Bloomberg News

Suzuki Denies Breaking Cooperation Agreement With Volkswagen

September 12, 2011

(Updates with comment from analyst in sixth paragraph.)

Sept. 12 (Bloomberg) -- Suzuki Motor Corp. said it didn’t break a cooperation agreement with Volkswagen AG, after the German carmaker said the Japanese company violated terms by deciding to buy engines from Fiat SpA.

Suzuki “definitely” didn’t break the partnership agreement, Hideki Taguchi, a spokesman for the Hamamatsu City, Japan-based automaker, said today by phone. Suzuki decided in June to buy diesel engines from Fiat for cars built in Hungary, expanding its partnership with the Italian carmaker.

Volkswagen and Suzuki have been at odds since VW said in its annual report published in March that it could “significantly influence financial and operating policy decisions” at Suzuki, describing the Japanese company as an “associate.”

VW said in a statement today that it has given Suzuki “several weeks” to remedy the alleged infringement.

“Volkswagen considers this step regrettable, but necessary, and has offered to discuss the matter with Suzuki,” the Wolfsburg, Germany-based company said.

‘Challenging Suzuki’

“VW’s statement seems like they are challenging Suzuki, and shows that they aren’t backing down,” said Satoru Takada, an analyst at TIW Inc. in Tokyo. “I don’t think Suzuki would back down either, and if VW wants to expand in emerging markets, they wouldn’t want to lose their partnership with Suzuki.”

Osamu Suzuki, the Japanese carmaker’s chairman, said in an interview on Aug. 10 that the company “sees no reason why Volkswagen would be upset” about Suzuki expanding its purchase of engines from Fiat.

Suzuki formed an alliance with Fiat to make diesel engines in Asia in 2005. In June this year, it expanded the agreement to buy engines from Fiat in Hungary.

Suzuki fell 2 percent to 1,496 yen as of 12:36 p.m. in Tokyo trading. The stock has dropped 27 percent from the 2,061 yen that VW paid per share in January 2010, totaling 222.5 billion yen ($2.9 billion) in forming the alliance.

The public feud has brought to a halt VW’s efforts to form an operational alliance. The partnership was meant to combine Suzuki’s leading position in India, Asia’s second-fastest growing major economy, with Volkswagen’s global reach as the world’s third-biggest carmaker.

‘Latest Setback’

“This is the latest setback in a so-called partnership that has been developing anything but well,” Juergen Pieper, an analyst at Bankhaus Metzler in Frankfurt who recommends buying VW stock, said yesterday by phone. “The two sides have quite a bit of work to do to set aside tensions and focus on business.”

When the deal was signed in December 2009, with VW taking about a 20 percent Suzuki stake, the companies said they intended to cooperate on technology, including hybrids and electric cars, and expansion in emerging markets. Almost two years later, no joint projects have begun.

VW, which forecasts deliveries will rise 5 percent this year after selling 7.2 million vehicles in 2010, aims to surpass Toyota Motor Corp. and General Motors Co. as the world’s largest carmaker by 2018 and is targeting India as an expanding market to boost sales. Suzuki, which sold 2.64 million cars in its last fiscal year, delivered 1.13 million of those vehicles in India. VW sold 53,300 cars in the country in 2010.

Keeping Stake

Volkswagen has no plans to sell or decrease its Suzuki stake, Christine Ritz, VW’s investor relations chief, said in a telephone interview yesterday. VW said the carmaker still views Suzuki as “an attractive investment.”

VW is of the opinion that Suzuki has rolled back the partnership to square one by keeping its German ally in the dark about the Fiat plans and its intentions to seek alliances with rivals, a person familiar with VW’s thinking said last month. VW Chief Financial Officer Hans Dieter Poetsch said on a July 28 conference call that the partnership is under “review.” That review is still ongoing, VW said.

A successful relationship depends on an understanding that the two are equal partners, two Suzuki executives, who declined to be publicly identified discussing the matter, said last month. The company aims to clarify what direction it wants to take with the partnership by October, one of the executives said.

VW Technologies

“Volkswagen keeps talking to the media, but not to us directly,” Chairman Suzuki said in the Aug. 10 interview.

Osamu Suzuki hasn’t found any VW technologies he’d like to adopt following an extensive review of what they have to offer, he wrote in a Nikkei newspaper column in July. Suzuki also said in July the automaker was open to forming alliances with others.

Volkswagen Chief Executive Officer Martin Winterkorn said in May the automaker planned to target the small-car segment in India as a potential joint project with Suzuki, as well as parts procurement and development of alternative-drive technologies.

While Suzuki has a dominant position in India, where its Maruti Suzuki India Ltd. unit is the market leader, increasing competition means holding onto the top spot will become harder. VW’s global reach and product portfolio, with more than 60 models at the namesake brand alone, could help.

Maruti Suzuki will sell 36 percent of the 3.07 million vehicles delivered in India in 2011, IHS Automotive estimates. Overall sales in the market will climb 76 percent to 5.41 million in 2016, with Maruti Suzuki nabbing 25 percent, according to IHS forecasts.

--With assistance from Makiko Kitamura in Tokyo. Editors: Kae Inoue, Terje Langeland

To contact the reporters on this story: Anna Mukai in Tokyo at amukai1@bloomberg.net; Yuki Hagiwara in Tokyo at yhagiwara1@bloomberg.net; Andreas Cremer in Berlin at acremer@bloomberg.net

To contact the editor responsible for this story: Kae Inoue at kinoue@bloomberg.net


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