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IBS Center for Management Research

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After the Breakup: The Troubled Alliance between Volkswagen
and Suzuki
This case was written by Syed Abdul Samad, under the direction of Debapratim Purkayastha, IBS Hyderabad. It was compiled
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from published sources, and is intended to be used as a basis for class discussion rather than to illustrate either effective or
ineffective handling of a management situation.
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2012, IBS Center for Management Research. All rights reserved.

To order copies, call +91-08417-236667/68 or write to IBS Center for Management Research (ICMR), IFHE Campus,
Donthanapally, Sankarapally Road, Hyderabad 501 504, Andhra Pradesh, India or email: [email protected]

www.icmrindia.org


BSTR/412

After the Breakup: The Troubled Alliance between

Volkswagen and Suzuki

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VW and Suzuki wanted access to each others crown jewels, so it was always a little doomed
from the start.i

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Tim Urquhart, IHS Global Insight1 auto analyst, September 2011
Clearly there are cultural differences between European or US-based (carmakers) and Japanese
manufacturers and, with the exception of Renault/Nissan, alliances between Western and Japanese
(carmakers) have often ended without tangible results,ii

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Christian Aust, analyst, UniCredit2, in September 2011.
On November 18, 2011, the relationship between Suzuki Motor Corporation (Suzuki) and

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Volkswagen AG (VW) came to an end, with Suzuki terminating the framework agreement
between them. Suzuki also demanded that VW return its 19.9% shareholding in the company.
In December 2009, VW and Suzuki made headlines when the German company purchased a 19.9%
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stake in the Japanese manufacturer. Both agreed to share their technologies and cooperate with each
other. VW agreed to provide its larger-vehicle technologies to Suzuki; Suzuki, in turn, agreed to
provide VW access to its small-displacement motors and Indian presence. While the proposed
partnership goals spurred interest among industry observers, both the auto manufacturers failed to
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arrive at an agreement on any of their proposed goals. Since the second quarter of 2011, there were
indications in the media that the partnership was failing. Suzuki claimed that VW did not give it
access to the hybrid technology which it had promised to share when forming the alliance. Similarly,
VW accused Suzuki of violating the agreement by procuring diesel engines from Fiat S.p.A3 (Fiat).
The partnership further soured because of their cultural differences and failed joint business
proposals. Apprehensive that the issue might adversely affect their cooperation with other
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companies, the two parties finally terminated their partnership in November 2011.
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After the break-up, Suzuki wanted to buy back its 19.9% stake from VW and sell the 1.5% stake
of VW back to the German company. However, VW made it clear that it would not forego its
stake in Suzuki and that it was not legally bound to do so. As a result, Suzuki filed for arbitration
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with the International Chamber of Commerces4 (ICC) International Court of Arbitration5 in

1
IHS Global Insight provides economic, financial, and political coverage of countries, regions, and
industries and is recognized as one of the most consistently accurate forecasting companies in the world.
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2
UniCredit SpA is an Italy-based, pan-European banking organization.
3
Fiat S.p.A. is the largest automobile and engine manufacturer in Italy, with a production output of more
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than 2 million units, revenue of 35.88 billion and a profit of 179 million in 2010.
4
The International Chamber of Commerce (ICC), the largest, most representative business organization in
the world, was founded in 1919 to serve world business by promoting trade and investment, open markets
for goods and services, and the free flow of capital. The organizations international secretariat was
established in Paris.
5
The International Court of Arbitration is an institution for the resolution of international commercial
disputes. The International Court of Arbitration is part of the International Chamber of Commerce created
in 1923.

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 After the Breakup: The Troubled Alliance between Volkswagen and Suzuki

London. VW, on the other hand, was prepared to go through the arbitration process. While the
partnership did no good to either party, both the parties stuck to their respective stands. Some
industry observers opined that while Suzuki had lost huge financial and technological support,
VW had lost the opportunity to leverage on Suzukis small car platform and its entry ticket into
the fast-growing Indian market. They opined that both the companies needed to clear off the
rubble and start afresh which while not impossible, would be a difficult task for both.

ABOUT SUZUKI

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Headquartered in Hamamatsu, Shizuoka, Japan, Suzuki Motor Corporation specialized in
manufacturing compact automobiles, motorcycles, all-terrain vehicles (ATVs), outboard marine
engines, wheelchairs, and a variety of other small internal combustion engines. As of 2011, the
company was the 9th largest automobile manufacturer in the world and the 4th largest in Japan after

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Toyota Motor Corporation6, Nissan Motor Company Ltd.,7 and Honda Motor Company Ltd.8 The
company produced 2,878,000 automobiles and 2,735,000 motorcycles during 20102011 earning
revenue of 9 2.6 trillion and making a profit of 45.17 billion during FY2011iii (Refer to Exhibit
I for Suzukis key financials).
Michio Suzuki founded Suzuki Motor Corporation (Suzuki) in 1909 as Suzuki Loom Works in the

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village of Hamamatsu, Japan. The company built weaving looms for Japans textile industry for 30
years and then diversified into manufacturing small cars. However, with the onset of the Second

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World War, the government declared civilian passenger cars as a non-essential commodity and
Suzuki stopped producing cars. After the war, Suzuki was back to producing looms. However, the
cotton market collapsed in 1951 and Suzuki again took up the production of motor vehicles.
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During those times, the Japanese had a great need for affordable and reliable personal
transportation. Banking on this need, many firms were producing clip-on gas-powered engines
that could be attached to a common bicycle, which could then be used as a motor vehicle.
Recognizing the need for motorcycles, Suzuki created its first two-wheeled motorized bicycle
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called the Power Free in 1952. This innovation was considered ingenious and the patent office of
the new democratic government of Japan granted Suzuki a financial subsidy to continue research
in motorcycle engineering. In 1954, the company officially changed its name to Suzuki Motor Co.,
Ltd. and was producing 6,000 motorcycles per month.
Over the years, many more innovations followed at the company. By 2011, the company had
expanded its reach to all over the world, with 35 production facilities across 23 countries and 133
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distributors in 192 countries. The company had three subsidiaries. Maruti Suzuki India Limited,
formed in 1982, had a 54.2% stake owned by Suzuki and the rest owned by various Indian public
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and financial institutions. The other two subsidiaries of the company were Pak Suzuki Motor Co.
Ltd. in Karachi, Pakistan, and Magyar Suzuki in Esztergom, Hungary, which were established in
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1982 and 1991 respectively. The company had also formed technological and sales tie-ups with
many global automobile companies like General Motors Company10, Fiat, Nissan, etc. It also
entered into a tie-up with VW for technological and sales cooperation in 2009.
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6
Toyota Motor Corporation (TMC) is a multinational automaker headquartered in Toyota, Aichi, Japan. In
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2010, it was the worlds largest automobile manufacturer by production.

7
Nissan Motor Company Ltd. is a multinational automaker headquartered in Yokohama, Japan.
8
Honda Motor Company, Ltd. is a Japanese manufacturer of automobiles and motorcycles. Honda has
been the worlds largest motorcycle manufacturer since 1959 and is the sixth largest automobile
manufacturer in the world.
9
is the symbol for Japanese currency Yen. As on March 15 2012, 1$=83.57 and 1= 109.15.
10
General Motors Company is a US multinational company headquartered in Detroit. It is the worlds
largest automaker and owns brands like Buick, Cadillac, Chevrolet, GMC, Opel, Vauxhall and Holden.

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 After the Breakup: The Troubled Alliance between Volkswagen and Suzuki

ABOUT VOLKSWAGEN

Volkswagen AG, headquartered in Wolfsburg, Germany, was ranked as Europes largest and the
worlds third largest motor vehicle manufacturer in 2011. The company had sales of 8,361,294
vehicles, garnering revenues of 159.33 billion and a profit after tax amounting to 15.8 billion
during 2011iv (Refer to Exhibit II for VWs key financials).
Volkswagen, meaning Peoples Car in German, was established on May 28, 1937, as
the Gesellschaft zur Vorbereitung des Deutschen Volkswagens mbH (Society for the preparation of

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the German Peoples Car) by the Nazi Deutsche Arbeitsfront (German Labor Front). The company
was established to manufacture the Porsche Type 60, with the basic air-cooled, rear-engine, rear-
drive platform, which later came to be known as the Volkswagen Beetle. On September 16, 1938,
the company was renamed Volkswagenwerk GmbH (Volkswagen Factory limited liability

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company).
However, during the Second World War, Volkswagen primarily manufactured military vehicles
and the production of the Beetle was reduced to only a small number. After the war, the production
of the Beetle started slowly, but the pace picked up in the 1950s and 1960s, with the introduction

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of new models. In 1960, the German federal government acquired a stake in the company.
In addition to product development, the company was also actively expanding itself through

Daimler-Benz to produce Audi. In August 1969, NSU Motorenwerke AG was acquired and
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mergers and acquisitions. In January 1965, Volkswagenwerk acquired Auto Union GmbH11 from

merged with Auto Union to form Audi NSU Auto Union AG (later renamed Audi AG in 1985). In
September 1982, Volkswagenwerk expanded out of Germany by signing a co-operation agreement
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with the Spanish car manufacturer SEAT, S.A.12 By 1990, Volkswagenwerk acquired SEATs
entire equity. In the meanwhile, the company again changed its name to Volkswagen
Aktiengesellschaft (Volkswagen AG) on July 4, 1985. In March 1991, the company signed a joint
venture with koda automobilov a.s.13 of Czechoslovakia, but gradually raised its stake in the
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company, making Skoda its wholly-owned subsidiary by May 2000.

As of September 2011, Volkswagen AG consisted of 342 Group companies, which were
involved in either vehicle production or other related automotive services. The VW Group
comprised eleven active automotive companies, and their corresponding marques Volkswagen
Passenger Cars, Volkswagen Commercial Vehicles, Audi, Bentley, Bugatti,
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Lamborghini, Porsche, SEAT, Scania AB, MAN SE, and koda each with its own unique
identity and operating independently. It also owned five inactive marques Auto Union, Dampf-
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Kraft-Wagen (DKW), Horch, NSU Motorenwerke AG, and Wanderer. The VW Group operated
worldwide with 62 production plants in 15 European countries and 7 other countries in the
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continents of Americas, Asia, and Africa. The company had its reach in 153 countries, with
China being its largest single country market followed by Germany with sales of 1,924,649 units
and 1,038,596 units respectively in 2010.v The companys recent acquisitions included Wilhelm
Karmann GmbH in November 2009, Italdesign Giugiaro S.p.A. in May 2010, and a 19.9% stake
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in Suzuki Motor Corporation in December 2009.

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11
Auto Union was an amalgamation of four German automobile manufacturers Audi, DKW, Horch, and
Wanderer in 1932. The company has evolved into the present day Audi, as a subsidiary of Volkswagen
Group.
12
SEAT, S.A. was a Spanish state-owned automobile manufacturer founded on May 9, 1950. It is currently
a wholly owned subsidiary of the Volkswagen Group
13
koda Auto (founded as an arms manufacturer in 1859), is an automobile manufacturer based in
the Czech Republic. koda became a wholly owned subsidiary of the Volkswagen Group in 2000.

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 After the Breakup: The Troubled Alliance between Volkswagen and Suzuki

ABOUT THE INDUSTRY

Since 2009, there had been a decline in auto sales worldwide due to the economic crisis. This had
prompted global carmakers to form partnerships and alliances to save billions and develop state-
of-the-art powertrains. For instance, Europes second-biggest carmaker, PSA Peugeot Citroen, and
Japans Mitsubishi Motors Corp. formed a strategic partnership involving an equity investment.
Industry experts saw this pair-up as a union of the weak, to strengthen their positions in the global
automobile industry. Carmakers were also shifting their investments to emerging markets which

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had withstood the economic slump.
Another tie-up was formed when Italys Fiat SpA acquired a 20% stake in Chrysler Group LLC in
June 2009. General Motors and Chinas Shanghai Automotive Industry Corporation too announced
that they would make small cars in India. Another alliance that tasted success during these tough

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times was that of Renault from France and Nissan Motor of Japan, which had developed low-
emissions vehicles. Similarly, many manufacturers were keen to raise their presence in China and
India to tap the soaring demand in the Asian countries.
While major Western markets suffered a setback, the emerging markets of China and India, with
their booming sales, had become a lifeline for many automobile companies. However, the

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interesting aspect that had arisen amidst the crisis was that Asian automakers too were looking to
buy into brands on sale from global automobile behemoths such as GM and Ford Motor Co. to
strengthen their technological capacities and increase their global presence.

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The emerging markets had a high demand for fuel-efficient cars. Even in the developed markets,
particularly in Europe, there was a move toward more eco-friendly cars. With the introduction of
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stricter emission regulations and the introduction of incentives for manufacturers doing research in
green technologies, the demand for green vehicles had increased. Vehicle manufacturers all over
the world were trying to fit in with the EUs emission norms (Euro 5 and Euro 614 standards).
Automobile manufacturers were trying to acquire or indigenously develop such green technologies
to tap the soaring demand.
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THE SUZUKI-VW PARTNERSHIP

In its annual report of FY2009-2010, VW said that it intended to position itself as a global economic
and environmental leader among automobile manufacturers and termed it as Strategy 2018.
Through this strategy it aimed to be the most successful and fascinating automaker in the world by
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2018, using intelligent innovations and technologies to deliver customer satisfaction and quality,
increase unit sales to more than 10 million vehicles a year, and capture major growth markets.
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In line with the global trend of alliances and its own goals of becoming the worlds biggest
automaker, VW joined the flurry of realignments and alliances and discussed a partnership with
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Suzuki in June 2009. Battered by the falling demand in the US and Europe and the stricter
environmental standards, it hoped that the alliance would create a formidable new force in the
global car industry. This comes right after the Mitsubishi deal and shows that foreign carmakers
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are coming to take stakes in Japanese firms, raising expectations of a reorganization in the autos
sector,vi said Noritsugu Hirakawa, a strategist at Okasan Securities15. VW had performed better
than its rivals during the recession and had taken a bold step to strengthen itself. However, analysts
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opined that the move had been made too early (the second in a week) after VWs 3.9 billion
(US$5.8 billion) purchase of a 49.9%vii stake in sports car maker Porsche AG.

14
Euro 5 are emission limits set by the EU for diesel vehicles. Euro 6 are emission limits set by the EU
for vehicles using petrol, natural gas or LPG.
15
Okasan Securities Group Inc., is a securities company group established in 1923 and is committed to a
wide spectrum of securities investment and asset management businesses.

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 After the Breakup: The Troubled Alliance between Volkswagen and Suzuki

On December 9, 2009, VW and Suzuki officially announced that they had reached a common
understanding to establish a close long-term strategic partnership. Both the companies opined
that they would complement each others strengths and make a perfect fit in exploiting their
advantages and rise to the challenges of the global automobile industry. According to the deal, VW
would purchase 19.9% of Suzukis issued shares for 1.7 billion (222.5 billion or US$2.5
billion) and Suzuki would invest up to half of the amount received from VW (about 100 billion or
US$1.13 billion) to purchase a 1.5% voting stake in VW. Owing to these developments, Suzukis
shares rose 3.5% in Tokyo and VWs rose 2.3% in Germany.viii

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VWs chief executive, Martin Winterkorn (Winterkorn), had a 10-year goal of increasing VW-
brand sales by 80% (6.6 million vehicles) by 2018 and with this purchase, VW became a top
shareholder in Suzuki. Analysts too opined that the VW-Suzuki deal would be game-changing and
help them in competing head to head with Toyota. It was also expected to open the doors for VW

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to one of the worlds fastest growing car markers and give more visibility to Suzuki globally.
Earlier, GM owned a 20% stake in Suzuki (invested in 1981). However, since 2006, Suzuki had
been cutting its ties with GM and had completed the purchase of its shares back from GM in 2008.
After the deal with VW was finalized, the company planned to use 100 billion of the proceeds
from VW to repay its debt and 122.5 billion on its research and development.ix

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THE RATIONALE FOR THE ALLIANCE

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VW entered into this partnership to tap Suzukis strengths in small cars and its dominance in the
fast-growing Indian market apart from allowing the automakers to pool management resources,
share auto parts to cut down production costs, and jointly develop the next generation of fuel-
efficient cars. However, the companies were not in favor of the idea of sharing dealership or
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service center space. Industry analysts expected that the VW-Suzuki combined vehicle sales (3.265
million and 1.15 million in the first half of 2009) would easily take the numbers above Toyotas
(4.415 million).x Together, we can maximize our opportunities for growth. In partnership with
Suzuki, the Volkswagen group can take a big step forward in the compact car segment, particularly
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in the emerging markets in Asia. In turn, Suzuki can benefit from our experience with efficient and
environmentally friendly vehicles. In 8 to 10 years from now, we want to become No. 1 in the
world. I believe we will be able to accelerate that with the cooperation with Suzuki,xi said
Winterkorn.
VW was struggling to make its presence felt in the Indian market because it did not have small
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cars to offer and its only mini vehicle, UP, was still under development. It hoped to crack the
Indian and South-east Asian markets through Suzukis Indian subsidiary Maruti Suzuki India
Limited a powerful player in India (Refer to Exhibit III for some key statistics related to the
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Indian market). Suzuki was known for its minicar models, like WagonR, the Swift hatchback,
and Jimny, a small sport-utility vehicle, which were sold mainly in Japan, India, and Southeast
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Asia. It was considered a world leader in the mini-car segment. It also had close to 50% share of
the fast-growing Indian market and a huge network of dealerships across the subcontinent.
However, it lagged behind in gas-electric hybrids, electric vehicles, and other fuel-efficient cars.xii
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Suzukis chairman and chief executive, Osamu Suzuki, also highlighted the need for better
economies of scale to keep up with the cut-throat competition, as mass production (by having
common parts and components) and mass sales played a key role in controlling costs. However, he
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made it clear that his company would be an equal partner and would not become a subsidiary of
VW. He also bristled at the idea of having a German CEO at his company and said, I dont want
other folks telling me how to do things.xiii
Industry experts were of the opinion that the cross-border deal would have a positive effect on Maruti
Suzuki, catapulting it into a global small car hub for supplying these cars through VWs strong
network. Volkswagen has looked at Suzuki obviously from a small car angle. India could become
an original equipment manufacturer and supplier of small cars for Volkswagen. It is too early to

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 After the Breakup: The Troubled Alliance between Volkswagen and Suzuki

speculate on its (deals) implications on India (Maruti). The deal means Volkswagen and Suzuki see
much value in the arrangement in terms of technology sharing,xiv Maruti Suzuki India chairman, R
C Bhargava, said. The deal (sale of shares) was finally completed on January 15, 2010.

JOINT PROJECTS

A few days after the two companies announced their tie-up, VW sought to leverage on its partners
R&D facility to jointly work on hybrid16 and electric car projects. Jochem Heizmann, VW board
member responsible for production, said, Its too early to give out concrete details of our plans,

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but what is definite are common projects on hybrids and electro mobile cars. VW can offer hybrids
and electric technology. Suzuki also has a fuel cell technology program going on at its end.xv
They planned to develop cars together under both brand names and expected their first car using
parts from both manufacturers to be introduced by the end of 2010. VW also intended to supply

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diesel engines to Suzuki in the future. The partnership also spurred some interesting thoughts of a
VW motorcycle coming to fruition.
After the tie-up, Suzuki announced that it did not intend to sell more shares to VW, but was open
to buying more stakes in VW. However, on the production front, it planned to increase the
production capacity of its Indian subsidiary by 50% and to boost its annual production to 1.5

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million vehicles by 2015. VW, on the other hand, was optimistic about the positive influence of
Suzukis partnership on its future products like the concept car VW New Compact Coupe

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(NCC), the New Beetle Final Edition, a subcompact car Polo, the Phaeton Luxury sedan, the UP!
Lite, the VW Jetta TDI, etc. all with a clean diesel technology powertrain, which it intended to
introduce in the US market.
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On January 20, 2010, Osamu Suzuki announced that a co-developed car would be released in
2013. He furthered clarified that the companies were working on all models of common
components like air conditioning, power steering, etc. The Japanese automaker was also interested
in procuring VWs powerplants (probably a Diesel and V6 petrol engines) for its midsized Kizashi
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sedan but was of the opinion that it might take some time to discover the synergies and then
collaborate.
By April 2010, the two companies were planning to develop an eco-car in Thailand. These plans
were developed as a result of Nissans eco-car launch in Thailand followed by announcements
from other Japanese companies like Toyota and Honda. While it was not clear whether the eco-
cars would be developed jointly or separately, cooperation between the two partners was expected
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in terms of supply chain, parts procurement, shared production facilities and distribution. Suzukis
eco-car investment involved building the facilities for pressing, welding, painting, assembly, and
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engine production with production starting from early 2012 at 10,000 units per annum.
In August 2010, both the partners explored the possible synergies. While VW was keen on
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controlling costs by harnessing Suzukis production practices and generating volumes in the small
car segment, Suzuki decided that it would not share its car platforms in India with VW. There is
no possibility of platform sharing (with Volkswagen) as the German companys production and
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product development costs are very high and that could make our business unviable. There is a
possibility of an original equipment manufacturing deal with Volkswagen, like the way we have
with Nissan which sells hatchback A-Star as the Pixo in Europe. Volkswagens cost of products is
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high whereas Marutis product management costs are very low; so they can learn from us,xvi said
Shinzo Nakanishi, MD and CEO of Maruti Suzuki India. Moreover, he made it clear that Maruti
Suzuki did not want to use VW Indias facilities to overcome its capacity crunch as they were too
expensive. Later in November 2010, both companies were expected to design a mutually

16
A hybrid electric vehicle combines a conventional internal combustion engine propulsion system with an
electric propulsion system, and is, therefore, more fuel-efficient.

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 After the Breakup: The Troubled Alliance between Volkswagen and Suzuki

beneficial global business model and unveil joint projects by December or January 2011.
However, by mid- 2011, there were clear indications that the companies were not able to cooperate
with each other and had not made any progress in terms of co-development of cars, technology
sharing, platform sharing, etc.

THE PROBLEMS

In March 2011, VW, in its annual report, termed Suzuki as its associate and that it could
significantly influence financial and operating policy decisions of the company. This angered

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Suzuki executives, as the two companies were intended to cooperate as equals in the partnership.
After that, the disagreements between the two partners only escalated.
CULTURAL MISMATCH

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In addition to policy differences, the partnership faced a cultural mismatch in their working
approach (Refer to Exhibit IV for the differences in work culture of Japanese and German
companies). While VW bemoaned the slow decision-making of the Japanese company, Suzuki
criticized VWs high-handed approach to the alliance and the level of technological access being
offered by the Germans. Winterkorn said that VWs managers were trying to build mutual trust but

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this was difficult as there were significant cultural differences in the working approach of the two
companies. Volkswagen and Suzuki had a different approach in taking decisions. Working with a
Japanese partner is not easy. European companies were fast in making decisions. In the West

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sometimes, we make decisions more quickly. In the Japanese culture, sometimes things are a little
different.xvii But analysts opined that issues such as decision-making structures, cultural
differences, and building of mutual trust should have been addressed before the alliance was
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formed rather than being discussed a year after.
DISAGREEMENTS IN TECHNOLOGY SHARING
There were disagreements in terms of technology sharing and cooperation as well. Since the framing
of the partnership, the collaboration between the two companies was not progressing as expected. In
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almost two years of their alliance, there was nothing fruitful that emerged from it. During June-July
2011, Hans Dieter Poetsch, chief manager for finance at VW, announced that the company might
have to rethink its agreement. In response to VWs announcement, Suzuki vice president, Yasuhito
Harayama, blamed the lack of progress in the collaboration on the fact that VW was hoping to
influence Suzuki as a company. In addition to this, Osamu Suzuki also indicated that VW had
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nothing on the shelves in terms of technology that Suzuki immediately wanted.

The relationship further deteriorated when Winterkorn stated, Suzuki wants as much modern
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technology as possible from Volkswagen, but is not willing to reciprocate. The Japanese still need
some training in proper cooperation.xviii Osamu Suzuki fired back through his blog stating, Since
the companies differ in size, people of Volkswagen may develop a mistaken impression that
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Suzuki is placed under their umbrella. The initial basic agreement seems to falter. We learnt about
Volkswagens technologies, but we did not find any one of them interesting enough to adopt
immediately. If we are short of any technology, we have an option to ask other companies with
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which we benefit from technological exchanges.xix

Earlier, in 2005, Suzuki had formed an alliance with Fiat to make diesel engines in Asia. In January
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2011, the company entered into an agreement with Fiat to supply diesel engines for its Indian
subsidiary Maruti Suzuki. It further extended its partnership with Fiat in June 2011 to buy Multijet
engines from the company in Hungary. This led to speculation in the industry that a new global
alliance could be in the offing. The general impression was that VW would be Suzukis first choice
for diesel engines and opting for Fiat instead sure set tongues wagging,xx said an automobile
executive. VW accused Suzuki of a breach in the agreement for taking technology from Fiat. VWs
reaction to this supply arrangement between Suzuki and Fiat which pre-dated the VW alliance by
several years was the final straw for Suzuki and hastened the decision to part.

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 After the Breakup: The Troubled Alliance between Volkswagen and Suzuki

PROBLEMS IN POLICY AND COOPERATION

The media war between the companies got wilder by the day. While VW felt that it was not getting
enough cooperation from its Japanese counterpart, Suzuki opined that VW was not giving it the
respect due to it as an independent company. However, the industry experts opined that the
partners were lacking in the departments of control and planning regarding the alliance and needed
to do a rejig in the stake holding pattern. By August 2011, rumors about the possible break up
surfaced but were quickly laid to rest by VW. VW and Suzuki still are, and will continue to be,
two independent companies with different business models from different cultural environments.

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The cooperation is marked by highest respect and acceptance,xxi said, Hans Demant, VWs
coordinator for international projects.
According to analysts, a tiff that started over VWs statement had turned into a public feud and
escalated into a spat threatening the alliance. Since the initial agreement, both companies had tried

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to move the partnership forward but had failed due to cultural differences and the ethos of the
companies. Suzuki regarded its operational independence as sacrosanct and also opined that VW
had acted in an arrogant and high-handed manner. Suzuki in its statement said, Suzuki thinks that
it is crucial to secure independence in its operating policy decision for maintaining its
competitiveness in the domestic Kei-car market and Asian markets including India. However,

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Volkswagen AG publicly reported that Suzuki was a company over which Volkswagen AG had
significant influence where financial and operating policy decisions were concerned. Taking these
facts into account, Suzuki concluded that it was difficult to attain its primary aim for of entering

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into the partnership. Also there was concern that the partnership would have a negative impact on
Suzukis autonomous decision-making in its operating policy.xxii
SERVING NOTICE: BREACH OF CONTRACT
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In September 2011, VW served a notice of breach of contract on Suzuki stating that Suzuki had
gone to Fiat for its engines instead of approaching VW. This upset Suzuki further and it demanded
that VW withdraw the claim. However, according to Suzuki, the matter of buying Fiat engines
had been discussed with Volkswagen back in January and both sides accepted the terms. The
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reason behind the deal is Suzukis need of an engine that would meet specified parameters for their
Sx4 compact. Fiat had such a 1.6 liter diesel engine available while Volkswagen did not.xxiii
Osamu Suzuki also stressed that the deal with Fiat did not violate any contractual agreements with
VW and decided to dissolve the partnership and cross-shareholding deal as it would disrupt and
disparage its honor.
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Following these incidents, on October 13, 2011, Suzuki too served VW with a notice of breach
of the Framework Agreement that was drawn up in 2009. The notice required VW to remedy the
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breach. Osamu Suzuki, said, This capital alliance was intended to facilitate Suzukis access to
VWs core technologies. I remain disappointed that we have not received what we were promised.
If Volkswagen will not allow access it must return Suzukis shares. We are very encouraged by
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Suzukis consistently solid performance. We remain on track for profitability and are excited about
the potential for future growth.xxiv
In response to the notice, Ulrich Hackenberg, Executive Vice President and Member of the Board
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of Management, VW Brand, explained, The association with Suzuki Motor is purely financial and
not technical. There has been some misinterpretation of the issue. The collaboration with Suzuki is
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financial only. The investment in the company has been positive so far. Stocks have gone up
because of the collaboration. The collaboration was possible because they approached
Volkswagen. Actually, we do not have the same interpretation of the partnership.xxv The company
also insisted that a clause existed in the agreement which barred VW from getting more shares of
Suzuki, but once the agreement was cancelled it was no longer bound to that clause and could start
buying shares from the open market. Citing the development of UP!, he opined that the small car
had been conceptualized and developed without the help of Suzukis small car platform and much
before the partnership had been entered into.

8
 After the Breakup: The Troubled Alliance between Volkswagen and Suzuki

THE BREAKUP

Finally on November 18, 2011, Suzuki terminated its partnership with VW and demanded the
return of its shares. In his statement on the termination, Osamu Suzuki said, Today Suzuki
terminated the partnership with VW. Suzuki will be seeking the return of its shares from VW in
arbitration. I am disappointed that we have to take this action but VWs actions have left us no
choice. They have continued to refuse our attempts on numerous occasions to resolve these issues
through negotiation. I am more disappointed that having shaken the hand of Dr. Winterkorn in
agreeing to this partnership, he has not honored his commitment to grant Suzuki access to what

ST
was originally agreed. In the absence of VWs cooperation and given its failure to do what was
agreed, there is no basis for the partnership to continue. With the cessation of the partnership there
is also no basis for VW to hold on to Suzukis shares. We will now work to restore the relationship
between Suzuki and VW to its original state as independent parties who do not restrict each others

PO
business. I call on Dr. Winterkorn to honor this.xxvi
The move had left VW baffled, opined an industry observer. Its clear VW hoped to learn more
about Suzukis almost miraculous ability to engineer profitable low-cost cars, something VW
struggles with. If the partnership is over, theyre going to have to figure it out themselves. Its also
going to cost them more to get into the Indian market that it would have done with Suzuki. But

R
neither are insurmountable challenges for a company with VWs money, ambition, and, I would
assume, patience,xxvii said Max Warburton at Bernstein Research17.

O
Industry analysts opined that finding another partner for VW to build small cars or entering the fast
growing Indian market on its own would be a costly affair for the German car maker. They also
described Suzukis diesel engine deal with Fiat as a snub to VW, as Suzuki in partnership with
VW would have got global scale and access and superior hybrid technologies (Refer to Exhibit V
PY
for a diagram summarizing the VW-Suzuki Breakup).

THE AFTERMATH
CO

After the termination of the partnership, Suzuki wanted VW to sell back its 19.9% stake. However,
VW refused to acknowledge Suzukis request saying that it was not legally bound to do so. As a
result, Suzuki filed for arbitration with the International Chamber of Commerces (ICC)
International Court of Arbitration in London. But VW braced up to fight all the way. We wont
sell our Suzuki stake. If the current management at Suzuki doesnt want to work together with us,
then maybe the next generation will.xxviii said Winterkorn.
T

Frank Schwope, a NordLB18 analyst, opined that there was no urgent financial need for VW to
return Suzukis shares unless the arbitration court forced it to do so. Instead it could keep them as
O

an investment and wait for Suzuki to weaken to a point where it would need a partner again. Other
analysts argued that VW would retain the shares to ensure that no other competitor like Fiat took a
stake in Suzuki. They will just keep the stake as a financial investment and see what they do with
N

it ... even if its only to annoy them. They wont take a loss selling down their stake,xxix said a
London-based equity analyst.
Industry observers debated on the possibilities of the outcome of the feud. They opined that the
O

chances of VW selling its stake were slim as the German carmaker had no immediate need for
further liquidity. But Suzuki might be willing to pay a premium to put the partnership behind it,
they felt. However, some analysts felt that the stalemate could be broken if both companies built
D

up mutual trust. For instance, they opined that Suzuki could buy some diesel engines while VW
could grant access to its alternative technology. However, if both the companies were adamant
about their decisions, then analysts opined that the relationship between the two would be bitter

17
Bernstein Research, founded in 1967, is widely recognized as Wall Streets premier sell-side research firm.
18
The Norddeutsche Landesbank (abbreviated Nord/LB) is a German landesbank and is one of the largest
commercial banks in Germany.

9
 After the Breakup: The Troubled Alliance between Volkswagen and Suzuki

even after Osamu Suzukis regime. Observers did not rule out the possibility of a hostile takeover
of Suzuki, but opined that it would be a tough battle for VW. Commerzbank19 analyst Daniel
Schwarz said, First of all, (Suzuki chairman and CEO) Osamu Suzuki would not want to sell. VW
simply wont be able to take over all of Suzuki against his will.xxx

THE ROAD AHEAD

Both the companies were pegged back due to the breakup of the alliance. According to Aleksej
Wunrau, a Frankfurt-based BHF Bank AG20 analyst, Suzuki really needs a big manufacturer

ST
behind it, so the effect of a withdrawal would be far worse for them. 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.xxxi As the Indian market was central to
VWs plans of becoming a world no#1 by 2018, analysts and top industry executives felt that the

PO
company needed a revamped strategy and a new alliance partner to compete in Indias small car
market or develop a strong small car product line-up on its own. In 2010-2011, VW India offered
seven models across price points which included hatchback Polo and the sedan Vento. VW
planned to introduce a special variant of its UP and more compact cars for India in 2012 to
consolidate its position in the fast growing small car market which constituted more than 70% of
the total cars sold in the country.xxxii The UP, the company expected, would take on Marutis A-

R
star and WagonR and help increase its market share in India. In 2010, VW had sold 53,300 cars in
India and aimed to double the figure in 2011. It further aimed to raise its market share to 11% by

O
2015-2016. The tie-up would have offered Volkswagen an automatic advantage as they would
have got a strong local partner in Maruti Suzuki. The Indian market is skewed toward low-cost
cars while Volkswagens expertise lies in the premium cars. The (market share) target looks
ambitious,xxxiii said Colin Couchman, a European automotive analyst at IHS Automotive.
PY
After distancing itself from VW, Suzuki sought help from the Mitsubishi Group of Companies21 to
power its hybrid cars. Meanwhile, Fiat CEO, Sergio Marchionne said, Suzuki would be an
interesting partner for Fiat in Asia. This doesnt shock us because we have already speculated that
Fiat was right partner for Suzuki and not VW. He also said that Suzuki and Fiat had been working
CO

together for a very long time and were familiar with each others business methods and thus could
leverage on the strengths of each other. Suzuki had made a deal with Fiat to supply the SX4
crossover in mid-2011. Later, the Maruti Suzuki SX4 was launched with a Fiat Multijet engine and
it planned to deploy the same engine for the 2011 Swift and Swift Dzire. The VW TDi engines had
proved to be too expensive to procure and had higher maintenance costs for Suzuki. Suzuki further
offered to build the next generation Sedici (rebadged SX4crossover) for Fiat in Italy and a small
T

SUV for Chrysler (now owned by Fiat). With all these improvements in the Suzuki-Fiat
relationship when compared to the Suzuki-VW alliance, analysts opined that Fiat would have been
O

the right partner for Suzuki rather than VW.

While some industry analysts expected a full takeover of Suzuki by VW, there were others who
N

trashed the idea and felt that both the companies should move on. Tim Urquhart, IHS Global
Insight auto analyst, stated, I dont 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 Suzukis point of
view a defamation case.xxxiv
O

19
Founded in 1870, Commerzbank AG is the second largest bank in Germany, after Deutsche Bank, and is
headquartered in Frankfurt am Main.
20
BHF-Bank is a leading German investment bank currently owned by Deutsche Bank.
21
The Mitsubishi Group of Companies or Mitsubishi Companies) founded in 1870, is a
Japanese multinational conglomerate comprising a range of autonomous businesses like
Mining, shipbuilding, telecom, financial services, insurance, electronics, automotive, construction, heavy
industries, oil and gas, real estate, foods and beverages, chemicals, steel, aviation and others. The
revenue and profit of the group for the FY 2010 were US$ 248.6 billion and US$ 7.2 billion respectively.

10
 After the Breakup: The Troubled Alliance between Volkswagen and Suzuki

Exhibit I
Suzuki Financials (20072011)
Millions of Yen () Thousands of US
(except per share amounts) $ (except per
share amounts)

Years Ended 2011 2010 2009 2008 2007 2011

March 31

ST
Net sales 2,608,217 2,469,063 3,004,888 3,502,419 3,163,669 31,367,622
Net Income 45,174 28,913 27,429 80,254 75,008 543,283
Net Income per share:

PO
- Primary 80.65 62.76 61.68 177.96 169.41 0.969
- Fully diluted 74.11 55.26 53.97 155.89 151.41 0.891
Cash 13.00 12.00 16.00 16.00 14.00 0.156
dividends per

R
share
Net assets 1,106,999 1,089,757 742,915 902,894 855,973 13,313,285
Total current
assets
Total assets
1,372,885

2,224,344
1,479,336

2,381,314
1,267,790

2,157,849
O 1,483,038

2,409,165
1,435,405

2,321,441
16,510,954

26,750,988
PY
Depreciation 138,368 141,846 141,203 161,600 149,910 1,664,088
and
amortization
Automobile Production (in thousand units)
CO

Year Ended March 31 Overseas Japan Total

2007 1,199 1,212 2,412
2008 1,418 1,219 2,637
2009 1,355 1,139 2,494
T

2010 1,586 959 2,545

O

2011 1,884 994 2,878

Motor Cycle Production (in thousand units)
N

Year Ended March 31 Overseas Japan Total

2007 2,562 621 3,183
2008 2,841 549 3,391
O

2009 2,993 312 3,305

D

2010 2,743 162 2,904

2011 2,550 185 2,735

Adapted from Annual Report 2011- Suzuki Motor Corporation, www.globalsuzuki.com

11
 After the Breakup: The Troubled Alliance between Volkswagen and Suzuki

Exhibit II
Volkswagen Financials (2007-2011)
Volume Data 2011 2010 2009 2008 2007
Vehicle Sales (units) 8,361,294 7,278,440 6,309,743 6,271,724 6,191,618
Production (units) 8,494,280 7,357,505 6,054,829 6,346,515 6,213,332
Employees as on Dec 31 501,956 399,381 368,500 369,928 329,305

ST
Financial Data (IFRSs), million 2011 2010 2009 2008 2007
Sales revenue 159,337 126,857 105,187 113,808 108,897
Operating profit 11,271 7,141 1,855 6,333 6,151

PO
Profit before tax 18,926 8,994 1,261 6,608 6,543
Profit after tax 15,799 7,226 911 4,688 4,122
Profit attributable to shareholders of 15,409 6,835 960 4,753 4,120
Volkswagen AG

R
Cash flows from operating activities 8,500 11,455 12,741 10,799 15,662
Cash flows from investing activities 16,002 9,278 10,428 19,710 13,474
attributable to operating activities
Automotive Division O
PY
EBITDA 17,815 13,940 8,005 12,108 -
Cash flows from operating activities 17,109 13,930 12,815 8,771 13,675
Cash flows from investing activities 15,995 9,095 10,252 11,450 6,550
attributable to operating activities
CO

Of which: investments in property, 7,929 5,656 5,783 6,762 4,555

plant and equipment
As a percentage of sales revenue 5.6 5.0 6.2 6.6 4.6
Capitalized development costs 1,666 1,667 1,948 2,216 1,446
T

As a percentage of sales revenue 1.2 1.5 2.1 2.2 1.5

Net cash flow 1,112 4,835 2,563 -2,679 7,125
O

Net liquidity at Dec 31 16,951 18,639 10,636 8,039 13,478

Return ratios in % 2011 2010 2009 2008 2007
N

Return on sales before tax 11.9 7.1 1.2 5.8 6.0

Return on investment after tax 17.7 13.5 3.8 10.9 9.5
O

(automotive division)
Return on equity before tax (financial 14.0 12.9 7.9 12.1 16.1
services division)
D

Adapted from Volkswagen AG Annual Reports 2011, 2009 and 2008, www.volkswagenag.com

12
 After the Breakup: The Troubled Alliance between Volkswagen and Suzuki

Exhibit III
Some Key Statistics Related to the Indian Automobile Market
Gross Turnover of the Automobile Industry in India (In US$ Million)

38,238
40,000 36,612
34,285
35,000

ST
30,000 27,011
25,000 20,896
20,000

PO
Turn
15,000
10,000
5,000
0

R
200405 200506 200607 200708 200809

Category
Passenger
2004-05
1,061,572
2005-06
1,143,076
2006-07
1,379,979
O
Sales of Automobiles in India
2007-08
1,549,882
2008-09
1,552,703
2009-10
1,951,333
2010-11
2,520,421
PY
Vehicles
Commercial 318,430 351,041 467,765 490,494 384,194 532,721 676,408
Vehicles
Three 307,862 359,920 403,910 364,781 349,727 440,392 526,022
CO

Wheelers
Two 6,209,765 7,052,391 7,872,334 7,249,278 7,437,619 9,370,951 11,790,305
Wheelers
Grand Total 7,897,629 8,906,428 10,123,988 9,654,435 9,724,243 12,295,397 15,513,156

Change in Market Shares of Different Automobile Manufacturers in India

T

2011-2012 2010-2011
O

Maruti Suzuki 40.4% 44.9%

Hyundai 14.9% 14.3%
N

Tata Motors 12.3% 14%

M&M 9.2% 6.8%
Toyota 5.6% 3.3%
O

GMI 4.6% 4.2%

Ford 3.7% 3.9%
D

Volkswagen 3.2% 2.1%

Honda 2.0% 2.4%
Others 4.2% 4.1%

Source: SIAM

13
 After the Breakup: The Troubled Alliance between Volkswagen and Suzuki

Exhibit IV
Comparison of Japanese and German Business Etiquette
Japanese Business Etiquette:
Unhurried Japanese concept is gone, decisions are made swiftly and efficiently
Making a personal call for business appointment is more effective than sending a letter
Punctuality is essential; arriving 5 minutes early is good practice

ST
Strong hierarchical structure in negotiation process; begins from executive and goes to
middle level management; but decisions are made by the group
In business meetings, the Japanese will line up in the order of seniority with the most senior
person in the front and least senior person closest to the door

PO
It is important to show greater respect to the eldest members; age and rank are strongly
connected; however, even a low ranking individual can become a manager if he performs
well
Personal space is highly valued; being silent at meetings is acceptable; it is considered to be
a thought process

R
Business cannot start until the exchange of business cards or meishi; use both hands to
present or take the card and examine it carefully before placing it away

O
Gift giving is accepted with gratitude; but too big a gift is considered a bribe
Engaging in small talk about education and family and social life before business
negotiations is a good practice
PY
Business protocols are not necessarily final agreements; after care and long-term
relationships are positively encouraged
Greet your counterparts with a bow or handshake, use apologies and express gratitude
CO

frequently
Avoid confrontation and showing negative emotions during business negotiation
Dont praise a single Japanese colleague; the group is more important than the individual
Dont use first names unless invited to do so; use titles and their family names
Dont use large hand gestures, unusual facial expressions, or dramatic movements
T

German Business Etiquette:

O

Personal relationship is not needed to do business; your academic credentials and

experience in business will do
Germans work with their office doors closed, so knock and wait till invited in
N

Communication is formal and following the established protocol is important to maintain

business relationship and maintain direct eye contact while speaking.

O

Germans are suspicious of hyperbole promises and display of emotions

Germans require a great deal of written communication both in English and German
D

They display great deference to people in authority, so it is imperative that they understand
your level relative to their own.
Appointments are mandatory and are to be made 1-2 weeks in advance; punctuality is taken
extremely seriously
Meetings are generally formal. Initial meetings are used to get to know each other. They
allow your German colleagues to determine if you are trustworthy.
Contd...

14
 After the Breakup: The Troubled Alliance between Volkswagen and Suzuki

Contd...
Meetings adhere to strict agendas, including starting and ending times.
The eldest or highest ranking person enters the room first. Men enter before women, if their
age and status are roughly equivalent
Do not sit until invited and told where to sit. There is a rigid protocol to be followed.
Germany is heavily regulated and extremely bureaucratic. They prefer to get down to
business and only engage in the briefest of small talk.

ST
Contracts are strictly followed. Once a decision is made, it will not be changed.
You must be patient and not appear ruffled by the strict adherence to protocol. Germans are
detail- oriented and want to understand every innuendo before coming to an agreement.

PO
Business is hierarchical. Decision-making is held at the top of the company. Final decisions
are translated into rigorous, comprehensive action steps that you can expect will be carried
out to the letter.
Avoid confrontational behaviour or high- pressure tactics. It can be counterproductive.
Men should wear dark coloured, formal, and conservative business suits and women should

R
wear either business suits or conservative dresses without ostentatious jewelry or
accessories.

O
Adapted from Doing Business in Japan- Japanese Social and Business Culture, www.communicaid.com;
and Germany - Language, Culture, Customs and Business Etiquette, www.kwintessential.co.uk
PY
Exhibit IV

Suzuki-VW Breakup
CO
T
O
N
O
D

Adapted from: Chanchal Pal Chauhan, Volkswagen May Bring Special UP!, The Economic Times, Page
7, September 13, 2011

15
 After the Breakup: The Troubled Alliance between Volkswagen and Suzuki

End Notes:

i
Chris Bryant and John Reed, VW Tie-up with Suzuki Hits Slippery Patch, www.ft.com, September 12, 2011.
ii
Volkswagen Suzuki Divorce Raises Doubts Over Auto Alliances, http://economictimes.indiatimes.com,
September 13, 2011.
iii
Annual Report 2011 Suzuki Motor Corporation, www.globalsuzuki.com, 2011.
iv
Volkswagen AG Annual Report 2011, www.volkswagenag.com
v
Volkswagen AG Annual Report 2010, www.volkswagenag.com

ST
vi
Chang-Ran Kim and Christiaan Hetzner, VW Buys $2.5 Billion Suzuki Stake, www.reuters.com, December 9,
2009.
vii
Ibid.
viii
Makiko Kitamura and Andreas Cremer, Eyeing India Market, VW Buys 20% of Suzuki,

PO
www.businessweek.com, December 2009.
ix
Ibid.
x
Volkswagen AG Buys $2.5 Billion Stake in Suzuki Motor Corp, Eyes World #1 Wutomaker Spot,
http://articles.nydailynews.com, December 9, 2009.
xi
Hiroko Tabuchi and Bettina Wassener, Volkswagen to Buy 20 Percent Stake in Suzuki, www.nytimes.com,
December 9, 2009.

R
xii
Ibid.
xiii
Chang-Ran Kim and Christiaan Hetzner, VW Buys $2.5 Billion Suzuki Stake, www.reuters.com, December 9,

xiv

xv

xvi
2009.

O
VW Buys $2.5 bn Stake in Suzuki, a Foothold in India, www.indianexpress.com, December 10, 2009.
VW-Suzuki Plans to Carry out Hybrid Car R&D in India, http://suzukifan.com, December 14, 2009.
PY
Suzuki and Volkswagen May Make Some Solid Global Announcements in the Next Six to Eight Months, http://suzukifan.com,
August 5, 2010.
xvii
Volkswagen CEO Admits to Differences with Suzuki on JV, http://suzukifan.com, March 13, 2011.
xviii
Bertel Schmitt, Osamu Suzuki Blog Bombs Volkswagen, www.thetruthaboutcars.com, July 7, 2011.
xix
Ibid.
CO

xx
Murali Gopalan, VW, Suzuki Go Nowhere Despite Two-year Drive, www.thehindubusinessline.com, August 8,
2011.
xxi
Makiko Kitamura, Yuki Hagiwara, and Andreas Cremer, Volkswagen-Suzuki Alliance Unraveling Over Control
of Drivers Seat: Cars, www.bloomberg.com, September 6, 2011.
xxii
Suzuki Made a Timely Disclosure Regarding the Partnership with Volkswagen AG, www.globalsuzuki.com,
September 12, 2011.
T

xxiii
Danny Choy, Suzuki Demands Volkswagen Withdraw Claim of Breached Contract, www.autoguide.com,
September 23, 2011.
O

xxiv
Suzuki Motor Corporation Serves Volkswagen AG a Notice of Breach Regarding Partnership,
www.theautochannel.com, October 14, 2011.
xxv
V Rishi Kumar, Volkswagen-Suzuki Tie Up is Financial, Not Technical, Says VW Official,
N

www.thehindubusinessline.com, September 14, 2011.

xxvi
Termination of the Framework Agreement Regarding the Business Alliance and Cross-holding of Shares with
Volkswagen AG, www.globalsuzuki.com, November 18, 2011.
xxvii
Chris Bryant and John Reed, VW Tie-up with Suzuki Hits Slippery Patch, www.ft.com, September 12, 2011.
O

xxviii
Chikafumi Hodo and Christiaan Hetzner, Suzuki Files for Arbitration in VW Dispute, www.reuters.com,
November 24, 2011.
D

xxix
Volkswagen and Suzukis Crumbling PartnerShip, http://business-standard.com, October 3, 2011.
xxx
Full Takeover of Suzuki by Volkswagen Unlikely, http://economictimes.indiatimes.com, September 20, 2011.
xxxi
Makiko Kitamura, Yuki Hagiwara and Andreas Cremer, Volkswagen-Suzuki Alliance Unraveling over Control of
Drivers Seat: Cars, www.bloomberg.com, September 6, 2011.
xxxii
Chanchal Pal Chauhan, Volkswagen May Bring Special UP! The Economic Times, Page 7, September 13, 2011.
xxxiii
Shally Seth Mohile, Volkswagen to Bring More Small Cars to India to Raise Market Share, www.livemint.com,
November 2011.
xxxiv
Volkswagen and Suzukis Crumbling Partnership, http://business-standard.com, October 3, 2011.

16