VW Gets Profitable Small Car Expertise, Access To India
Suzuki Gains Engine Technology
Volkswagen’s deal with Suzuki of Japan was warmly received by many investors, who immediately identified the arrangements as having that rare advantage; everybody wins.
“We see a strong strategic rationale for the partnership. Suzuki offers VW access to industry leading small car expertise and facilitates a future expansion in the Indian market. Simultaneously, Suzuki gains access to VW’s advanced powertrain knowhow, which remains prohibitively expensive for the relatively small operator,” said Nomura International analyst Dorothee Cresswell in a report.
VW has said the Indian market is set to expand almost 130 per cent between 2008 and 2018, making it the highest growth region in the world.
“Suzuki enjoys a market share of over 50 per cent (in India), while VW controls less than one per cent of the market,” Cresswell said
“We think the strategic rationale behind the deal, which likely involves a cross-holding in VW shares by Suzuki, is convincing,” said UniCredit analyst Christian Aust.
Under the terms of the deal, VW will buy a one-fifth stake in Suzuki Motor for $2.5 billion. Suzuki will invest some of the proceeds in buying a 2.5 per cent stake in VW’s equity.
Bernstein Research analyst Max Warburton said this will help VW because it continues to struggle with the economics of small car production in Europe and emerging markets, while Suzuki has an exemplary record of making small cars profitable and enviable emerging markets exposure.
“Suzuki has great strengths in small cars but lacks strong expertise in electronics, diesels, hybrids and medium and large cars. It has also struggled to build a strong position in Europe, and ever since problems with the roll-over performance of its small SUVs in the U.S., has barely hung on in North America. A partnership with VW would arguably give Suzuki access to technology and better geographical distribution,” Warburton said.
There were some cautionary thoughts about though.
“They may be a good strategic fit at a time when the recession and environmental regulation are making all car makers reassess their business models. But they are also fiercely independent family companies, which may make any benefits more difficult to deliver,” said the Wall Street Journal’s Heard on the Street column.
But Deutsche Bank was positively downbeat about the deal.
- We see the scale of the investment as limited. With no previous cooperation a cautious approach is understandable, but the relationship is unlikely to bear fruit in the near term.
- We wonder if VW’s approach to environmental technology will be suited to Suzuki, given its low cast, weak brand position in developed markets.
- Uncertainty over future business with other partners in European plants.
- We see limited scale for immediate purchasing cost reductions given respective geographic concentrations, the bank said.
Soon after the deal was announced, a newspaper report from Bangalore, India, said VW and Suzuki would develop a small car for India costing between $4,300 and $5,400, replacing the big selling Suzuki Alto. The report said the car would be destined for Europe, where it would fit in below the new Up, priced at about $8,800, the report said.
Neil Winton – December 15, 2009
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