VW-Suzuki Deal
12:09 AM
| VW-Suzuki Deal : Small is Beautiful The deal between Germany's VW and Japan's Suzuki Motors only reaffirms the fact that small cars hold the key to the survival of the global automakers. On December 9, 2008, European auto giant Volkswagen AG—which makes such marque brands as Beetle, Golf and Passat, besides boasting of several others like Audi, Skoda and Bentley in its kitty through its holdings in various other group firms across the globe—announced its intention to pick up a 20% stake in Suzuki Motors, Japan's leading automaker, which controls more than half of the passenger car market in India through its Indian subsidiary Maruti Suzuki; the Japanese automaker will in turn own 2.5% stake in VW through cross shareholding valued at around $1.13 bn. The part acquisition boosts VW's India entry, as it aims to topple Toyota to emerge as the world's largest automaker. The acquisition fits perfectly into the scheme of things at VW, which is aiming to bootstrap its presence in the small car market in India, selling 1.6 million small cars in 2009 alone. According to industry estimates, small cars account for over three-fourths of all cars sold in India. With the demand for cars in the developed economies receding to an all-time low, automakers are shifting their focus to emerging economies, particularly China and India. Above all, one could say, one single event that has attracted the attention of global auto biggies is the resounding success of Tata Nano, which was launched last year. However, cracking the market for small cars would not be easy. Also, the rush for small cars is not a new one. In fact, in the 1990s, the country witnessed a similar frenzy among global auto giants such as South Korea's Daewoo and Hyundai and Italy's Fiat, among others, to tap the growing demand for small cars in India. But of all, only Hyundai could succeed, as Fiat, after initial failure (Uno failed to click with the Indian buyers), has now partnered with Tata Motors in its second attempt, while Daewoo, which filed for bankruptcy a few years back, sold its successful small car Matiz to GM, which rebranded and relaunched it in the Indian market a couple of years back as Chevrolet Spark, the best-selling small car from the GM stable in the Indian market. According to analysts, creating small and compact cars demands access to new technologies and cost management skills, which is only feasible with the alliance between Indian and foreign counterparts to jointly develop in India. Given that, a section of analysts believe VW's $2.5 bn deal with Suzuki to be a game changer for the global car majors, which are struggling to cope with technology issues, on the one hand, and stringent environmental regulations, on the other, to deliver fuel-efficient vehicles. When coopetition, not competition, matters The VW-Suzuki deal aims to solidify the alliance between two culturally different entities. Going ahead, both the players look to leverage on areas like production, distribution and development of more environment- friendly vehicles through cross-technology partnerships, while focusing on next generation electric and hybrid vehicles that are more fuel-efficient and low on emissions. According to the two firms, in terms of global presence and product diversity, the partnership marks an important step towards their future, while in terms of product portfolio, global distribution and manufacturing capacities, Volkswagen and Suzuki ideally complement each other. The companies plan a joint approach to the growing worldwide demand for more environment- friendly vehicles. Suzuki's Indian subsidiary, Maruti does over 30% of the global sales by its parent company, and the Japanese parent expects its Indian arm to play a pivotal role in promoting its "World Strategic Models" to drive long-term growth. VW, the world's third largest automaker, will bank on Suzuki's prowess in making its micro and subcompact car, a category in which it has been struggling to find success for a long time. On its part, having VW as a dominant stakeholder would give the Japanese counterpart access to the much-needed array of VW technologies, such as its diesel power trains and electronic capabilities, besides giving it a strong hold in Europe and China. VW has a little presence in the US, with 2% market share. Besides, the deal will also enable Maruti Suzuki to directly import diesel power trains for its popular models like Maruti Swift and Dzire. According to analysts, the Indian subsidiary of Suzuki currently sources diesel engines from Fiat through a three-way partnership with GM and Fiat, which, however, is set to expire as soon as the deal materializes with VW. The US auto giant General Motors Corp, which remained world's top automaker from 1931 to 2007, lost its supremacy to Toyota Motor Corp in 2008 as the world's top automaker. VW is now aiming to unseat Toyota as the top automaker by 2018 by aligning with Suzuki Motor Co, which also gives it an entry into India's booming car market. "Eight to ten years from now, we want to become No. 1 in the world and I believe that we'll be able to accelerate that into happening with cooperation with Suzuki," said Martin Winterkorn, CEO, VW. Auto analysts believe that the two players would aggressively exploit each other's expertise in clean technologies like electric and hybrid versions to launch more futuristic models under respective brand names. Further, as both the partners have shown interest in developing cars through common platforms, it will enable VW to use Suzuki's existing platforms in India and Japan to export to Europe. To begin with, VW has invested around $850 mn in Suzuki's Indian subsidiary Maruti-Suzuki' s plant in Pune and has started to roll out its Polo models in India. The start of Polo's production in India "marks a milestone in our journey together into a successful future for the Volkswagen Group in India," said Jochem Heizmann, a member of the company's management board. With car sales zooming past 61% y-o-y in November 2009, it holds `enormous potential' for Volkswagen, he added. Currently, the Pune plant has the capacity to produce 110,000 cars annually. The two partners are also expected to jointly develop a small compact in the near future. Volkswagen AG, which runs 10 different brands from Audi, Seat, Skoda and Porsche AG, in which it recently acquired a 49.9% stake for 3.9 bn euro ($5.8 bn), has presence in US, Europe and China. However, it has struggled to indigenously develop small cars and grab market share in emerging economies like India and Southeast Asia, which is less than 2%. "Volkswagen is like a department store carrying everything from luxury brands to truck makers," said Koji Endo, Managing Director of Advanced Research Japan in Tokyo. "What they're missing is any presence in India and Southeast Asia. The point of partnering with Suzuki is to grab India." While Global auto giants Toyota and Honda are struggling with declining demand and rising inventory costs, which is further eroding their profits, the inorganic route might be an advantage for VW, as it intends to lower entry costs through associating with domestic vendors in India. Currently, VW imports around 85% of the parts for its cars and acquires only 15% from the local vendors. With this deal materializing, VW intends to improve localization, giving it an advantage over Toyota and Honda in the long run. "VW has a poor vendor base in India and Maruti-Suzuki has the biggest number of equipment suppliers," said Ashok Taneja, MD of Sriram Pistons. "With this alliance, VW gets ready-made platform and vendors get additional volume," added he. Alliances, the way to go As demands continue to wane in the developed markets, more and more auto biggies are now chasing the emerging market growth story. For instance, many foreign players are partnering with auto companies in India to exploit the low-cost factor from procurement of raw material to production and distribution of the compact cars to Europe and other parts of the globe. Analysts believe that in the coming years, India would transform itself into an auto manufacturing hub with foreign auto giants either establishing their shops in India or partnering with the Indian peers to develop micro and subcompact cars inexpensively and profitably, benefitting each other in the long run through joint R&D efforts. A case in point is the latest tie-up between General Motors and Chinese SAIC. The two firms have formed a 50:50 joint venture to produce small cars in the Indian subcontinent. While GM will contribute through its existing factories and distribution network in India, China's biggest carmaker SAIC will invest up to $350 mn in cash and other assets to jointly develop minivans and pick-ups along with another Chinese partner, Wuling, apart from developing ultra-cheap cars. Experts say that partnerships such as this are expected to be the game changer for the auto industry, with more players expected to follow the inorganic route. "The automobile industry is going through a fundamental shift," said Winterkorn of VW. He added, "Alliances are at the top of the agenda and they are indispensable for competition. The global crisis has speeded up this reorganization. " Italian automaker, Fiat, has a successful partnership with Tata Motors. The tie-up has worked well so far for the former, as the Italian automaker registered a 50% sales growth, thanks to the wide network presence of India's most trusted brand. And the trend is set to continue, with heavy vehicle manufacturers like Ashok Leyland partnering with Nissan to jointly develop trucks and France's Renault partnering with Mahindra to manufacture mini-trucks and heavy vehicles.  With more and more foreign players focusing on tie-ups with Indian auto companies, this is expected to boost the business opportunities for existing auto ancillary manufacturers and suppliers like Rane Steering and Amtel Auto, stated analysts. According to the Society of Indian Automobile Manufacturers (SIAM), passenger vehicles sales in the country zoomed past the 15-lakh mark in FY2008-09, while in the first nine months of FY'10, it sold off 1.6 million cars, though it pales in comparison with neighboring China where passenger car sales crossed over 12.2 million in 2009. Nevertheless, India remains a hot spot for the global auto biggies, given its growth prospects. According to the global consultancy firm, KPMG, "By 2014, the Indian car market will double itself. And a big chunk of sales will come from smaller towns and cities where the small car will be the main driver of growth." No doubt, the auto majors are in a hurry. In a latest example, French automaker PSA Peugeot Citroen is desperately attempting to acquire around 30-50% stake of Mitsubishi Motors Corp. The alliance will focus more on developing environment- friendly cars like Electric Vehicles and Hybrid range to enter into emerging markets. "The small car segment in this country has been growing at 14-15% y-o-y and it will maintain its double-digit momentum for a long time to come," Michael Boneham, Ford India's Managing Director, was quoted as saying by The Economic Times.  The shift towards small cars is also in part driven by the worldwide economic slowdown and its aftereffects, forcing consumers to shift from luxury cars and large vehicles to low-priced, fuel-efficient small cars. Besides, the emphasis by many developed nations to impose tougher emission norms and on fuel-efficiency has also forced automakers to invest millions of dollars into clean technologies for developing hybrids and electric vehicles in future. This move is set to change the dynamics of the auto industry, as it further integrates the auto and electric industries on the common platform. According to auto analysts, the three main drivers that are set to realign the future auto industry are focusing on emerging economies, emphasis on clean energy and lowering their costs through cross-technology partnerships and alliances. Stumbling blocks ahead As global automakers enter the consolidation phase by partnering with other players to jointly develop more futuristic models, emerging markets will tremendously benefit from their investments with initiatives like greenfield projects. However, analysts caution that the aggressive approach by automakers to conquer new markets by associating with Indian players might not spell success, as Nissan Renault's alliance with Mahindra, offering Logan, is fast losing its market share, and believe only those with strong fundamentals and technical know-how can dare to lead the race. Christoph Stuermer advised VW not to take the aggressive approach and warned that "several European groups that were too aggressive had problems in Japanese markets." A Commerzbank analyst worried that purchases like sports car maker unit Porsche AG might cause VW "to lose sight of its priorities" and advised to increase its capacity, which remains below that of world's top automaker Toyota Corp. While several automakers in the past have made alliances to develop low-cost cars, not many have succeeded in achieving the synergies in the long run. Several complexities like cultural differences among the Asian and Western car makers, followed by the reluctance to share technology with the other partner, were the major constraints which played spoilsport. Recently, Bajaj and Renault were at odds as to who should represent the ultra low-cost car jointly developed by both the companies to be pitted against Tata Nano in India. Moreover, the Indian auto market is a very challenging one for foreign players, as three big automakers like Tata Motors, Maruti Suzuki and Korean automaker Hyundai rule the Indian roads. Tata Motors with its first car, Indica, stormed the passenger car market at the end of the 1990s and continues to gain market share with new brands like Indigo, Indica Vista and Manza while Maruti Suzuki, which sells every second car in the subcontinent, has become a household name in India. The Korean automaker Hyundai too has steadily made its presence felt in the Indian market with new, technologically- competent models. The world's fourth largest automaker, which had initially forayed into small car segment with its Santro, Accent, Sonata and Embera, now has two of the top-selling models in India in Hyundai i10 and i20. All these three automakers are competing fiercely to stay ahead in the race with aggressive price cuts, discounts and providing largest number of service stations across India. Given that, it will not be easy for the challengers to compete head on with the incumbents. Further, automakers are focusing on fuel-efficient vehicles while reducing the emission levels to grab the prospective buyers in the country. In this scenario, new entrants have to make a balance between the pricing and technology well; in other words, they would have to understand the trade-offs well. Against this backdrop, the Suzuki-VW deal, if succeeds, may offer some useful lessons. According to Phillipe Houchois, Auto Analyst at UBS, "By comparison, Suzuki deal is more game changing, than the VW's acquisition of Porsche AG," giving the Japanese auto giant an advantage to access VW's technological expertise in developing diesel power trains for its small and compact cars. However, some analysts believe that despite the strategic rationale behind the VW-Suzuki deal, its success would depend on how well the two carmakers iron out the differences and complexities. For example, VW intends to market, distribute and promote under respective brands, which will give Suzuki a tough competitor in the form of Volkswagen's Polo, which clashes with its brands like Swift and Dzire, and thus may eat into the latter's market share. Last but not the least, though GM had a large stake in Suzuki, it never managed to achieve the level of cooperation it intended to. As Houchois said, "That may largely be because of GM, but it's probably not just GM's fault, pointing to Suzuki's strong family-run corporate culture," something which the German auto giant may have to guard itself against.
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