The VW-Suzuki Spat: Should we be Concerned?

They might look like the neighbourhood couple squabbling on the front porch and washing their dirty linen in public. But make no mistake; the outcome of this deal is bound to have tremendous implications for the Indian car market.

Are VW and Suzuki fighting?

In December 2009, VW (with the consent of Suzuki) bought a 19.9% stake in Suzuki to facilitate “closer technological alliance” between the two automakers (like a marriage, if you may). Cooperation discussions went on all through 2010 and nothing concrete ever emerging. Finally, in June 2011 Suzuki went ahead and extended an existing engine sourcing deal it had with Fiat. This did not go down well with the big German and it publicly accused the little Japanese of infidelity. The humiliated Jap filed for a divorce and asked the German bully to tender a public apology. And that’s where things stand now.

Duh! Why should we care?

Well, we actually should. VW has this pet target of being the world’s largest carmaker by 2018. It already has a huge presence in China, Brazil and Russia. The only big emerging car market where it does not have a major presence is India. And that, mi amigos, is sole reason why VW did the deal in the first place. The deal was that in return for VW’s diesel, electric and hybrid powertrain technologies (which Suzuki needs for its international ops) Suzuki would give them access to Maruti’s “frugal engineering” and compact car technologies.

What happens if the Alliance works out?

If the VW-Suzuki alliance does works out, we would immediately see Maruti using VW’s diesel engines instead of the current ones whose technology is sourced from Fiat. On the other hand, VW would most likely get their hands on Maruti’s low-cost small car platforms. Which means we could see VW and Skoda branded small cars which share their underpinnings with Maruti’s A-star and Ritz. Needless to say, Maruti could end up losing significant market share to VW. But, the added economies of scale could bring down the costs of the cars which is never bad for the car buyer. Ones heart does go out for Maruti; for the parent’s benefit it would end up lending a helping hand towards its own market share loss.

Wasn’t there talk of VW taking over Suzuki?

Although the chances of it are very slim, it is worthwhile to examine the aftermath of such an acquisition. For starters, VW would instantly become the largest carmaker in the world, trumping Toyota and GM. Maruti, now under the VW umbrella, would have access to probably the world’s largest parts bin. It would be safe to say that the quality of Maruti cars would only improve. VW’s India strategy could then be to use Maruti as their lowest cost rural brand; Skoda a sub-premium rural-urban brand and VW a premium urban brand. All in all, an aggressive German carmaker would be controlling the largest share of the Indian car market and it would certainly do everything in its power to kill the competition.

I would definitely like to keep one eye on the VW-Suzuki developments. Because if the alliance breaks, things will go on as though nothing ever happened. If it works, Maruti could lose out but the car buyer could gain. But if VW takes over Suzuki, things could undergo a dramatic change; and it could be for the better or worse, who knows!