Volkswagen-Suzuki Alliance Unraveling

A tiff that started over Volkswagen AG (VOW)’s description of Suzuki Motor Corp. (7269) in its annual report has escalated into a spat threatening to unravel the two automakers’ planned alliance before the partnership ever gets going.

“Volkswagen is not talking to us,” Osamu Suzuki, the Hamamatsu City, Japan-based company’s chairman, said in an interview. “We have no plans to talk to them.”

The downward spiral began in March when VW said in the report that it could “significantly influence financial and operating policy decisions” at Suzuki, describing the Japanese company as an “associate.” That didn’t sit well with Suzuki.

The two since then have engaged in a public feud that has brought to a halt VW’s efforts to turn a 222.5 billion-yen ($2.9 billion) investment into 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.

When the deal was signed in December 2009, with VW taking 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. (7203) and General Motors Co. (GM) 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.

Partners Needed

“Suzuki really needs a big manufacturer behind it, so the effect of a withdrawal would be far worse for them,” said Aleksej Wunrau, a Frankfurt-based BHF Bank AG analyst. “Volkswagen could very well step back from Suzuki and either seek another partner or start afresh on their own in Japan and India, which would of course be a lot more expensive.”

VW shares have gained 64 percent since the partnership was announced on Dec. 9, 2009, valuing the Wolfsburg, Germany-based carmaker at 46.1 billion euros ($65 billion). Suzuki has dropped 33 percent, giving Japanese company a market capitalization of 860 billion yen ($11.2 billion).

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. Instead, he decided in June to buy diesel engines from Italy’s Fiat SpA (F) for cars built in Hungary. Suzuki in July also said the automaker was open to forming alliances with others.

Fiat Snub

The moves have left VW baffled, with the carmaker now 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, according to a person familiar with VW’s thinking, who declined to be identified discussing private matters. VW Chief Financial Officer Hans Dieter Poetsch on a July 28 conference call said the partnership is under “review.”

“VW and Suzuki still are, and will continue to be, two independent companies with different business models from different cultural environments,” Hans Demant, VW’s coordinator for international projects, said in an e-mailed statement. “The cooperation is marked by highest respect and acceptance.”

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

Indian Attraction

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

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. (MSIL) 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.

GM Alliance

The German automaker remains convinced of business opportunities for both sides, according to the person familiar with VW’s thinking. A report by German newsletter Platow Brief on Aug. 5 that VW and Suzuki will terminate the alliance “is nonsense,” VW spokesman Michael Brendel said. Suzuki’s intention is also to salvage the relationship, said one of its executives who declined to be identified.

Suzuki previously had a 27-year equity alliance with GM, which resulted in joint product development and global purchasing. The partnership ended as GM headed toward bankruptcy. The Detroit-based carmaker sold a 17 percent stake in 2006 to raise $2 billion and strengthen its balance sheet. It unwound its remaining 3 percent stake in 2008.

The lack of progress in the new cooperation with Volkswagen contrasts with what Mitsubishi Motors Corp. (7211) and PSA Peugeot Citroen have achieved, said Masatoshi Nishimoto, a Tokyo-based IHS auto analyst.

Starting Over?

Mitsubishi and Peugeot began a partnership in 2005 when the Japanese carmaker began supplying a car based on its Outlander sport-utility vehicle to its French partner. Since then, they’ve built a factory together in Russia that started operating last September, and Peugeot in 2010 announced it would sell electric cars supplied by Mitsubishi.

“That partnership has resulted in many joint models; it’s been working very well,” Nishimoto said. For Suzuki and VW, “the alliance hasn’t benefited either company in any significant way so far.”

Volkswagen and Suzuki originally planned to work together to develop hybrid and electric cars to sell under both car brands, and set up offices at each other’s headquarters. Before any of that can happen, they need to figure out whether they still want to work together.

“The question is whether they can really start again with a clean slate,” Wunrau said. “Can they start over?”

US growth and eurozone woes hit stocks

Investors are paring positions in growth-focused assets as worries about the US economy and the eurozone debt crisis continue to hit sentiment.
The FTSE All-World equity index is down 1.3 per cent, following a rotten session in Asia and a rough start for Europe. There is broad softness in commodities, where copper is off 1 per cent to $4.07 a pound and Brent crude is lower by 1.3 per cent to $110.85 a barrel. Gold is little changed at $1,884 an ounce.
Wall Street is closed on Monday for the labour day vacation, but in electronic trading the S&P 500 futures contract is down 0.8 per cent.
The action at the start of the week is primarily focused on two themes: the hangover from an extremely disappointing US jobs report on Friday and nervousness ahead of a week of eurozone fiscal and political wrangling.
The former was one of the main reasons why the S&P 500 finished the previous session down 2.5 per cent as investors fretted that the world’s biggest economy was at risk of dipping back into recession.
Bulls had hoped that the market was re-entering that Panglossian state where good data were welcomed but bad data were also considered good news because they may hasten the US Federal Reserve to deliver more support to financial assets as part of its attempt to gird sentiment – rather like was seen a year ago, as QE2 was on the cards,
But it appears that many in the market sense a greater reluctance by the Fed to deliver further quantitative easing, and in any event there is a growing view that any such move may prove counterproductive as it would reinforce a feeling of exasperation. Thus news that no jobs were created in August in the US took the S&P 500 back down to a one-week low and ensured that the volatility seen during August carried over into the fresh month.
Another reason why markets have been so skittish during the late summer is that the eurozone budget crisis is delivering one of its pulses of stress. Fiscal vacillation in Rome and doubts about Greece’s latest bail-out tranche are again causing tremors. Italian 10-year yields have risen for the eleventh consecutive session, up 11 basis points to 5.39 per cent, even as the European Central Bank is seen standing as a backstop.
The ECB will meet on Thursday to discuss monetary policy and the Italian debt purchase programme is likely to be on the agenda.
Traders thus this week are going to have to navigate developments in the discussions between Athens and its lenders and also track the passage of the Italian government’s austerity proposals.
In addition, Wednesday is expected to see a court ruling in Germany that may affect the country’s participation in financial rescue packages – potentially removing the assumption that the region’s biggest economy will stand shoulder to shoulder with weaker peers.
Initial reaction suggests investors are not overly optimistic about these issues. The yield on the 10-year German Bund has hit a recent record low of 1.96 per cent, down 5 basis points on the session.
The US Treasury market is closed, but benchmark yields finished on Friday near record lows too, of 1.99 per cent.
Little surprise, then, that the euro is under pressure. The single currency is down 0.2 per cent to $1.4128 and the Swiss franc is leading the perceived havens with a gain of 0.4 per cent to SFr1.1116 per euro.
European stocks are under the cosh, with the FTSE Eurofirst 300 sporting a loss of 2.1 per cent as miners and financials suffer heavy selling.
Earlier in Asia, the repercussions of the US jobs data rattled investors, pounding exporters, technology shares and commodity producers. Tokyo’s Nikkei 225 lost 1.9 per cent and Shanghai shed 2 per cent as the FTSE Asia-Pacific index declined 2.7 per cent.
The resource-heavy Australian market was badly hit, with Sydney’s S&P/ASX 200 falling 2.4 per cent. But one of the worst performers was the highly sensitive South Korean bourse, where the Kospi tumbled 4.4 per cent as consumer-focused technology plays in particular took a pounding.