Suzuki drives solo again with VW’s exit

Osamu Suzuki said he felt as if a small bone had been stuck in his throat.

The reference was, of course, to the troubled alliance with Volkswagen. With the removal of this bone, the Chairman of Suzuki Motor Corporation will have reason to feel triumphant. What promised the moon in an exciting alliance turned acrimonious with the partners blaming each other for the state of affairs. Eventually, Suzuki sought international arbitration and with the verdict ruled in its favour after a long wait, its Chairman perhaps had reason to feel vindicated.

This is sure to be a costly divorce for the Japanese automaker with a payout of $3.8 billion for its 19.9 per cent from VW. In addition, there could be extra damages for breach of the joint venture agreement. From O Suzuki’s point of view though, all this could be a small price to pay for the larger cause of freedom.

The back story Even as the veteran auto industry chief basked in the moment at a recent Tokyo press conference, the leadership team at VW remained relatively quiet except for a statement in which it welcomed the court’s decision. It was perhaps a setback to the German auto giant which has, over the years, been on a relentless acquisition drive. The brand line-up is formidable with the likes of Porsche, Audi, Skoda, Bentley and Bugatti in its portfolio apart from MAN Trucks and Scania.

The alliance with Suzuki, announced in 2009, marked a key step where markets like India have continued to elude VW even while it rules the roost in China. This void was expected to be filled by this new joint venture where Suzuki is the clear leader in a market projected to be the third largest by 2020.

However, as things began to quickly turn sour, not too many within the auto industry thought Suzuki would have an easy exit. The general opinion was that it was up against a tough adversary which was not going to yield ground in a hurry. To that extent, the court verdict is a shot in the arm for the smaller company.

“It was a classic David versus Goliath ending. For an aggressive player like VW which has constantly emerged victorious in takeovers, this would not have been easy to digest,” says an auto industry CEO who preferred not to be named. This news also came at a time when the German automaker raced to the Number 1 position, ahead of Toyota Motor Corporation, in the first half sales worldwide. So, does the story end here with a happier and victorious Suzuki marching into a sunset? Sure, it is not going to be bogged down by any joint venture pressures any longer but it is not clear if staying solo can be a permanent option especially for a small player.

Future predictions If there is one person who has constantly been clamouring for further consolidation in the automobile space, it is Sergio Marchionne, the charismatic CEO of Fiat Chrysler Automobiles. He first pulled Fiat out of the woods when he took charge of the beleaguered Italian company. The next dramatic turnaround happened with the acquisition of Chrysler when Detroit’s iconic automakers had their backs to the wall in the 2009 crisis.

One would have thought that Marchionne had enough on his plate as the seventh largest automobile player in the world but he still had a surprise in store. Fiat Chrysler reached out to former ally, General Motors, for a possible merger but the proposal was quickly turned down. From Marchionne’s point of view, there was still someway to go in this competitive landscape which meant further consolidation.

Some months earlier, his company vehemently rejected reports of a possible merger with VW. The million dollar question now is if Fiat Chrysler will reach out to Suzuki as an ally for the future. After all, it does supply its diesel engines to the Japanese automaker (which irked VW) and there is no reason why this relationship cannot be extended. Fiat Chrysler would be delighted to grow its footprint in promising markets like India where it has not been successful for decades now. Yet, an equity partnership may not appeal to Suzuki at this point in time unless it wants to make up for the costly payout to VW. Apart from concerns on a cultural fit, neither company would be interested unless there is mutual gain.

Carlos Ghosn, like Marchionne, has been vocal about the need to work in tandem with allies. It was he who made the marriage of Renault and Nissan work like a dream script and as CEO of this alliance knows only too well that challenges remain in the automobile arena. Ghosn is also aware of the huge potential in emerging economies which explains not-so-successful initiatives like Datsun but nobody can question his logic.

The emergence of China has also changed global dynamics in a big way. Today, Dongfeng owns 14 per cent in PSA Peugeot Citroen while SAIC is the key driver for GM globally. Geely’s acquisition of Volvo Cars has been a happy story so far.

At one point in time, GM was considered the most reliable ally for Suzuki till it changed course and bought out Daewoo. Suzuki is happily single now but can it maintain this status quo forever? That is the million dollar question.

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