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The Suzuki Volkswagen ‘Divorce’ – What Not to Do or a Case Against Partnerships Altogether?

Suzuki and Volkswagen have finally completed their ‘divorce’ or the breakup of their 2009 partnership that was supposed to bring market, manufacturing, and technical expertise together for the benefit of both parties. This true story sadly illustrates the dark side of collaborative business relationships – and that is the fallout for all parties if and when they fail.

For my podcast on the topic, including guest audio on the story from Reuters, visit Blog Talk Radio or Sound Cloud.

As sad as the state of the relations between these two companies is today, the partnership started with high expectations on both sides. In 2010, VW purchased a 20% stake in Suzuki, worth approximately $2B US, indicating that this deal was no informal initiative.

Unfortunately, it also started with ulterior – or at least secondary motives – that may have doomed the effort from the outset.

 

The benefits of the agreement were supposed to be that Suzuki would get access to fuel efficient, next gen powertrain technology as well as the more advanced economic markets where VW excels. In return, VW would get help building their presence in India, where Suzuki has a foothold, and learn about low cost manufacturing.

Although the deal was struck in 2009, it almost immediately soured. It would seem that while representatives from both sides signed on the dotted line and smiled at the handshake, there was lingering distrust present that a contract could not overcome. Almost immediately, the two sides were arguing about relatively small details such as spot vs. laser welding, the timing of efforts, and manpower contributions. The divide continued to grow until arbitration was unavoidable and both companies just wanted out.

Suzuki felt that VW had the upper hand in the agreement – in other words, they did not see the partnership as an equal one in execution. They were wary of VW’s intentions and, much like an unruly teenager, they started exerting their independence. In fact, they went as far as to imply that VW only agreed to be their partner to prevent them from becoming a source of direct competition in certain markets.

One of the ways Suzuki exerted themselves involved their sourcing and purchasing organization. It also ended up being the final nail in the agreement’s coffin. Suzuki purchased diesel engines from Fiat rather than VW, although according to the agreement VW had the right to expect that Suzuki would purchase the engines from them – or at least give them the right of first refusal.

Suzuki, on the other hand, claimed that VW refused to share their valuable hybrid technology IP that was supposed to be part of the agreement. They also took issue with the way VW handled the 20% stake in Suzuki on their financial records.

Suzuki took the initiative to call off the alliance, although the London Court of International Arbitration ultimately found that Suzuki actually breached the agreement. In fact, there should be an additional ruling still to come about whether or not Suzuki owes VW damages for buying the engines from Fiat.

The agreement lasted for only two years, but it took twice as long for both sides to extract themselves. There has been loss in brand reputation, opportunity, and profit. According to the London Arbitration Court, Suzuki has to buy back the 20% stake from VW.

For all the best practices we hear about the need to be more collaborative and relationship oriented, this is a cautionary tale about what can happen when things go wrong. It would seem that there was too much suspicion and distrust in both parties to handle the natural tension of collaboration.

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Tuesday, 19 September 2017