Suzuki's Surge Against Giants

Investment in gas-sippers and emerging markets has pushed Suzuki's market cap within sight of Ford's. Now the Japanese automaker wants to expand in the U.S.

by Ian Rowley

Sometimes two simple numbers can illustrate one company's predicament and another's good fortune. Take, for instance, the market capitalizations of Suzuki Motor of Japan and Ford Motor (F) of North America. Suzuki's market cap: $16.2 billion. Ford's: just over $18 billion. In other words, Ford, with 2006 sales of $160 billion, gets roughly the same valuation by investors as Suzuki, a comparative midget at $30 billion in sales.

At this point in the story, you would expect an extended passage along the lines of "Oh, how the mighty have fallen." However worn the sentiment, it's valid here: Ford, once the byword for U.S. dominance of the global auto industry, is now a bargain stock, thanks to poor decisions on models, a red-tape management culture, and the crushing burden of pension and health-care costs.

But maybe the story should be more about Suzuki than Ford. Suzuki, a small and distant competitor to Toyota (TM), Honda (HMC), and Nissan (NSANY), grabbed investors with a contrarian strategy that's a million miles from Detroit.

Promising a Buildup

How's that? Suzuki has caught the wave in two key trends: small cars and emerging markets. Thanks to this twin strategy, the company's stock performance outstrips its larger Japanese rivals, including the mighty Toyota, over the last three years—rising 82%.

This year, investment bank UBS (UBS) projects the company will increase sales by 11% to $30.4 billion while operating earnings are expected to grow 23% to $1.4 billion. The company aims to raise global production to 3 million vehicles, from 2.4 million, by 2010. Its capital spending, measured as a share of sales, is the highest in the Japanese auto industry. "We will build up our production bases at home and abroad," Suzuki's 77-year-old chairman Osamu Suzuki told Japan's Nihon Keizai business daily in July following the company's quarterly results.

The septuagenarian chairman is a shrewd leader. Born Osamu Matsuda, Suzuki married the granddaughter of Suzuki's founder, taking her surname and rapidly rising through the ranks at the company. By 1978, he was president and began pursuing strategies that largely avoided head-to-head confrontations with Japanese rivals. "Their strategy was to avoid the markets where Toyota and Honda were strong and concentrate on producing small cars efficiently," says Hirofumi Yokoi, an analyst at CSM Worldwide in Tokyo.

Big in Emerging Markets

In Japan, that meant focusing on small passenger cars, including the 660cc mini-car sector, which today accounts for one-third of all cars sold in the country. That helped Suzuki sell just 10,000 fewer cars than larger rival Honda in Japan last year.

Suzuki's ability to transfer its talent for building small cars to emerging markets has spurred growth, too. In particular, a deal struck with the Indian government in the early 1980s to begin production with Indian automaker Maruti Udyog has been a triumph for Suzuki.

Despite India's looming large on all major automakers' radars, Maruti's market share in India is still over 40%. About a quarter of Suzuki's global production is made in India. "This is a spectacular combination from the Japanese perspective," says Ramnath Subramaniam, vice-president of research at SSKI Securities in Mumbai.