Germany's Volkswagen will buy a one-fifth stake in Suzuki Motor for $2.5 billion, giving it access to the Japanese firm's expertise in small cars and dominance in India as it seeks to become the world's top automaker.
With the global car industry facing still fragile demand, chronic overcapacity and stricter environmental regulations, pressure has grown on automakers to join together to reduce costs and develop new technologies.
Earlier this month, PSA Peugeot Citroen of France and Japan's Mitsubishi Motors Corp said they were exploring deeper ties, which have so far been limited to a project-based partnership.
"This comes right after the Mitsubishi deal and shows that foreign carmakers are coming to take stakes in Japanese firms, raising expectations of a reorganisation in the autos sector," said Noritsugu Hirakawa, a strategist at Okasan Securities.
The latest deal, confirming an earlier Reuters report, will see Suzuki invest up to half the proceeds in VW shares, gaining it the backing of the world's No.3 car maker and sending its shares up 3.5 percent in a weaker Toyko market on Wednesday. Volkswagen rose 2.3 percent in Germany.
"This is an interesting combination that comes with mutual benefits," said Aizawa Securities analyst Toshiro Yoshinaga. "Suzuki has a solid position in India and the same is true for Volkswagen in Europe."
VW, which is also the No.1 car maker in China, the world's largest auto market, would provide Suzuki the technology to make the hybrid and electric cars it lacks in its line-up.
Executives at Volkswagen have publicly said in recent months that Suzuki would be an interesting target given its expertise in small cars -- a key segment to compete in fast-growth emerging markets.
"In partnership with Suzuki, the VW Group can take a big step forward in the compact car segment, particularly in the emerging markets in Asia," CEO Martin Winterkorn told a news conference in Tokyo. "In turn, Suzuki can benefit from our experience with efficient and environmentally friendly drivetrain and vehicle technologies."
Volkswagen, with its 10 brands including Audi, Skoda, Seat and Porsche , has said it wanted to become the world's No.1 automaker by 2018 -- a goal it would reach with relative ease if Suzuki became a subsidiary.
In the first six months of 2009, Volkswagen sold 3.265 million vehicles and Suzuki sold 1.15 million. Their combined sales of 4.415 million units would be larger than top-ranked Toyota's 3.564 million.
Suzuki lost its equity ties to General Motors Co a year ago, having bought back the U.S. automaker's 20 percent stake in it, now worth about 257 billion yen ($2.9 billion).
In contrast to a potential pair-up between PSA and Mitsubishi Motors, which many regard as a union of the weak, Volkswagen and Suzuki are both regarded as being among the stronger automakers thanks to their big exposure to China and India.
While major Western markets have suffered one of their worst years on record, booming sales in China and India are providing a lifeline. GM and SAIC Motor said last week they will make small cars and commercial vehicles in India, taking a successful 12-year Chinese partnership into one of the world's fastest growing auto markets.
Shares in Maruti Suzuki Ltd, India's top carmaker and 54 percent-owned by Suzuki, rose as much as 3.8 percent on Wednesday.
Another Franco-Japanese auto alliance, between Renault SA and Nissan Motor Co, is stepping up its push to achieve bigger synergies after 10 years of partnership, considered one of the industry's few success stories.
The bankruptcy of Chrysler this year was twinned with a link-up with Italy's Fiat SpA, while Chinese automakers are looking to buy into brands on sale from GM and Ford Motor Co.
Analysts said the move could benefit Suzuki by giving it cash and a partner to develop clean-car technology, where it lags, while giving VW a minicar platform, as well as a foothold in emerging markets such as India and Southeast Asia.
Japan's Mazda Motor Corp has also come under some scrutiny given its diminished equity ties with Ford, whose stake has dropped to 11 percent from one-third.
But Mazda is fresh from raising about $1 billion in a share sale to fund the development of hybrid and other technologies, indicating that it could maintain the status quo.
Analysts are particularly upbeat about a new generation of fuel-efficient engines and transmission to be rolled out from 2011 as a cost-effective technology that could contribute immediately to Mazda's bottom line.