Volkswagen taking over a 19.9% stake in Suzuki is the first global deal whose basis is the valuation of the Indian market. In other words, the Wolfberg, Germany, based VW is spending $2.5 billion primarily to get into the Indian auto stakes big time. The corollary is that every other auto major will have to create a corresponding level of investment to maintain their share of this market. This is, therefore, a game-changer for auto companies in India, each of which has to fix corporate strategy for a very different decade, compared to the one just 16 days away from closing out.
The two end-to-end companies in the Indian auto league will now be the Volkwagen-Suzuki combine facing the Tata-JLR combine. The others are a couple of steps down the ladder.
Just take a look at the Volkswagen-Suzuki deal. Suzuki is pretty much one of two companies in the world that knows how to build quality small cars at basement level prices. The other is Hyundai. In fact, Suzuki?s know-how to develop small car is so good that other Japanese firms, including Daihatsu-Toyota and Nissan, use its facility.
Yet, that is not the reason why Volkswagen fell in love with it. It is the market leadership position of Suzuki in India with an overarching 53% share that translates into a bottomline that makes up for 20% of its global business. The company expects to manufacture a million vehicle for the first time in this financial year.
Volkswagen, on the other hand, has a classy range, but not built to a cost advantage. But despite that, it is the market leader in China and would obviously like to repeat that pole position here. That means it is ready to dig deep into its pocket. This is where the game changes for all competitors in India.
The frugal engineering concept to develop on the Indian love for small cars will not translate into a frugal budget for car companies. The need to shell out huge amounts of money means consolidation among others could take place soon.
What are the VW strengths that will be useful in India, one of the world?s two fastest-growing market? The current ratio is 17 vehicles for every 1,000 Indians; so the market will continue to be strong for a long time to come. For Volkswagen, the most important cost benefit will be the sharing of the platform to build small cars, which would have taken it a long time to design. Ownership of petrol engines that are below 1200 cc is crucial to make a mark in the Indian market, as tax differences for those below and above are tremendous.
What does Suzuki get from the deal? It will get access to VW?s globalleadership in diesel engines, each compliant with the fast-changing Euro norms. Until now, the Japanese company has only relied on the sole multijet diesel engine that crippled its ability to sell in European markets cars built on diesel engines. So, one could see Suzuki petrol engines powering VWs up here.
Also globally, while the deal is seen to be VW?s way of taking on Toyota Motors, the competition will be from others in the Indian market. The nearest competitor will be Tata Motors, whose 2008 deal with JLR now seems to be beginning to pay off. Of course, with last year?s impact still hovering over Tata Motors, the Beta for the stock is still way over 1 at 1.3, indicating more volatility than the market indices. Maruti Suzuki for instance, has a Beta of 0.6, demonstrating far more sense of security, even at the cost of possibly lower returns as on last week.
Tata Motors has finally reported a net profit of Rs 22 crore in its second quarter, despite a Rs 488-crore loss reported by JLR.
What the company now needs going forward is to cut down on its netdebt that is still very high at over Rs 16,000 crore. At a time when the VW-Suzuki combine will be bringing competition into the market, this overhang could limit Tata Motors?s ability to mount a counter-offensive in new products and research & development. But in the analysts? call, JLR has reported its plans to almost quadruple its product development cost from the current ?11 million to ?42 million by the next financial year and thereafter to ?50 million.These are big numbers, but the company will need them.
Therefore, it is now a direct competition between the Nano and Maruti 800, at one end, and between the Jaguar and Lamborghini, at the other, in the Indian market.