TOKYO/BERLIN: Volkswagen AG, Europe's largest carmaker, agreed to buy 19.9% of Suzuki Motor  for 222.5 billion yen ($2.5 billion) to boost its presence in India.

Suzuki, Japan's fourth biggest automaker, will spend as much as half of the amount it will receive from Volkswagen on buying VW shares, Wolfsburg, Germany-based Volkswagen said in a statement today.

The deal is subject to regulatory approval and will probably be completed by January, the companies said.

The carmakers will focus on "achieving synergies" in developing and manufacturing energy efficient small cars in emerging markets. Suzuki controls Maruti Suzuki India, the maker of half of the cars sold in India. VW is the second biggest overseas automaker in China, which is set to surpass US as the world's largest auto market this year.

"This is clearly the next step in going head to head with Toyota," said Christoph Stuermer, a Frankfurt-based automotive analyst with IHS Global Insight. The cross shareholding is a "very wise choice" because it allows Suzuki to "keep its face" while opening the door to Volkswagen, he said.

Department Store

Volkswagen and Suzuki have been discussing a partnership since June, a person familiar with the matter has said. An investment by Volkswagen would pose a "serious threat" to the global dominance of Toyota, said Koji Endo, managing director of Advanced Research Japan in Tokyo.

"Volkswagen is like a department store carrying everything from luxury brands to truckmakers," Endo said. "What they're missing is any presence in India and Southeast Asia. The point of partnering with Suzuki is to grab India."

Car sales in China surged 42% in the first 11 months of this year to 12.2 million. In India, passenger car sales rose 61% last month, the biggest gain in more than five years.

A decline in worldwide auto sales this year is prompting carmakers to form alliances and shift investment to emerging markets, which have withstood the slump amid economic growth and government subsidies.

PSA Peugeot Citroen, Europe's second-biggest carmaker, and Japan's Mitsubishi Motors are in talks to deepen a strategic partnership that may involve an equity tie-up, the companies said last week.

Porsche Takeover

Volkswagen supervisory board chairman Ferdinand Piech has said he wants to bolster the company with additional brands. The company this week completed the purchase of a 49.9% stake in Porsche Automobil Holding SE's carmaking unit.

"A Suzuki deal would be a bit more game-changing than Porsche," said Philippe Houchois, an analyst with UBS AG in London. In the Porsche transaction, "Volkswagen is paying full price in an area where it's already strong - Europe and luxury cars."

Volkswagen chief executive officer Martin Winterkorn has a 10-year goal of increasing VW-brand deliveries by 80% to 6.6 million vehicles by 2018. The manufacturer also wants to overtake Toyota, the world's biggest carmaker, in global deliveries and profit margins by 2018.

Bentley, Skoda

To help finance its takeover of Porsche, VW, whose other brands include Audi, Skoda and Bentley, has shareholder authorization to sell as many as 135 million preferred shares, valued at 8.7 billion euros at market price.

Michael Brendel, a spokesman at Volkswagen, said there hasn't been a decision on whether Suzuki will acquire VW's ordinary shares or non-voting preferred stock.

Suzuki forecasts global sales of 2.3 million vehicles in the fiscal year ending March 31. Volkswagen said in October it may deliver 6.2 million units in 2009. The combined figure exceeds Toyota's sales estimate of 7 million for the current fiscal year.

Suzuki is known for its minicar models, including the WagonR and Carry vehicles, which are sold mainly in Japan, as well as for its Swift hatchback and Jimny small sport-utility vehicle.

GM-Suzuki Ties

The company began making cars in India in 1983 through a partnership with the government. Suzuki took a majority stake two decades later, just before the venture, now called Maruti Suzuki India, was listed.

Suzuki has been cutting ties with General Motors, which owned a 20% stake in the Japanese carmaker until 2006. Suzuki said December 4 that it will sell its 50% stake in a Canadian joint venture to the Detroit auto company. GM first invested in Suzuki in 1981 and Suzuki completed a purchase of its own shares from GM last year.

Operating Matrix 

                         Suzuki     Volkswagen
Revenue        $30.02bn    $167bn
Profit               $274mn      $6.99bn
EBITDA           $2.17bn     $21.84bn
Liabilities       $14.24bn    $182bn

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