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Possible Suzuki, VW tie-up cheered on market

The prospect of a possible cooperation between Suzuki Motor and Volkswagen raised an enthusiastic response among investors, driving the two carmakers' shares higher.

A source familiar with the matter had told Reuters on Thursday that Volkswagen is exploring a deal to cooperate with the Japanese automaker to boost its presence in ultra-small cars.

Cooperation with Suzuki, which dominates Japan's 660cc minivehicle market along with Toyota's Daihatsu Motor Co, could yield a new model for VW below the upcoming “New Small Family” range of cars, the source said.

Such a tie-up would mark the second attempt for Europe's top automaker and Japan's No.4 carmaker, which in 1992 signed an agreement to jointly develop small cars. That deal ultimately fell through.

“Volkswagen could benefit from an alliance by increasing its product line-up in the ultra-small car segment ... Suzuki could benefit from VW's know-how regarding diesel engines,” said MM Warburg analyst Marc-Rene Tonn.

German publication manager magazine said Volkswagen was looking to secure a cooperation deal by taking a 10% stake in Suzuki. A spokesman for Suzuki said he had not heard anything about a potential tie-up, while Volkswagen declined to comment.

Investors cheered the prospects of ties between the two automakers, which have weathered the global downturn better than many rivals due to their heavy presence in emerging markets.

Volkswagen is China's top seller, while Suzuki is No.1 in India through majority-owned unit Maruti Suzuki India. Analysts said they see an opportunity to tap into growing demand for smaller vehicles.

“The ultra-small car segment is expected to grow substantially through high demand in emerging markets such as India and potential demand in mega cities,” Tonn said.

Suzuki Chief Executive Osamu Suzuki has repeatedly said he would welcome any calls for cooperation, acknowledging that his company lagged in hybrid and other fuel-saving technology.

Suzuki is cooperating with former top shareholder General Motors in the field of hybrid and fuel-cell vehicles despite the US automaker's bankruptcy filing this month.

Suzuki already has a broad range of projects with rivals, including an original equipment manufacturing deal with German brand Opel. It also produces diesel engines using licensed technology from Italy's Fiat.

“It could help Suzuki pick up its pace in the hybrid and electric vehicle field as those segments look set to grow faster than expected now,” said Mitsuru Kurokawa, an analyst at IHS Global Insight.

Vehicle demand, especially in developed markets such as North America, Japan and Europe, has yet to recover as a recession tightened customers' purse strings.

Suzuki has fared much better than its domestic rivals thanks to its focus on the relatively steady 660cc microcar segment in Japan, and its dominance in India, its biggest market. (Reuters)