Size matters

VW executives have publicly said over the past six months that Suzuki would be an interesting target for a tie-up, and now it's official. On Wednesday, the German carmaker announced it was buying a 19.9-percent stake in Suzuki by January 2010, with Suzuki also acquiring a stake in VW.

"Two of the world's leading carmakers are joining forces and preparing to meet the growing challenges that lie ahead," VW chief executive Martin Winterkorn said in a statement. "Together we can maximize our opportunities for growth."

It was the second coup this week for the ambitious company, coming on the heels of VW's 3.9 billion euro ($5.8 billion) purchase of a 49.9 percent stake in luxury carmaker Porsche.

Ferdinand Dudenhoeffer, one of Germany's foremost auto industry analysts, welcomed the news, saying the tie-up with Suzuki was "a very sensible deal."

Dudenhoeffer told Deutsche Welle that the deal could well help VW attain its goal of becoming the world's biggest automaker by 2018, as the German firm will now be able to profit from Suzuki's solid position in developing countries, where small cars are in demand.

"Small, cheap cars - cars that sell for $5,000 or less - are the fastest growing market segment," the car expert said. "Only companies that are in this market can be global leaders - that's why VW needs Suzuki."

Thanks to its partnership with Indian carmaker Maruti, Suzuki has a 50 percent market share in India.

Globally, VW presently has a 10.9 percent market share, while Suzuki has a 4.1 percent share. If VW were to eventually take a controlling share in Suzuki, the Wolfsburg-based company could displace the current number one carmaker, Toyota, which has a 13.9 percent market share.

One step at a time

But some analysts say it's too soon to speak of the partnership in terms of a turning point in the global auto industry.

"It's an engagement, not a wedding," said Christoph Stuermer, auto sector analyst at IHS Global Insight. "This loose coalition with a buying of mutual stakes was the best VW could do in a rush to get the deal under its belt this year."

Stuermer predicts that VW is bracing itself for a very difficult year in 2010, when the effects of the financial crisis will be felt without the buffer provided by government subsidies such as the "cash for clunkers" scheme. Despite this, he said it still made sense for VW to secure a viable partnership now, and to bring a good Japanese brand into the fold before a competitor got there first.

"It's wise to not let the short-term worries of next year interfere with the longer term strategy for the company," he said.

Benefits for Suzuki

The partnership with VW also makes sense for Suzuki, analysts say, after the company lost its equity ties to General Motors a year ago, having bought back GM's stake.

"After ending its alliance with GM, Suzuki needed to find a strong partner in order to survive tough competition in the global market," auto analyst Tatsuya Mizuno of Mizuno Credit Advisory told AFP news agency.

Ratings agency Standard & Poor's also said the deal would offer Suzuki access to investment funds, which will be helpful when investing in future technologies.

Suzuki could also benefit by selling its technology and know-how in producing small, affordable vehicles to VW, Global Insight analyst Stuermer said.

"VW has a big presence in Brazil, for example, but it has been filling the market there with outdated products," Stuermer said. "Brazil might well be one playing field where VW can implement know-how from Suzuki."

Top slot by 2018?

Speaking at a press conference in Tokyo, VW CEO Winterkorn was hopeful the Suzuki alliance would help catapult the German firm past industry leader Toyota ahead of the company's 2018 target.

"If that succeeds faster (than 2018), we're happy," he said.

But Suzuki CEO Osamu Suzuki was careful to underscore that his company would be retaining its independence and corporate culture in the partnership.

"I don't want you to misunderstand: Suzuki is not becoming a 12th brand for Volkswagen," he said when asked if Suzuki may have a German CEO in future. "I don't want other folks telling me how to do things."

Whether or not VW manages to usurp Toyota by 2018, the goal itself will have made a significant contribution to the company's progress, believes analyst Stuermer.

"It's an internal motivation vehicle, and the fascinating thing is, it works," he said. "Between now and 2018, things in the auto sector will change a lot, and VW will likely have a new vision before then. But its current vision will have served its purpose - people believe in it and are working toward it, and it's important that they do so."

Author: Deanne Corbett
Editor: Sam Edmonds