Public CompanySmall is beautiful
VW/Suzuki: Volkswagen’s $2.5bn investment in Japanese rival Suzuki is a small step in its ambition to be the world’s biggest car maker. But it is a smart move for both sides. And the strategic benefits for the German autos group are particularly attractive.
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Suzuki sold 1.15 million vehicles in the first half of 2009. A full takeover by VW would take the enlarged company straight to the top of the pack, with combined sales of 4.4 million units, putting it miles ahead of Toyota’s 3.5 million. But Suzuki is probably not a willing seller right now. Its chairman, Osamu Suzuki, is at pains to stress that the company is not about to become VW’s 11th brand. In any case, VW could not afford to buy it. The German group has just forked out ¤3.9 billion for a 49.9 per cent stake in Porsche’s sports car business, ahead of closer integration planned for 2011. It has the go-ahead to sell new preference shares to fund the Porsche buy and other acquisitions, but is keen to avoid taking on any more debt which could jeopardise its credit rating.
A strategic partnership was the best way forward. The tie-up gives VW access to Suzuki’s small-car expertise. With growing demand in both the developed and developing world, that has been a weak spot for VW. And while VW has made inroads into China, Suzuki will give it improved access to India and South East Asia — markets where small and cheap is beautiful when it comes to four wheels.
As for Suzuki, the benefits are as much financial as strategic. Half the proceeds of the share sale will go towards paying down debt and increased spending on the development of low-cost, low-emission electric and hybrid cars.
The partnership isn’t perfect. Suzuki will spend the other half of the consideration on VW shares, which looks like a purely cosmetic move to convey the sense of a balanced relationship. A full-blown takeover would probably create more value than this complicated cross-shareholding agreement. There is still the possibility of a deal in the future. In the meantime, this partnership looks like the next best thing.