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Thursday, December 10, 2009

Volks Wagon, Suzuki could create auto powerhouse in India

Mumbai, Dec. 9

Volkswagen and Suzuki could end up becoming an automobile powerhouse in India in the coming years following their decision to go in for a global cross-holding of equity.

VW will buy 19.9-per cent stake in Suzuki for ¥222.5 billion or $2.5 billion by January and the latter would invest half the amount to pick up a stake in the German carmaker. The companies said they had reached a common understanding to establish a close long-term strategic partnership. The goal is to establish a cooperative relationship while respecting each other's independence. Both VW and Suzuki also plan a joint approach to the growing worldwide demand for more environmentally friendly vehicles.

Suzuki is one of the biggest car brands in India thanks to the Maruti association for over 25 years now. In contrast, VW is a new entrant and due to launch its first locally made car, the Polo, early next year. VW's arm, Skoda, has been here for some time and carved a niche for itself as a premium brand.

Till not so long ago, General Motors had a 20 per cent stake in Suzuki and was tipped to use this as a plank to grow its India business. However, GM decided to buy out the ailing Daewoo business in South Korea and exited Suzuki.

How will the Suzuki-VW script pan out in India? For the Japanese carmaker, the biggest plus is access to VW's diesel engine technology. It now uses the GM-Fiat 1.3-litre diesel powertrain but will be inclined to moving to VW in the medium term.

Asked about the implications of the deal, Mr R. C. Bhargava, Chairman, Maruti Suzuki, said: “The partnership would help in R&D areas and for entering new markets for both companies, where one may not have had presence before.”

For VW, the partnership will mean a foothold in Suzuki's cost-competitive foundation carefully built over the years. Localisation is the biggest challenge and VW may not have to worry much on this score now thanks to Suzuki and its robust in-house base of critical parts.

Sources say VW could even consider sourcing Suzuki's petrol engines till it reaches the kind of volumes that justify local manufacture of its own range. In fact, the possibilities of a Fiat sourcing arrangement for diesel engines cannot be ruled out, they add.

Both companies will, however, continue with their individual branding strategies in India. Synergies will help in keeping costs in check or sharing common platforms but the retail efforts will be exclusive.

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