Mumbai: Volkswagen AG (VW) will acquire one-fifth of Suzuki Motor Corp. (SMC) as the world’s third largest auto maker tries to make amends for a delayed entry into India, a rare market that’s growing in a world where not enough people are buying cars.

Driving force: (from left) Osamu Suzuki, chairman, president and CEO of Suzuki Motor, shakes hands with Martin Winterkorn, chairman and CEO of Volkswagen AG, during a news conference in Tokyo. Kimimasa Mayama / Bloomberg

Japan’s fourth biggest car maker controls Maruti Suzuki India Ltd, which sells every second car sold in the 1.7 million-plus domestic market and accounts for 20% of the parent’s global sales, while VW only offers low-selling, high-priced models in the South Asian nation. The deal comes as Europe’s largest car maker is preparing to sell what will be its first model aimed at the mass market in India—the Polo.

VW’s stake purchase is also aimed at reaching its ambition of becoming the world’s No. 1 car maker, overtaking Toyota Motor Corp., besides matching the global reach of auto makers that have formed combines such as Renault and Nissan. PSA Peugeot Citroen of France and Japan’s Mitsubishi Motors Corp. said this month they were exploring deeper ties, which have so far been limited to a project-based partnership.

Weak demand, overcapacity and stricter environmental regulations are forcing auto makers to join forces to save billions that each would otherwise need to spend on research on developing technology.

Graphics: Ahmed Raza Khan / Mint

The immediate impact could be on Maruti’s agreement with Fiat Automobiles SpA on diesel engines. Fiat Powertrain Technologies SpA provides the 1.3-litre multijet engine that powers Maruti’s Ritz,Swift and DZiremodels, which could switch to using VW technology.

“Suzuki may not have to buy technology from Fiat anymore as VW is globally renowned for its diesel engine technology," said Deepesh Rathore, managing director at forecasting firm IHS Global Insight, Gurgaon.

There may be collaboration in some areas, Takahiko Hahimoto, group leader (planning) at SMC, said in a phone interview from Tokyo. “Probably we are going to have some synergies at the vehicle development stage, and sales and marketing strategy," he said. “However, we may not have cooperation saleswise" in India.

Hahimoto was non-committal on the subject of diesel engines. “The arrangement with Fiat may or may not change," he said, adding that his company would take a call after due deliberation.

VW and Suzuki said the strengths of each company make for a perfect fit in exploiting their respective advantages as well as rising to the challenge of the global market, according to a release from the German company.

Maruti’s shares rose 2.54% to close at Rs1,608.95 on the Bombay Stock Exchange on Wednesday. Suzuki’s shares rose 3.41% to close at 2,370 yen (Rs1,256) on the Tokyo Stock Exchange.

While there are no plans for a combined dealer network, the firms will undertake joint activities such as purchasing of parts, said Kurt Rippholz, spokesperson for VW India.

Chennai-based R. Venkatraman, partner at global consulting firm AT Kearney, said: “Such partnerships reflect the pressures on the auto industry globally."

The VW-Suzuki announcement comes a week after China’s biggest auto maker, SAIC Motor Corp. Ltd, entered into a 50:50 joint venture with General Motors India Pvt. Ltd, the local arm of General Motor Corp. (GM).

The move marks a significant departure for VW, which has been in a takeover mode since the 1990s, Christoph Stuerrmer, associate director at IHS Global Insight Automotive, said on phone from Frankfurt.

“The only long-term partnership they have is that with Shanghai (Volkswagen Automotive Company, VW’s joint venture with SAIC in China) and FAW (-Volkswagen Automobile Co. Ltd, the joint venture between FAW Group Corp. and VW) in China," he said. The Suzuki deal marks another instance of the European firm being willing to take a passive stake in a company successful in one of the fastest-growing markets in the world.

The move is the second coup this week for VW’s chairman Ferdinand Piech, coming on the heels of the German carmaker’s €3.9 billion (Rs26,832 crore today) purchase of a 49.9% stake in sports car maker Porsche AG.

Piech’s top lieutenant, VW chief executive (CEO) Martin Winterkorn, was hopeful the Suzuki alliance would help catapult the Wolfsburg-based car maker past industry leader Toyota Motor ahead of plan.

“If that succeeds faster (than 2018), we’re happy," a grinning Winterkorn told reporters as he sat next to Suzuki’s nearly 80-year-old CEO Osamu Suzuki at a Tokyo press conference on Wednesday.

CEO Suzuki repeated that he did not intend the company he has led for three decades to come under VW’s control.

“I don’t want you to misunderstand: Suzuki is not becoming a 12th brand for VW," Suzuki said when asked whether the company might get a German CEO in the future. “I don’t want other folks telling me how to do things."

IHS’ Stuerrmer said Suzuki has been under evaluation by several global auto makers since GM sold off its residual stake in the Japanese car maker. GM initially sold a 17% stake in Suzuki in 2006, leaving it with a 3% holding.

In a bid to tide over the financial crisis that hit GM last year, the Detroit-based auto maker sold its remaining 3% stake to Suzuki in November 2008. GM’s partnership with Suzuki dates back to 1981.

Stuerrmer said the deal would boost growth for both companies. “It’s an offensive alliance where both the partners play upon each other’s strength rather than weaknesses," he said.

The successful Renault-Nissan partnership has paved way for alliances, Stuerrmer added.

Statutory approvals for the deal are expected in January, VW said. Some of the money will be invested in the buyer.

“Suzuki intends to invest up to one half of the amount received from VW into shares of VW," the German company said in its release. “Both companies will form a long-term strategic partnership based on this, which will support their successful strategies in these challenging times."

Suzuki will spend roughly 100 billion yen for a 2.5% voting stake in VW.

Bloomberg contributed to this story.