India access big factor in VW-Suzuki deal

Volkswagen AG and Suzuki Motor Corporation’s equity stake deal may appear similar to the unsuccessful partnership between General Motors and Suzuki some years back, but the key differentiator this time is India.

As against a minuscule share a few years back, the India operations of Suzuki now account for a huge chunk of its profits.

In the first six months of this year, 80% of Suzuki’s global profits came from India. So any long-term deal will obviously factor in the India potential.

In India, Maruti Suzuki controls half the domestic market whereas VW is a marginal presence. There are significant synergies to be had for VW, for sure.

Maruti stands to gain since its stated ambition is to move away from the ‘M800’ kind of vehicles to bigger, better and premium cars.

Maruti chairman R C Bhargava acknowledged the possibility of his company becoming an original equipment manufacturer for VW in India, much like the Suzuki-Nissan pact for the ‘A Star’.

He also pointed out the technological and other synergies this partnership could bring. “Suzuki stands to gain from VW’s technology, products, geographical reach and R&D. We can also work jointly in developing environment-friendly vehicles”.

For India, the environment aspect is unlikely to be in focus immediately since Maruti has no immediate plans of working on either electric vehicles, hybrids or fuel cells to develop India-specific products.

Suzuki also stands to gain from the diesel expertise of VW if the deal comes through since it lacks a strong diesel line-up for the domestic market.

In India, Maruti already has installed capacity to make a million vehicles whereas VW has set up a plant at Aurangabad with installed capacity one-tenth of Maruti’s, at 1.1 lakh units per year. Maruti is expected to invest significantly in expanding capacity to retain its market share whereas VW is looking to use a bulk of the installed capacity to enter into the small car segment here.

The deal was obviously welcome news for the markets, with Maruti scrip jumping the most in three weeks on BSE to close 2.7% higher at Rs 1,611.1.