VW-Suzuki divorce: Logic of beauty-and-brains didn't work

This story - probably apocryphal- is told like a joke. Playwright George Bernard Shaw is once believed to have been propositioned by a beautiful actress with these words: “Wouldn’t it be great if we got married? Our child would have my beauty and your brains.” To which the not-so-good-looking Shaw was supposed to have replied: “But what if he got your brains and my beauty?”

Leaving aside the sexism inherent in the story, this is really the problem with the Volkswagen-Suzuki two-year marriage of convenience which ended abruptly on Monday. The duo wanted to create a your-beauty-and-my-brains kind of wunderkind without stopping to consider whose brains and whose beauty. When an improbable alliance raises the prospect of producing not a prodigy but a moron, it ends in acrimony.

The divorce proceedings started with Volkswagen criticising Suzuki for tying up with Fiat for diesel engines. Suzuki’s board returned the compliment with a stinker. “Suzuki hereby announces that its board of directors has officially determined on Monday (the) dissolution of the comprehensive partnership and the cross-shareholding relationship with Volkswagen AG. Suzuki thinks that it is crucial to secure independence in its operating policy decisions for maintaining its competitiveness in the domestic car market and other Asian markets, including India.”

The last two words (“including India”) are most crucial to understanding why this partnership broke down. A key reason for the VW-Suzuki global alliance was that the former would help Suzuki build diesel cars and the latter would share its expertise in small cars. The two points converge in India - where both “small” and “diesel” are big marketing USPs.

Maruti Suzuki, which is Suzuki’s main workhorse and showhorse, has an Achilles heel: it has no diesel cars worth the name. VW, which is only now making a big entry in India, does not really have the small car models to become a big player in India.

In theory, this is the perfect excuse for jumping into bed with brains-and-beauty dreams in pink-tinted sights. But the alliance was a non-starter primarily because both would have ended up with neither: beauty or brains. When the Indian market is so crucial for all auto majors, neither VW nor Suzuki could afford to help the other here.

This explains Suzuki’s talaq notice which emphasises the “crucial” need to “secure independence in its operating policy decisions” from VW.

Here’s why a marriage like VW-Suzuki was made in hell and couldn’t never have lasted anyway, despite the best of starting intentions.

First, there can be no marriage between unequals. Worldwide, VW is a whale with projected revenues of $148 billion in 2001, while Suzuki is a minnow with $18 billion in revenues. By definition, a whale cannot marry a minnow. It can only swallow it.

Since Suzuki did not want to be swallowed, it has opted to escape while it was still possible. Whether VW will allow it to slip out of its grasp is another matter. Reason: it already owns nearly 20 percent of Suzuki while Suzuki owns only 1.5 percent of VW. VW also has oodles of cash (its profits of $9.9 billion in 2010 were more than half of Suzuki’s entire turnover) and sitting on 20 percent of Suzuki shares for no apparent benefit is not a problem for it. It will be hoping that Suzuki will ultimately fail and return to an unhappy wedlock.

Second, marriages between different cultures are almost impossible to pull off. Globally, two-thirds of all mergers and acquisitions fail because of people and cultural factors. This is why most mergers reduce value for shareholders. Among all the marriages between western auto companies and Japanese ones, only one - Renault’s marriage with Nissan - has survived all the turbulence.

In India, too, we have seen Hero break off from Honda, Firodias from Honda (even earlier), TVS from Suzuki, and Premier from Peugeot. And this is just in the auto field.

This is what The Wall Street Journal has to say about the fate of cross-cultural marriages in the auto sector.

“Foreign auto makers have had a mixed track record with capital tieups in Japan. General Motors in recent years has sold off stakes in Suzuki, truck-maker Isuzu Motors and Subaru maker Fuji Heavy Industries as the US auto company’s Japan strategy teetered and the company’s financial situation weakened. Ford Motor has slashed its 33.4 percent controlling stake in Mazda Motor to 3.5 percent. Daimler AG bought a controlling stake in Japan’s Mitsubishi Motors in 2000, which increased to a peak of 37.3 percent, and sold it all in 2005.”

We can now add VW-Suzuki to the list even as the jury is out on Renault-Nissan.

Third, there is the crisis of varying expectations between partners. Suzuki wanted diesel technology from VW without the loss of independence. VW wanted Suzuki’s small-car expertise without sacrificing its market share goals for the Indian and Asian markets. As the Suzuki statement announcing the divorce noted ruefully: “Suzuki’s primary aim for the partnership was to receive (diesel) technology transfer…(but) with Volkswagen AG’s minor equity participation, it is difficult to receive technology transfer at the same or higher level VW group companies…”.

VW wants to raise its share of the Indian market to 10 percent of more - something that can only come at the expense of Maruti Suzuki’s 45 percent share. It made no sense for Suzuki - which derives over 40 percent of its global revenues from India - to invite a global giant to share its meal in India, when India is crucial to its own future. A tieup with Fiat for diesel engines makes more sense for Suzuki since Fiat is no threat to it in the Indian market - as yet.

Fourth, no strategic alliance can work without a clear understanding of what one brings to the table, what one wants, what one gains and what one loses. In the VW-Suzuki alliance, VW brings diesel and cash; Suzuki brings small cars and knowledge of the Indian and Asian markets. But when you have cash, you can buy what Suzuki brings to the table. This explains why VW holds all the aces and Suzuki the low cards.

The alliance could only have worked if Suzuki was willing to surrender to VW. Since it wasn’t, divorce was the only way out.

The Hero-Honda divorce happened for precisely this reason. Honda would not have given high technology to Hero when it had its own 100 percent subsidiary, Honda Motorcycle and Scooter India Pvt Ltd, to take care of. In this scenario, the Hero group had two choices: let Honda run Hero Honda or seek independence. The Munjals opted for the latter.

The bottomline: Suzuki needed VW more than VW needed Suzuki. In this scenario, a complete buy out of Suzuki was the only viable option. Since Suzuki was unwilling to surrender its independence, it has chosen the Hero-ic way out.