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Suzuki and Volkswagen Deal in detail expectation

Volkswagen at present has a minimum presence in India with just about two per cent market share in the passenger car segment. But it recently announced plans to ramp up presence here by selling about 100,000 units by 2014.

Europe is shifting to compact and small cars due to rising petrol costs as well as concerns of climate change. Suzuki has the expertise to make small cars, Volkswagen does not. The German company has the expertise in environment friendly technology and has invested large sums. Combining the two will reduce cost of making new cars. Volkswagen, which has a stronger dealership network in Europe compared to Suzuki, could source small cars from India and sell them under its own brand name,” said R C Bhargava, Chairman of Maruti Suzuki.

Bhargava added that there was scope for cooperation between the two in diesel engine technology. “Suzuki only has diesel engines of up to 1.3 litres for which it has a tie-up with Fiat. But Volkswagen has the technology for diesel engines above 1.3 litres, which could be shared with Suzuki.” He also did not rule out the possibility of the two collaborating in emerging markets other than India.

Maruti Suzuki has a similar outsourcing deal with Nissan to produce 50,000 A-Stars for the European market (sold as Pixo by Nissan). This deal will continue.

India is the second-largest producer and market for Suzuki, apart from its home base and, therefore, the India operations would play a key role in the tie-up with VW. Suzuki Motors has an installed capacity exceeding 2.5 million units globally. India contributes for 20 per cent of its revenues and over 32 per cent of its production capacity.

Experts said sharing of technology could be the key to the collaboration. Suzuki’s skill lies in making gasoline-powered compact engine in the range starting from as small as 660cc (about the same engine size that drives Tata’s Nano) to 1.6 litres, which drives mid-sized sedans like SX4.

Suzuki and VW would thus get the opportunity to tap into each other’s engine and vehicle technologies, which would allow them to consolidate in key emerging markets like India.

“It is a costly affair to develop technology afresh, which also consumes a lot of time, effort and risk of losing out on market share. This deal will allow both the companies to leap frog on uncommon glitches and improvise on areas where they were absent,” said Abdul Majeed, auto head, PricewaterhouseCoopers.

“VW’s presence in the Indian market is fairly at a nascent stage, while Maruti has over 25 years of experience. When you develop new cars, you need to tune them to the needs of the local market. Suzuki will bring about a number of such intangible resources that can greatly benefit VW operations in India,” he added.

VW is gearing up to make a big splash in India with the launch of the all new Polo, a sub-premium hatchback, in a few weeks. This would be for the first time in recent years that a multinational auto company would start manufacturing in India with a small car.

VW would make the car at Chakan, its Euro 580-million Pune facility with 110,00 units per annum capacity, from Saturday. The facility has the capacity to ramp up to 160,000-180,000 units.

VW India executives declined comment saying that they were yet to get an official word from the parent company. When contacted, K K Swamy, Managing Director and VP, Volkswagen India, said, “It’s too early to comment right now.”

Sharing Dealers?

“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.”

Cutting Costs

“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.

Volkswagen (VW) picks up 20% stake in Suzuki. May source small cars from Maruti Suzuki
* Suzuki has technology for small, compact hatchbacks
* VW will share its green technology
* Suzuki has diesel engines of up to 1.3 litres
* VW has tech for diesel engines above 1.3 litres
VW sells 4 models in India — Beetle, Passat, Jetta and Touareg
* Price range: Rs 13-52 lakh
* Has sold 955 cars in India
* Maruti Suzuki sells 13 models
* Price range: Rs 2-18 lakh
* Sold over 792,000 lakh cars last year

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