VW and Suzuki are heading for divorce, although VW may not give up without a fight and still holds nearly 20% of Suzuki.
IHS Global Insight Perspective | |
Significance | Suzuki has confirmed that it is planning to disband its partnership and cross-shareholding alliance with Volkswagen (VW) after VW said that Suzuki had broken the terms of the alliance by sourcing diesel engines elsewhere. |
Implications | The news of the complete breakdown in the relationship between VW and Suzuki is potentially damaging for both companies' long-term prospects as on the face of it, the alliance addressed weaknesses in both companies' portfolios. It seems that cultural differences and a simple inability of both companies to agree on the best way to move forward have been responsible for the breakdown. |
Outlook | It is hard to think of an alliance between major OEMs in the in the modern times that has gone as badly as the VW and Suzuki tie-up. If anything, it emphasises that when operating in a global environment, respecting cultural differences and an emphasis on personal relationships remain key to getting the best out of these alliances. |
Suzuki will move to dissolve its partnership and cross-holding with Volkswagen (VW) after what has appeared to be a comprehensive breakdown in the relationship between the two companies. In a statement on its website Suzuki said that it was moving to disband the alliance because it was not getting the same level of technology transfer as brands in the VW Group. The statement said, "Suzuki's primary aim for the partnership was to receive technology transfer (including receiving technical information, etc.) from Volkswagen AG so that Suzuki could accelerate its development of environmental technology and other engineering areas to cope with intensifying competition of technology development in the worldwide automotive industry. In order to ensure such cooperative relationship, both companies agreed to have the cross-shareholding relationship. However, Suzuki had to realize that with Volkswagen AG's minor equity participation of 19.89% in Suzuki, it is difficult to receive technology transfer at the same or higher level as Volkswagen Group companies where Volkswagen AG has nearly 100% of voting rights. From the beginning of this year, Suzuki has been accelerating its development of own environmental technology and other engineering areas."
Reading between the lines, it appears that over the two years since the initial agreement was signed, both VW and Suzuki have held extensive discussions over how best to move the partnership forward. While Suzuki wanted to gain access to VW's alternative powertrain technology, including its hybrid and state-of-the-art diesel technology, VW wanted access to Suzuki's sales, distribution and production networks in Asia, specifically India, where the company is relatively underrepresented if one disregards its market-leading position in China. However, a reciprocal deal that would offer both companies elements of what they wanted from the other has proved too complex to agree, not helped by the simple fact that cultural differences and company ethos appear to have stymied any constructive agreement. Suzuki also appears to believes that VW has acted in a somewhat arrogant and high-handed manner. From the beginning of the mooted alliance, Suzuki had emphasised that although VW had acquired nearly a fifth of Suzuki's shares, the Japanese OEM regarded its operational independence as sacrosanct. Suzuki's statement went on: "Suzuki thinks that it is crucial to secure 'independence' in its operating policy decision for maintaining its competitiveness in the domestic Kei-car market and Asian markets including India. However, Volkswagen AG publicly reported that Suzuki was a company over which Volkswagen AG has significant influence on financial and operating policy decisions. Taking account of these facts, Suzuki has concluded that it is difficult to attain its primary aim for the partnership and also there is concern that the partnership would cause negative impact on Suzuki's autonomous decision-making in its operating policy." The entry on Suzuki in VW's annual report appears to have greatly angered Suzuki's management.
Suzuki will now ask VW to sell its shares in the Japanese OEM, although it remains to be seen whether this request will be adhered to. VW for its part has issued a statement on its website saying that Suzuki broke the terms of agreement when it signed an agreement with Fiat to source diesel engines. Reading between the lines of the statement, it appears that VW may be prepared to play hardball with Suzuki and has no intention of selling its stake at the moment. Instead VW said it is "serving notice of an infringement by Suzuki of the cooperation agreement." What this entails is not exactly clear, but it appears that some kind of legal action cannot be ruled out. VW also says that the review of its alliance with Suzuki is still being carried out and that it still regards Suzuki as an attractive investment.
Outlook and Implications
It is quite remarkable that in this day and age a corporate alliance of this kind could have unravelled so quickly and comprehensively given the potential upsides that existed for both companies. However, in the end it appears that the cultural differences between two companies were simply insurmountable and it does also appear that VW has not been as sensitive as it could have been to Suzuki's desire to retain its autonomy. It may even be that VW and Suzuki are too similar in some respects in terms of their management ethos, with both companies having extremely strong-minded and autocratic family scions in senior positions. This gives both organisations a strong sense of their corporate identity and engenders a sense of fierce independence. In the case of VW there is the chairman of the company's supervisory board Ferdinand Piëch, while Suzuki has its CEO and chairman Osamu Suzuki. How things proceed now remains unclear but things could get messy if VW attempts to hold Suzuki to the terms of the co-operation and refuses to sell its significant stake in the company.
Prior to the initial co-operation and crossholding agreement in 2009 (see World: 9 December 2009: VW to Acquire 19.9% Suzuki Stake) it was rumoured that VW was looking at enacting a full takeover of Suzuki. It is possible that VW may have been considering this route and that the crossholding and co-operation agreement was a compromise. However, if VW refused to sell its stake in Suzuki it will remain a significant shareholder and may even look to increase its shareholding if it wants to put Suzuki under pressure. For its part, the deal Suzuki made with Fiat for diesel engines was antagonistic and Suzuki must have known that this would have angered VW (see Japan: 27 June 2011: Suzuki Extends Ties with Fiat, Plans to Buy Diesel Engines for New Car). Likewise, Suzuki is being somewhat disingenuous in claiming it decided to pull the plug when it became clear it would not be afforded the same access to VW's advanced and alternative powertrain technology as brands that were fully consolidated within the VW Group. If that is what Suzuki was genuinely expecting then that must be regarded as being somewhat naive. Why would VW treat Suzuki the same as a fully consolidated brand without securing full ownership? Whatever else is agreed, it appears that the relationship has broken down irrevocably unless there is some kind of major philosophical shift from both companies.