After the Breakup: The Troubled Alliance between Volkswagen and Suzuki
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Case Code: BSTR412 Case Length: 16 Pages Period: 2008-2012 Pub Date: 2012 Teaching Note: Not Available |
Price: Rs.500 Organization: Volkswagen AG, Suzuki Motor Corporation Industry: Automotive Countries: Global; Europe; Asia Themes: Growth Strategy, Strategic Alliance, Implementation |
Abstract Case Intro 1 Case Intro 2 Excerpts
Excerpts
About Volkswagen
Volkswagen AG, headquartered in Wolfsburg, Germany, was ranked as Europe's largest and the world's 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 2011. Volkswagen, meaning 'People's Car' in German, was established on May 28, 1937, as the Gesellschaft zur Vorbereitung des Deutschen Volkswagens mbH (Society for the preparation of the German People's Car) by the Nazi Deutsche Arbeitsfront (German Labor Front)...
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, Europe's second-biggest carmaker, PSA Peugeot Citroen, and Japan's 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 had withstood the economic slump...
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 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. In line with the global trend of alliances and its own goals of becoming the world's biggest automaker, VW joined the flurry of realignments and alliances and discussed a partnership with Suzuki in June 2009...
The Rationale for the Alliance
VW entered into this partnership to tap Suzuki's 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 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 Toyota's (4.415 million). "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 in the emerging markets in Asia...
Joint Projects
A few days after the two companies announced their tie-up, VW sought to leverage on its partner's R&D facility to jointly work on hybrid and electric car projects. Jochem Heizmann, VW board member responsible for production, said, "It's too early to give out concrete details of our plans, 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." 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 diesel engines to Suzuki in the future. The partnership also spurred some interesting thoughts of a VW motorcycle coming to fruition...
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 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...
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 VW's 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 was originally agreed. In the absence of VW's cooperation and given its failure to do what was agreed, there is no basis for the partnership to continue...
The Aftermath
After the termination of the partnership, Suzuki wanted VW to sell back its 19.9% stake. However, VW refused to acknowledge Suzuki's request saying that it was not legally bound to do so. As a result, Suzuki filed for arbitration with the International Chamber of Commerce's (ICC) International Court of Arbitration in London. But VW braced up to fight all the way. "We won't sell our Suzuki stake. If the current management at Suzuki doesn't want to work together with us, then maybe the next generation will." said Winterkorn...
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 AG analyst, "Suzuki really needs a big manufacturer 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." As the Indian market was central to VW's plans of becoming a world no#1 by 2018, analysts and top industry executives felt that the company needed a revamped strategy and a new alliance partner to compete in India's small car market or develop a strong small car product line-up on its own...
Exhibits
Exhibit I: Suzuki Financials (2007–2011)
Exhibit II: Volkswagen Financials (2007-2011)
Exhibit III: Some Key Statistics Related to the Indian Automobile Market
Exhibit IV: Comparison of Japanese and German Business Etiquette
Exhibit V: Suzuki-VW Breakup
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