major structural weaknesses in units global sales footprint, namely South-East Asia, Japan and India, where Suzuki has a strong presence. The alliance will potentially give VW access to production facilities in the region and will allow access to significant additional R&D resources to expand its model range in these markets. There could also be some form of collaboration in the Indian market, where VW has established its own manufacturing presence (see India: 1 April 2009: Volkswagen Inaugurates New Indian Plant) and in which Suzuki is the leading carmaker as a result of its 54.2% majority stake in Maruti. Suzuki stands to benefit from VW's advanced low-emission powertrain technology represented by its BlueMotion range of vehicles, while it will also gain access to the huge development resources the VW Group has been dedicating to alternative powertrain technology, such as hybrids, clean diesel and hydrogen fuel cell vehicles, as well as VW's recently established electric passenger car division. While it is too late for Suzuki to have significant input into VW's forthcoming Up! city car, it is likely that VW and Suzuki could collaborate on a new kei car/A–segment platform that could form the basis of the next generation Up! and a new Suzuki city car, or indeed a new budget global A-segment car, which could serve the Asian and South American markets.

There appears to be much to commend the proposed alliance between VW and Suzuki, with the deal addressing notable weaknesses in what are otherwise two very sound organisations. Suzuki arguably needs a major OEM alliance partner to give it the scaleability and access to expensive alternative powertrain technologies, and VW's global footprint has been lacking in Asia and in the field of small car design. Aligning itself with a financially robust global OEM that is actually currently growing its global market share would be a smart move for Suzuki in terms of underpinning its future growth prospects and R&D capabilities. If it is administered correctly and the German and Japanese management cultures can be successfully blended there is no reason why the alliance will not be a success. While there is currently no suggestion that VW will eventually enact a takeover of Suzuki, it is something that VW may look at further down the line. The acquisition of the Suzuki stake takes VW a step closer to realising its "Strategy 2018" goal of overtaking Toyota as the world's biggest carmaker by sales volume. If the VW Group's and Suzuki's global sales volumes forecast by IHS Global Insight for 2009 are combined, they come to 8.14 million units, comfortably in excess of the 7.04 million units forecast for Toyota in 2009. With VW only this week completing a 49.9% stake purchase in Porsche, the company is increasing its footprint in terms of covering all segments of the global passenger car market, while also increasing its geographical market reach. However, the company's senior hierarchy must be wary of spreading its management focus too thinly and over committing itself financially. However, the cross-holding structure of the deal with Suzuki appears to be a partial safeguard against that particular pitfall.