What was the rationale for the partnership between Volkswagen and Suzuki?

Stephen McGill

            In the business world the way in which Companies negotiate with each other is truly how they are culturally. For example, if Company A attempts to subvert information from Company B during negotiates than Company A could potentially dirty the water for future negotiations with Companies outside of their local circle. If a business is in a robust but limited saturation competitive market they cannot afford to jettison their image for a slight advantage during negotiations.

In the case of Volkswagen and Suzuki their rationale for the partnership was remarkably straight forward, “Volkswagen agreed to provide its larger vehicle technologies with Suzuki; Suzuki, in turn, agreed to provide Volkswagen access to its small-displacement motors and Indian presence” (Deresky 2014, pg. IC-13).

In ideal partnerships both sides receive a valued item within the agreement. From Volkswagen’s perspective they sought out the ability to enter the Indian market. Why was the Indian market so attractive to them?  In early 2014 The Wall Street journal published an article called GM, Ford struggle to crack India’s car market, in which they stated “The South Asian nation is expected to become the third largest car market in the world in the next five years behind China and the U.S. But U.S. auto makers have been struggling with debt and a slowdown at home, and they haven’t been as good as the Japanese and Koreans at offering the right products to India’s booming middle class, analysts and industry executives say” (Choudhury, S., & Bennett, J. 2014).

If negotiations would have gone well with Suzuki the Indian market could have been shared and the total cost of the alliance would have paid for itself via the total number of cars sold within a given period of time.

Given that both Companies represented success within their own niche market it would only make sense that the Companies would desire a partnership. Some partnerships lead to inflated costs due to corporate buyout rates and basic overhead costs but in the example of Volkswagen and Suzuki the shared agreement would have allowed both Companies to prosper by only given a small portion of themselves up.

 

Analyze the reasons for the break-up of the Volkswagen and Suzuki partnership

 

            Partnership agreements can have breakdown points at any time during negotiation. In the case of Volkswagen and Suzuki the communication within the oral agreement and the basic language of the written agreement created tension between the two companies. With one Company deciding to forgo the percentage of buyout. “Suzuki wants to buy back all the 19.9% of its shares that VW currently owns and that if the German automaker does not comply, Suzuki will seek mediation” (Faroq, 2011).

            Communicating with your business partner can be an extremely difficult process if the businesses have fundamental communication differences. In the case of Suzuki and Volkswagen many discussions and plans were put together but an overall lack of empathy on either part was found. For example, “We’ve known that Suzuki is a notoriously independent company with a chairman who is not going to bend over backwards to cooperate.  Volkswagen is better off focusing on a non-Suzuki-based strategy for India and Indonesia” (quote derived via Ashvin Chotai, a London-based managing director at Intelligence Automotive Asia Ltd., citation as follows: Mukai, 2011).

Although the communication piece is very important in the case of Suzuki and Volkswagen it was a complete lack of transparency within each company that dissuaded the other. Why for example, would Volkswagen share its larger vehicle technology to Suzuki before Suzuki granted them access to the Indian market? It was essentially a game of both sides being scared that the other wasn’t going to fulfill their end of the bargain and who could blame them? Both companies had ahold of markets and technology that they held precious. If either side decided to share with third parties that information that they had gained it could have led to a complete meltdown of the technology or location of business.

Even their individual company goals were full of secretive language and across the pond thinking. For example, Volkswagen stated that they “aimed to be the most successful and fascinating automakers in the world by 2018” (Deresky 2014, pg IC-16).

In the end the real reason that they could not get on the same page can be categorized by the power play between the two companies. On one hand Osamu Suzuki stated that a mistaken impression that “Suzuki is placed under their (Volkswagen) umbrella” (Deresky, 2014, pg. IC-19)

 

What role does culture play in a trans-border /transcontinental alliances?

Culture played a rather large role in the negotiation process as Japanese owners versus German owners have completely opposing cultural backgrounds. In the Japanese culture for example “Japan is a highly structured and traditional society. Great importance is placed on loyalty, politeness, personal responsibility and on everyone working together for the good of the larger group. Education, ambition, hard work, patience and determination are held in the highest regard. The crime rate is one of the lowest in the world” (Japan Cultural Etiquette, 2014).

While the Japanese place a large weight on politeness, togetherness and education the Germans’ have a bit of a dissimilar style of negotiation as they “Can be considered the masters of planning. This is a culture that prizes forward thinking and knowing what they will be doing at a specific time on a specific day. The German thought process is extremely thorough, with each aspect of a project being examined in great detail. Careful planning, in one’s business and personal life, provides a sense of security. Most aspects of German living and working are defined and regulated by structure, for example, through laws, rules, and procedures, which are evident in all economic, political and even social spheres” (German Cultural Etiquette, 2014).

Now that we have established the two cultures we can find the points in which they clashed. In the Japanese culture politeness is honored and respect is one of the more important rules of the game. However, the Germans want to discuss the fine tuning of the project which could come off as a bit intrusive to a Japanese negotiator. Additionally the German Company makes decisions seemingly a lot quicker than the Japanese company. While the German based company Volkswagen would plan the work and follow through with the execution of the plan, the Japanese company would want a slower more thorough approach to decision making.

Furthermore, Suzuki thought that engaging with Fiat in regards to engine research was a reasonable way of performing data collection and Volkswagen viewed that as a complete “breach of contract” (Deresky 2014, pg. IC-21).  If Suzuki would have communicated with Volkswagen, in regards to the trip itself, there may have not been a break-up of the partnership to start with. With open lines of communication and a clear/ concise communication plan between the companies they could have saved the opportunity cost that was lost with the filing and mitigation of said lawsuit.

Was this simply a cultural misstep as Suzuki viewed the business relationship as more of a loose controlled partnership or was it as stated from Mr. Suzuki himself when he stated “(about Volkswagen technology) if we are short of any technology, we have an option to ask other companies with which we benefit from technological exchanges” (Deresky, 2014, pg. IC-19).

 

Do you agree with critics who felt that cultural differences were a reason for the breakup of the alliance between Volkswagen and Suzuki? What could the companies have done to avoid these problems?

 

Personally, I do not agree that cultural differences were the reason for the breakup of the deal itself. It is my belief that the Companies themselves did not weight the cost/ benefit of such an endeavor before embarking on it. Individually their thoughts of success differ so drastically that they cannot even agree on what success would look like. Additionally, their ability to communicate was volatile not due to a cultural difference but due to the two companies not engaging with each other fairly. I understand that some companies communicate in ways that may seem abrupt or disjointed to others but it is the job or obligation of the CEO to interpret the communication style of their potential partner before engaging in negotiations with them.

Simply put the two companies did not do their homework. They both are to blame for the collapse of the partnership because they performed very little in terms of relationship building and I blame both of them for that. I blame Suzuki for dealing with Fiat instead of Volkswagen and not communicating to Volkswagen the reasoning behind it and I additionally blame Volkswagen for intentionally slowing down the process of data sharing.  It without question that they both acted in a way that was completely inappropriate in the world of large business. In no way would this type of behavior be accepted if they were both startup companies. Imagine the complete dismay of a potential customer at a local convenience store. The clerk stands behind the counter and fails to engage the potential customer. If that type of behavior was tolerated by the customer than the behavior could continue however if the customer complained than either there would be a corrective action by the management staff or the entire business would fail based on word of mouth.

Each engagement that either of these companies embarks on must be treated with the utmost respect as their shareholders expect a significant return on their investments each and every year. These engagements and speculations are measured directly by the overall worth of the company and while their value is shown as favorable their stock price raises. For example, when the partnership was initially shared with the public both companies looked favorable to the marketplace. Which meant their total earning potential of vehicles sold could have surpassed that of Toyota, 3.265 million and 1.15 million in the first half of 2009” (Deresky 2014, pg. IC-17).

The way in which the two companies could have overcome their differences should have been hammered out in the first conversations that the companies had when they initially discussed the coupling. They should have planned out their communication strategies and how and in which ways they would share information. Ideally, each milestone would be assigned with a specific date of accomplishment and benchmarking. They should have been completely transparent in their dealings and explained their individual points of view before final negotiations took place. Additionally, they should have taken the time to get to know the true stakeholders in the dealings. In this example, I would argue that they true stakeholders were the final consumers of their products. Furthermore I would have encouraged both companies to be completely forthright in their ideal goals and a shared ideal of what each step of success would look like.

With the total assets that both companies held it would have been extremely difficult to complete an asset alignment chart but that could have possibly been a way to show the openness of their negotiation. For example, the engine technology that was sought after could have been delivered at a given schedule if all the milestones were met. This kind of milestone charting can be very effective when dealing with small and big businesses.

 

What challenges would be in store for both the companies, now that the partnership is terminated? What should each company do now?

 

Going forward each company should perform their own SWAT (Strengths, weaknesses, opportunities and threats) analysis. For example, learning from ones missteps in regards to the negotiations between the two companies could be beneficial to future negotiations. In the case of Suzuki, they could learn to work on their overall communication skills and plan around their long voids of communication with either automated or third party reminders that they need to re-engage with their partners. Additionally, Volkswagen needs to find their own way into the Indian market via a shared interest with another company. Or Volkswagen can continue to perform well in the markets that they are in and chalk this experience up as a lesson learned.

The overall handling on both sides of the aisle are to blame here and both companies should perform their own after action review in regards to their shortcomings.

 

References

Business etiquette. (2014, September 12). Retrieved October 4, 2014, from

http://businessculture.org/western-europe/business-culture-in-germany/business-etiquette-in-germany/

 

Choudhury, S., & Bennett, J. (2014, March 24). GM, Ford struggle to Crack India’s Car Market.

Retrieved October 2, 2014, from

http://online.wsj.com/news/articles/SB10001424052702304020104579431322863346000

 

Deresky, H. (2014). Communicating across cultures. In International management: Managing

across borders and cultures : Text and cases (8th ed., pp IC-13, IC-17, IC-21). Boston:

 

Faroq, N. (2011, November 18). VW Refuses to Let Go of Suzuki Shares. Retrieved October 4,

2014, from http://www.autoguide.com/auto-news/2011/11/vw-refuses-to-let-go-of-

suzuki-shares.html

 

Japan – Cultural Etiquette – e Diplomat. (2014, January 1). Retrieved October 4, 2014, from

http://www.ediplomat.com/np/cultural_etiquette/ce_jp.htm

 

Mukai, A. (2011, September 12). Suzuki Seeks ‘Divorce’ From Volkswagen as Their 20-Month

Alliance Crumbles. Retrieved October 4, 2014, from

http://www.bloomberg.com/news/2011-09-12/suzuki-executives-to-discuss-ending-capital-alliance-with-volkswagen.html