VW, GM and Peugeot-Citroën - Asian alliances

Dec 9th 2009From The Economist print edition
New ties for VW, GM and Peugeot-Citroën signal a way forward for the car industry

HAVING weathered the storm, the thoughts of global carmakers are now focused on the tie-ups they hope will give them an edge in the upturn. Two such deals, the first involving General Motors and its Chinese partner SAIC, the second between Volkswagen and Suzuki, have been concluded in the past few days. Another, linking PSA Peugeot-Citroën and Mitsubishi, is still under negotiation. All three are aimed at winning a bigger presence in Asia and tapping into low-cost manufacturing expertise, while sharing components and development budgets.
Of the three, the most significant is Volkswagen’s announcement on Wednesday December 9th that it has agreed to pay $2.5 billion for 19.9% of Suzuki, a family-owned Japanese maker of small cars and motorcycles. Along with Fiat, Suzuki is the only international outfit that knows how to make money out of small, inexpensive cars. That is something VW forgot long ago. But it needs to relearn it, argues Max Warburton of Bernstein, as asset-management firm, if it is not to suffer from the worldwide trend towards downsizing, as new emissions laws bite and growth shifts to poorer consumers in emerging markets.

The other thing Suzuki offers is unique exposure to emerging markets. Through its 54% stake in Maruti Suzuki, it has managed to keep more than 40% of the increasingly competitive Indian market. It also has a strong position in Pakistan and Indonesia, two other teeming countries with nascent car markets. VW, which is the market leader in China and has around a quarter of the Brazilian market, was uncharacteristically late setting out its stall in India, where it only began manufacturing this year. If the alliance blossoms, and VW ends up turning Suzuki into its 11th brand, it will have taken a big step towards its long-term goal of overtaking Toyota as the world’s biggest car firm.
The deal between GM and SAIC to set up a 50:50 joint venture to produce small cars in India, announced on December 4th, is another sign of the times. GM will contribute the factories and distribution network it already owns in India; SAIC will invest up to $350m in cash and other assets. The plan gives China’s biggest carmaker a foothold in the second-fastest-growing car market in the world (after China), while helping cash-strapped GM to mount a more vigorous push into India, where it has struggled for several years to reach its target of a 10% market share. GM and SAIC are also intending to bring to India the ultra-cheap micro-cars, minivans and pickups they make with another Chinese partner, Wuling.
At the same time, GM said that it was ceding control of its successful joint venture with SAIC in China by selling a 1% stake to the Chinese firm for $85m. With a 51% shareholding , SAIC will have the right to approve budgets and all senior appointments. Nick Reilly, the architect of GM’s Asian strategy who was recently appointed boss of Opel/Vauxhall, insisted that the sale was merely a technicality to allow SAIC to consolidate its earnings from the venture. Some observers interpret it as the price for getting SAIC’s help in India. Others detect the beginning of a trend whereby Chinese car manufacturers will assert greater authority over their Western and Japanese partners. Mr Reilly merely said that GM had agreed in order to get SAIC’s “full co-operation and the full co-operation of the Chinese government in other things.”
PSA’s negotiations to buy between 30% and 50% of Mitsubishi, which has several times been close to bankruptcy and is still carrying a heavy burden of debt, have some way to go. The two firms have had ties for several years: Peugeot and Citroën sell a rebranded version of Mitsubishi’s Outlander crossover (somewhere between a car and an SUV) and PSA shares a factory with Mitsubishi in Russia. Mitsubishi, with its presence in Asia and its network of factories and dealers in America, could help the French group reduce its reliance on Europe. But cultural clashes have bedevilled such cross-border deals in the past. And PSA, whose automotive business has junk-rated debts of $3 billion, may have difficulty finding the $3.5-4 billion that a 50% stake in the Japanese firm is likely to cost.