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The companies will be partners after Volkswagen's $2.5 billion bid for Suzuki stake, but they'll still be rivals in the fast-growing Indian market
(Bloomberg) — Volkswagen (VOW:GR), the German carmaker that yesterday unveiled a deal with Suzuki Motor Corp. to help crack the Indian market, may end up fighting for sales with its new partner.
"Without competition, we can't improve," Chairman Osamu Suzuki told reporters in Tokyo yesterday. "In terms of sharing parts, we will cooperate, while we will compete in our overall businesses." Sitting next to him, Volkswagen Chief Executive Martin Winterkorn said he agreed.
The $2.5 billion VW agreed to pay for a 20 percent stake in Suzuki won't necessarily erode the Japanese automaker's dominance in India, said Ashvin Chotai, the London-based managing director of Intelligence Automotive Asia, an industry consultant. Volkswagen, while expanding sales of its own Polo and Skoda models, will compete with Maruti Suzuki India Ltd.'s Swift and Ritz hatchbacks.
"They won't suddenly say that 'you got the keys to the house, so raid it," Chotai said in an interview. "Suzuki is still in charge."
As part of yesterday's agreement, Wolfsburg, Germany-based VW and Suzuki plan to jointly develop hybrids and electric vehicles under both brands. The deal marks VW's first major share purchase of a non-European automaker. India, the fourth- largest Asian car market, may expand to 3.2 million vehicles by 2018 from 1.2 million in 2007, outpacing the growth rates in China, according to Ulrich Proske, the finance chief of VW's Indian unit.
Volkswagen, which plans to increase its own dealers to 120 by 2012 from 14 last year, may not get to share Maruti's network of 741 dealerships in 509 cities, said Puneet Gupta, a CSM Worldwide Inc. analyst in New Delhi.
"The real profits for Maruti are coming from Swift and Ritz hatchbacks,' Gupta said. "If they share dealer networks with Volkswagen for the Polo, that will be a setback for these models. Volkswagen will price the Polo very aggressively in India as this is one market they want to capture."
Volkswagen sells the Jetta and Passat sedans, the Beetle and Touareg sport-utility vehicles in India, besides vehicles made by its Skoda and Audi brands. It opened a 580 million-euro ($852 million) India factory earlier this year as it seeks to gain market share using own-brand vehicles.
VW will add the Polo subcompact and is considering making Up! minicars at the factory in Chakan, where it intends to double the number of workers to 2,500 in a year, Proske said in an interview this week.
"Whatever joint products they build will probably be one generation down the line," said Tim Urquhart, an analyst in London with IHS Global Insight. There may be "short-term" competition between the partners, he said.
In addition to getting cash to repay debt and fund development and research, Suzuki said yesterday the carmakers plan to share parts in India to lower costs.
To ease potential conflicts with Hamamatsu, Japan-based Suzuki, Volkswagen named Detlef Wittig, a 36-year VW veteran who was sent to Japan as a VW representative from 1975 to 1977, to oversee the partnership. Volkswagen's last attempt to clinch an Asian alliance failed in 2007 after the maker of the Golf compact ended talks with Malaysia's Proton Holdings Bhd. without a deal.
India is the biggest market for Suzuki, which entered the world's second-most populous nation in 1983 through a partnership with the government. Suzuki took a majority stake in the company, now called Maruti Suzuki India, two decades later.
Until 2006, General Motors Co. owned a 20 percent stake in Suzuki, and Suzuki completed a purchase of its shares from GM last year.
Volkswagen added 1.13 euros, or 1.4 percent, to 80.57 euros at 10:37 a.m. in Frankfurt. Suzuki fell 6.5 percent to close at 2,215 yen on the Tokyo exchange. Maruti Suzuki fell as much as 1.5 percent in Mumbai.
The Indian unit has a capacity to produce 1 million minicars, vans and sedans at its plants outside New Delhi. Maruti sold 792,167 vehicles in India and overseas in the 12 months through March, a 3.6 percent jump from a year earlier.
Volkswagen, which sold about 16,000 vehicles in India from January through October, is targeting more than 100,000 deliveries a year in the "long term," Proske said, without specifying a timeframe.
VW, which owns non-German brands including Skoda, Seat, Lamborghini, and Bentley, has had success outside its home European market. Its two joint ventures in China have made it the country's second-largest overseas automaker.
"Volkswagen has quite a good track record with brands like Seat and in China, so they understand different cultures," said Stephen Pope, chief global strategist at Cantor Fitzgerald in London. "Volkswagen is very well equipped to run a multi- national, multi-brand organization."
While the Indian market is set to grow at an average of 9 percent to 10 percent annually over the next five years, western European may not return to sales volumes achieved before the financial crisis until 2014, according to Peter Kelly, a senior director at J.D. Power & Associates in Oxford, England. China sales may decline after the government removes sales incentives, he said.
"The biggest challenge for VW in India will be to learn from Suzuki how to build cheap small cars," said Ferdinand Dudenhoeffer, director of the Center for Automotive Research at the University of Duisburg-Essen. "VW has to be able to make Tata Nanos or Dacias if they want to serve a cheap market like India."
To contact the reporters on this story: Chris Reiter in Berlin at firstname.lastname@example.org; Vipin Nair in Mumbai at email@example.com.