By on September 11, 2011

In the long simmering conflict between Suzuki and Volkswagen, the gloves are coming off and we are having a bit of domestic violence. Volkswagen just said in an emailed statement:

“The review of the partnership with Suzuki Motor Corp announced by Volkswagen Aktiengesellschaft has brought its first results. Volkswagen stated in Wolfsburg on Sunday that the company is serving notice of an infringement by Suzuki of the cooperation agreement concluded in December 2009.

The notice concerning the infringement relates to the supply of diesel engines produced by another manufacturer to Suzuki. Volkswagen takes the view that this contradicts the terms of the cooperation agreement. Suzuki has now been given a period of several weeks to remedy the infringement. Volkswagen considers this step regrettable, but necessary, and has offered to discuss the matter with Suzuki. At the same time, the company stresses it still regards Suzuki as an attractive investment.”

At this point (11:48 in the evening in Tokyo and a Sunday in Wolfsburg) it is unclear what the “notice of infringement” will trigger. It depends on how the contract is written. Typically, these contracts stipulate that the party that has been notified is given a chance to rectify the infringement. In this case, it would mean that Volkswagen expects from Suzuki that it at the very least cancels the diesel engine deal with Fiat. An even more welcome step would be that Suzuki places an order with Volkswagen. Both seem to be unlikely.

If Suzuki doesn’t rectify the alleged infringement, then Volkswagen can hold Suzuki in breach of the contract. What happens thereafter again depends on the language of the contract. Typically, an act like this  signals the impending end of the alliance. These notices usually serve to establish “cause” that allows an unilateral termination of the contract.

I’d read the claim that Volkswagen “still regards Suzuki as an attractive investment” not as a peace offer, more like a statement that bolsters future damage claims. Volkswagen ominously says that this may not be all:

“This review has not yet been finalized.”

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13 Comments on “Volkswagen And Suzuki: Shots Fired...”


  • avatar
    dwford

    Looks like VW is about to take the gloves off. If Suzuki thought it could take VW’s cash then bail on the deal, they are sadly mistaken. I think VW intended the deal to be the basis for a takeover of Suzuki and that they still intend it to be.

  • avatar
    Robert.Walter

    Although interesting.
    if VW terminated for a cause,
    unsupported by a clause,
    that would be fascinating.

    Also I wonder what the language, law, and venue of the contract are.

  • avatar
    Dayveo

    I dont know enough about the situation or the law to know who’s in the right here, but Volkswagen is such a cynical, nasty, and prideful corporation that I would never get tangled up with them.

    But someone please gift me a used VW anyway. mk1 preferred.

    • 0 avatar
      mike978

      I don`t know if I would call VW cynical. Until recently for the American market they stuck with “Euro” cars and only now after other manufacturers have they gone the Camry route for the Passat.

      VW has a market capitalization of 6 times Suzuki they also sell 4 times the number of cars and in many more markets (Suzuki is almost irrelevant in the US and Europe). VW holds 20%, so I don`t see how Suzuki could reasonably have complained a few months past that VW said they could “exert some influence on the corporate policy”. A shareholder with 20% has influence.

      • 0 avatar

        Volkswagen does not have 20% but 19.9%. This was carefully crafted to avoid any official influence through minority shareholdings. Suzuki can rightfully complain. If their contract stipulates that Suzuki may not buy engines from 3rd parties, then VW has a case. If not, tough. It indeed depends on language and jurisdiction. Under German law, such notice must be given and a chance for rectification must be granted – except for egregious circumstances. What matters here is that legal maneuvering is taking place. If someone serves this notice, then he wants out. Or a new contract …

      • 0 avatar
        th009

        The big question is that if Suzuki agreed not to buy engines and other technology from other auto companies, what did VW agree to do? To NOT buy shares beyond 19.9%? Even if there is a carrot in the contract, this might be the stick.

        If that were the case, terminating the contract would open up the possibility of a hostile takeover. And finding sellers for 30.1% of Suzuki shares should not be that difficult, assuming a decent premium on Suzuki’s current share price. VW has enough cash at the moment to buy the full 70.1% three times over at the current Suzuki share price.

        And, yes, 19.9% is careful indeed. But it still makes VW by far the biggest shareholder. And one should expect some (maybe unofficial) influence based on that.

      • 0 avatar

        The market doesn’t bet on a hostile takeover by Volkswagen. The Suzuki stock is trading down in Tokyo, not up. There are rumors flying around in Tokyo that Suzuki wants out. A press conference will be held at Suzuki at 5pm Tokyo time.

      • 0 avatar
        Robert.Walter

        Bertel,

        “Suzuki can rightfully complain. If their contract stipulates that Suzuki may not buy engines from 3rd parties…”

        Did you mean VW for the first Suzuki?

        “Volkswagen does not have 20% but 19.9%. This was carefully crafted to avoid any official influence through minority shareholdings”

        Is the law in Japan still that with 23% share (IDR so maybe it’s 28%) the entity holding that share has to consolidate it onto their balance sheet (as happened w Ford-Mazda, but IIRC not with DCx-Mitsu)?

      • 0 avatar
        th009

        … and now Suzuki has officially announced that they want to terminate the agreement. They would like VW to sell back the shares, but would Piech actually do that?

        And, yes, Bertel, you’re right: at least for the time being the Suzuki share price isn’t indicating any expectation of a hostile takeover.

  • avatar
    WetWilly

    This one is kind of a puzzler without knowing the exact breach alleged by Volkswagen.

    1) The Fiat Sedici/SX4 (which is built at a Hungarian Suzuki plant last I recall) predates the VW deal by a few years, so if Suzuki is getting Fiat diesels I’m not sure what the big deal is – especially if those diesels are going into the Sedici.

    2) The other Suzuki diesel I know of offhand, the 1.3L diesel in the Maruti SX4, is a Fiat design built by Suzuki themselves in India.

    Obviously, Suzuki is going to say they didn’t violate the agreement, and it does seem rather odd that they’d sign some sort of exclusivity deal with VW when they have this attachment to Fiat that doesn’t seem to have been terminated.

    Then again, maybe Suzuki isn’t enamored of grenading HPFPs.

  • avatar
    OldandSlow

    One day later: It sure looks like Suzuki’s reply to the legalese “shots fired” unleashed by VW is to simply tell Wolfsburg, – “It’s over.”

  • avatar
    JSF22

    Clearly none of us know what the contract says, but you don’t do this if you want to continue an amicable partnership. My guess is that VW is throwing anything it can against the wall in hope of getting as much of its money back as possible. Suzuki should give it all back and be happy to be rid of them.

    • 0 avatar
      mike978

      Why would VW sell the shares back? Because Suzuki asks?? If they are making a profit then VW gets a return on their investment. They have no obligation (unless in the contract) to sell back shares – 19.9% (my apologizes for rounding up to 20%) still gives them a commanding position to extract concessions or make a takeover. Suzuki is a second tier player in an increasingly consolidated industry. They have a good position in India, great! Lets see if that sustains them.


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