The VW-Suzuki breakup: Beware the ‘perfect’ partner

Summing up the recent demise of his firm’s failed partnership with Volkswagen, Suzuki boss Osamu Suzuki said he felt like he had cleared a small bone stuck in his throat.

“It’s so refreshing now,” he told reporters, saying he could finally breathe easier once more.

The termination of the Suzuki-VW partnership, coming just weeks before the explosive revelations of VW’s engine emissions cover-up, clearly left the Japanese carmaker burned although also perhaps happy to be single again.

Alliances may start with the best of intentions, but can quickly run into trouble when it comes to realising the actual benefits of working together.

Indeed, given the growing scandal around VW, Suzuki may well be counting itself lucky to have gotten out of the relationship when it did.

Yet the story of how this once-promising alliance faltered and failed is an instructive one, with implications well beyond the auto industry, including for firms here in Singapore.

It had all been so different back in 2009. Like a story taken from the pages of a romantic novel, the Suzuki-VW tie-up seemed a match made in heaven.

In press releases the two carmakers gushed about how they ideally complemented each other, while analysts noted the strong fit between the firms’ product portfolios, distribution networks and production capacity.

Divorce settlement

Instead, within months, the relationship turned sour amid bitter recriminations of broken promises, disloyalty and violated honour. Finally in August the London-based Court of International Arbitration issued its divorce settlement, ordering VW to sell its 19.9 per cent stake in Suzuki.

So what lay at the heart of the break-up?

Certainly there was an element of being blinded by optimism, with both sides eagerly rushing to the altar without first getting to know each other better.

weddingFirms should pick their partners carefully, and avoid being dazzled by ‘ideal’ matchesThe automotive industry – inherently a large-scale, high-cost enterprise – faces a range of challenges that have pushed calls for consolidation and partnerships.

Tougher regulations over vehicle fuel consumption, emissions and passenger safety, for example, mean carmakers are facing rising development costs – a situation where pooling expertise and sharing the financial burden makes obvious sense.

Fiat Chrysler CEO Sergio Marchionne has been a particularly vocal advocate of consolidation, saying recently that industry spending of more than $2billion a week on developing new vehicles and engines is unsustainable and wasteful.

On the face of it, that might seem a good idea. But the auto industry has a history of failed alliances – Suzuki’s partnership with VW is by no means the first.

Often these failures have been attributed to the partners also being direct competitors or the heavy fixed investments inherent to the car business hindering flexibility.

Another common cause of tension is the long lead time for developing new products – although one might think that established players in the business would be used to, or at least aware of, that factor.

Like any successful relationship, forming a business alliance brings with it a large element of compromise. If one party is set in its ways and believes only its methods are best, conflict is inevitable.

Nonetheless, such attitudes are common – and perhaps unavoidable.

Winning formula

After all, in a business partnership the initial spark of attraction usually comes from successful firms drawn together to target new growth opportunities. Yet it is also precisely because of this success that both parties may be unwilling to compromise on what they see as a winning formula.

ThinkAloud4Alliances may start with the best of intentions, but can quickly run into trouble when it comes to realising the actual benefits of working together.

Doing this requires effort – accommodation, adjustment and cooperation, none of which necessarily come easily or naturally, especially to firms used to working on their own. It takes hard work and a willingness to communicate and listen; egos must be accommodated and controlled.

One notable exception to the long list of failed partnerships in the auto industry is that between France’s Renault and Japan’s Nissan.

Among the reasons cited for its success are concerted efforts by both parties to build communications, coordination and structural links, as well as allowing the two firms to retain their individual identities and cultures.

What then can we extract from the VW-Suzuki saga for Singapore firms?

Despite a growing impetus to look overseas for future growth, Singapore firms have a poor record of building alliances, especially in neighbouring economies which should logically be our first port of call.

‘The SIngapore way’

For many there is a tendency to see ‘the Singapore way’ as the only way to do things – traits such as compromise and adaptation do not rank as priorities. But being open to new ideas is vital, particularly when working with partners in their home countries.

Used to operating in a relatively open environment on home turf, Singapore firms face very different business contexts in emerging economies and many seem to find that a difficult adjustment.

Certainly firms should pick their partners carefully, and beware of being overcome by apparently “ideal” matches. Then, when forming a partnership, all parties should establish their joint objectives clearly and formulate a joint strategy to achieve them.

Fundamental to success is whether one side’s objectives and strategy are compatible with those of their partner. If one party feels it is losing out to the benefit of the other then the partnership will be in trouble.

Compromise, to allow both parties to simultaneously achieve their aims, will increase the likelihood of success.

Singapore firms often do not exhibit a strong willingness to understand or adapt to local conditions or their partners. Their key strengths – centralised direction, hierarchical organisation, disciplined execution – restrict the flexibility and adaptation needed to work across borders and cultures.

Likewise a strong focus on bottom-line performance and on the one best way of doing things may cause inflexibility in adapting to foreign environments.

Deals may be agreed by senior leaders, but success ultimately depends on both sides learning that cooperation requires constant dialogue and adaptability – giving as well as taking.

After the initial due diligence is done, and the deal signed, alliances need constant and concerted effort to be successful and deliver the results that both sides expect.

Joe Havely is Editor of Think Business

  • Author Profile

    Professor Kulwant Singh is head of the Department of Strategy & Policy at NUS Business School. His research focuses on firm adaptation to external shocks, particularly in the context of firm alliances, and strategy in the Asia Pacific region.

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