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Volkswagen and Suzuki's crumbling partnership
VW had to retract its accusation that Suzuki breached their contract
By : Reuters | Published : October 03, 2011
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Volkswagen and Suzuki's crumbling partnership
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Germany's Volkswagen had until the end of Friday to retract its accusation that strategic partner Japan's Suzuki Motor breached their contract as a public and bitter spat raged between the two car makers.

Osamu Suzuki, chief executive of the eponymous car maker, has demanded VW sell its stake and end the partnership that has become a millstone round its neck, claiming Volkswagen harmed Suzuki's reputation.

Volkswagen, for its part, has given Suzuki an unspecified number of weeks to rectify what it says was a breach of contract, after the Japanese company agreed to procure diesel engines from Fiat for its Hungary plant in Esztergom.

 

"It's like this big old Western showdown -- drawing a line in the sand with this public deadline. Now ... they have to do something in a way, because if they don't they are going to look stupid," said IHS Global Insight auto analyst Tim Urquhart.

"I don't see what good it will do either company getting into a silly litigation either about what the terms of the alliance were supposed to be, or from Suzuki's point of view a defamation case," Urquhart added.

Following are some of the possible outcomes.

SUZUKI WINS - VW SELLS STAKE, EXITS PARTNERSHIP

VW bought a 19.9% interest in Suzuki for about 1.7 billion euros in January 2009. Were it to sell now at market prices, it would mean a loss on its investment. Suzuki may be willing to pay a premium just to put the partnership behind it.

The chances are seen as slim, however. Excluding acquisitions, Volkswagen generates billions of euros in cash per year after investments and has no immediate need for further liquidity, especially at such low market rates.

"They will just keep the stake as a financial investment and see what they do with it ... even if it's only to annoy them. They won't take a loss selling down their stake," said a London-based equity analyst.

VOLKSWAGEN WINS - SUZUKI STOPS BUYING FIAT ENGINES

Suzuki terminates its procurement deal with Fiat, which has been its partner in Hungary for years, in a move that would likely trigger repercussions from Fiat's side. The two have been building the Suzuki SX4 and the Fiat Sedici from one common architecture in Suzuki's plant in Esztergom.

This is unlikely. From Suzuki's perspective, the partnership has been a disaster and it just wants Volkswagen to go away.

BOTH EXTEND OLIVE BRANCHES TO EARN GOODWILL

Both car makers could take steps to build trust. Suzuki could agree to buy some engines from VW, which has a major powertrain plant in Gyoer, Hungary, not far from Esztergom.

Volkswagen, for its part, could grant targeted access to a portion of its trove of R&D into alternative powertrains, possibly in the area where Suzuki has been struggling most to make progress. Osamu Suzuki has clearly said the main reason he entered the deal was a technology transfer that never happened.

BOTH LOSE

Volkswagen keeps its stake, creating an ice-age in relations between the two that will likely last until after Osamu Suzuki's reign, barring a complete crisis at Suzuki that could lead to a thaw.

"Volkswagen isn't in a position now to sell the shares because it would need a profit on the investment given the pressure from shareholders," said Credit Suisse auto analyst Kunihiko Shiohara.

"But eventually it would have to either sell the shares or wait until Suzuki weakens to the point where it wouldn't object to a takeover," Shiohara added.

Suzuki refuses in return to help Volkswagen in India and Southeast Asia, treating it as a hostile investor and likely expanding its ties with VW rivals like Fiat to achieve the benefits they had hoped to get with the German car maker.

Since neither company is willing to back down and lose face, analysts see a stalemate as most likely.

"I can imagine Fiat may take some pleasure from all of this, since they have exchanged blows with Volkswagen over (Chairman Ferdinand) Piech's repeated advances on Fiat's Alfa Romeo brand," said a Frankfurt-based equity analyst.

VOLKSWAGEN DECLARES WAR

The nuclear option that remains is an hostile bid for an outright takeover of Suzuki. This is seen as the least likely of all scenarios, since hostile deals are extremely rare in Japan and most auto industry takeovers require the full backing of management and the workforce to extract the needed synergies.

"Volkswagen could also just increase its holding slightly to 25%, ensuring it a blocking minority," said one analyst, declining to be named.

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