Volkswagen Says Suzuki Broke Partnership Rules by Purchasing Fiat Engines

Volkswagen AG said Suzuki Motor Corp. broke the rules of a cooperation agreement by deciding to purchase engines from Fiat SpA and has given the Japanese carmaker “several weeks” to remedy the alleged infringement.

“VW considers this step regrettable, but necessary, and has offered to discuss the matter with Suzuki,” the Wolfsburg, Germany-based company said in a statement today, reported Bloomberg.

The two companies have been at odds since March when VW said in its annual report that it could “significantly influence financial and operating policy decisions” at Suzuki, describing the Japanese company as an “associate.” Suzuki in June decided to buy diesel motors from Italy’s Fiat for cars built in Hungary.

Osamu Suzuki, the Hamamatsu City, Japan-based company’s chairman, said in a Bloomberg interview published Sept. 6 that the two companies weren’t speaking. The public feud has brought to a halt VW’s efforts to turn a 222.5 billion-yen ($2.9 billion) investment into an operational alliance. The partnership was meant to combine Suzuki’s leading position in India, Asia’s second-fastest growing major economy, with Volkswagen’s global reach as the world’s third-biggest carmaker.

“This is the latest setback in a so-called partnership that has been developing anything but well,” Juergen Pieper, an analyst at Bankhaus Metzler in Frankfurt who recommends buying VW stock, said today by phone. “The two sides have quite a bit of work to do to set aside tensions and focus on business.”

Suzuki spokespeople weren’t immediately available to comment on VW’s statement outside normal business hours.

When the deal was signed in December 2009, with VW taking a 20 percent Suzuki stake, the companies said they intended to cooperate on technology, including hybrids and electric cars, and expansion in emerging markets. Almost two years later, no joint projects have begun.

VW, which forecasts deliveries will rise 5 percent this year after selling 7.2 million vehicles in 2010, aims to surpass Toyota Motor Corp. and General Motors Co. as the world’s largest carmaker by 2018 and is targeting India as an expanding market to boost sales. Suzuki, which sold 2.64 million cars in its last fiscal year, delivered 1.13 million of those vehicles in India. VW sold 53,300 cars in the country in 2010.

Osamu Suzuki hasn’t found any VW technologies he’d like to adopt following an extensive review of what they have to offer, he wrote in a Nikkei newspaper column in July. Suzuki in July also said the automaker was open to forming alliances with others.

Volkswagen has no plans to sell or decrease its Suzuki stake, Christine Ritz, VW’s investor relations chief, said in a telephone interview today. VW said the carmaker still views Suzuki as “an attractive investment.”

VW is of the opinion that Suzuki has rolled back the partnership to square one by keeping its German ally in the dark about the Fiat plans and its intentions to seek alliances with rivals, a person familiar with VW’s thinking said last month. VW Chief Financial Officer Hans Dieter Poetsch on a July 28 conference call said the partnership is under “review.” That review is still ongoing, VW said today.

A successful relationship depends on an understanding that the two are equal partners, according to two Suzuki executives, who declined to be publicly identified discussing the matter. The company is aiming to clarify what direction it wants to take with the partnership by October, one of the executives said.

“Volkswagen keeps talking to the media, but not to us directly,” Chairman Suzuki said in the interview.

Volkswagen Chief Executive Officer Martin Winterkorn said in May the automaker planned to target the small-car segment in India as a potential joint project with Suzuki, as well as parts procurement and development of alternative-drive technologies.

While Suzuki has a dominant position in India, where its Maruti Suzuki India Ltd. unit is the market leader, increasing competition means holding onto the top spot will become harder. VW’s global reach and product portfolio, with more than 60 models at the namesake brand alone, could help.

Maruti Suzuki will sell 36 percent of the 3.07 million vehicles delivered in India in 2011, IHS Automotive estimates. Overall sales in the market will climb 76 percent to 5.41 million in 2016, with Maruti Suzuki nabbing 25 percent, according to IHS forecasts.

The German automaker remains convinced of business opportunities for both sides, according to the person familiar with VW’s thinking. A report by German newsletter Platow Brief on Aug. 5 that VW and Suzuki will terminate the alliance “is nonsense,” VW spokesman Michael Brendel said. Suzuki’s intention is also to salvage the relationship, said one of its executives who declined to be identified.