Think Suzwagen

Volkswagen’s 20 per cent stake in Suzuki could help reshape the contours of the global race track.

It’s official. Volkswagen is eyeing world leadership of the car market. And having just bought a fifth of Suzuki, Japan, it can afford another bout of self jibes. Remember its ironic description of its iconic Beetle as a ‘Lemon’? This was before the derisive label was adopted by academia to explain why markets can fail under the strain of warped information. The Beetle defied sceptics to become the legend it did.

So what surprises does Volkswagen have in store for us now? Already, it’s an understatement to say that 2009 has been an incredible year for Europe’s largest car maker. As recently as March, as almost all the world’s car makers sputtered and screeched in agony, it looked as if Volkswagen would be taken over by Porsche, maker of that other legend, the 911 sports car. But by mid-year, its fortunes took a decisive turn, and it ended up taking over Porsche instead.

Some people in Wolfsburg, the German town where the company is headquartered, attribute the turnaround to events on the football field. By the end of May, Wolfsburg, an unfancied football club owned by Volkswagen, won the Bundesliga, Germany’s top-flight football league, for the first time in over four decades. Very soon, Volkswagen executives were talking about becoming the world’s biggest car maker by 2018.

Now, as the fog begins to clear on the global economy, a more confident Volkswagen has set about the task in earnest. Buying a 20 per cent stake for $2.5 billion in Japan’s Suzuki Motors, the world’s eighth largest car maker, seems like a move perfectly designed to blend its automotive excellence with the latter’s value consciousness to gain leadership in every size segment.

Of course, Suzuki is independent, but market logic can have its own dictates. In the first six months of 2009, Volkswagen sold nearly 3.3 million vehicles and Suzuki 1.2 million. Together, they sold more than market leader Toyota’s 3.6 million units. “In partnership with Suzuki, the VW Group can take a big step forward in the compact car segment, particularly in Asia’s emerging markets. In turn, Suzuki can benefit from our experience with efficient and environmentally friendly drive-train and vehicle technologies,” said Volkswagen CEO Martin Winterkorn soon after inking the deal.

In a recession battered industry crying out for consolidation, that would be welcome. Don’t forget, Volkswagen leads China just as Maruti-Suzuki leads India—and these are the two fastest growing markets in the world. Within the Suzuki empire, the Maruti Udyog venture is the crown jewel. It sells every second car in India and boasts of annual revenues close to $4 billion. Within Volkswagen’s sights, China is the most exciting target. Its Jetta and Passat models clog the streets of Shanghai, and the marque has been the big beneficiary of China’s motoring mania.

Volkswagen’s India entry, finally made as late as 2008, has not gone unnoticed at the upper end of the market. But for volumes, it would need to depend on Suzuki. “Volkswagen gets access to Maruti’s unbeatable sales network in India and also its vendor base,” says Sumit Arora, associate director, Synnovate Motoresearch, an automotive consultancy, “In terms of quality and engineering, Volkswagen is one of the best. Suzuki can dip into its partner’s diesel strength.”

Volkswagen has just rolled out its fancied New Beetle, with a 2-litre beast under the hood (sorry, the ‘curves’), and plans to launch its small car Polo later this month. But what has got people talking is Suzuki and Volkswagen working jointly on a small car priced at under Rs 4 lakh that could replace Maruti’s ageing workhorse Alto. Maruti suppliers are already excited by the news.

Technical collaboration in an era of trans-border supply chains throws up new opportunities. Says Norbert Walter, CEO, Deutsche Bank Research, “Germany has three wonderful automotive clusters in Stuttgart, Munich and Leipzig. They are outstanding in terms of quality. But for a bright future, they need demand—dynamic markets like India and China. It seems obvious that the wonderful engineering talent sitting here in Stuttgart should address the unique requirements of a market like India.”

Other car makers are also thinking along such lines. Recently, General Motors (GM) announced a partnership with China’s Shanghai Automotive Industries Corp to make small cars for India in the Rs 2-3 lakh price range, while France’s Peugeot and Japan’s Mitsubishi are working out similar alliances. “We are seeing a coming together of Detroit and Shanghai. The Volkswagen-Suzuki alliance could mean a coming together of Germany and India as a new auto axis that could challenge that alliance,” says Walter.

According to Abdul Majeed, head of automotive practice at PricewaterhouseCoopers, the race for world leadership would be won on fuel efficiency, clean technology and the ability to make money on small cars. “Today, not many can beat Suzuki in making small cars that make money, and Volkswagen, although weak in the small car segment, has a formidable portfolio of brands and models.” But then, he adds, the alliance’s objective has to be clear. “If it’s just based on adding sales figures, this isn’t going to work. You ought to have deep knowledge of vertical integration.”

One of the reasons that Detroit lost its way was its slow grip of globalisation. American car makers relied too heavily on the US market, and even their trans-Atlantic alliances (such as Daimler-Chrysler) had little to offer the emerging world. “Americans like to believe that they are great team players,” says Walter, “But they are team players only when they are team leaders. That’s one of the reasons I think Daimler-Chrysler didn’t work. European and Asian cultures have a greater chance of making such alliances work.”

There is a precedent. France’s Renault and Japan’s Nissan have forged what may be called a genuinely global partnership—with engineers and managers working cosily across continents and cultures. The two companies not only share drawing boards, technology, production platforms and sales networks, but also leverage their internal diversity and understanding of disparate markets—all under the leadership of Carlos Ghosn, a Brazilian of Lebanese origin.

Although analysts are convinced Volkswagen would eventually buy Suzuki in entirety, Osamu Suzuki, the octogenarian CEO of Suzuki, seems unwilling to cede control: “I don’t want you to misunderstand: Suzuki is not becoming a 12th brand for Volkswagen. I don’t want other folks telling me how to do things.”

This, despite Volkswagen’s reputation for according its business units their independence. Arora, for one, does not see it meddling in Suzuki’s affairs. “It has more than ten brands, including super-luxury marques like Lamborghini and Bugatti, and mid-market brands like Skoda and Seat,” he says, “But all of them are fairly independent, and as a result several strong brands add up to a very strong Volkswagen group.”

Pole position in the race for global leadership is no longer quite so enviable, some feel. After all, GM turned into a lumbering giant, woefully weighed down and out of touch. Toyota, which overtook GM two years ago, has been hit by a spate of negative publicity that hurt its reputation for reliability. To be sure, Volkswagen won’t have it easy stealing the lead. Words count. In a dizzying-pace game, victory would demand the warping of time and space, not information.

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TR Vivek