Suzuki hands Volkswagen ultimatum to retract claim

TOKYO/FRANKFURT Thu Sep 22, 2011 2:31pm BST

A man walks pasta Suzuki Motor car dealer shop in Tokyo December 9, 2009. REUTERS/Issei Kato

A man walks pasta Suzuki Motor car dealer shop in Tokyo December 9, 2009.

Credit: Reuters/Issei Kato

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TOKYO/FRANKFURT (Reuters) - Suzuki Motor Corp (7269.T) gave Volkswagen (VOWG_p.DE) until the end of the month to publicly retract a claim the Japanese car maker had violated their contract, stepping up a war of words as it tries to break off equity ties with its estranged partner.

Suzuki, Japan's fourth-largest automaker and owned 19.9 percent by Volkswagen, said it sent a letter on Thursday in Chief Executive Osamu Suzuki's name addressed to his German counterpart, Martin Winterkorn.

Turning the tables on Volkswagen, Suzuki said the German company had until September 30 to revoke a statement that Suzuki had breached a pact by agreeing to a diesel engine deal with Italy's Fiat (FIA.MI), which it said had significantly damaged the Japanese company's reputation.

The ultimatum came about 10 days after VW gave Suzuki "several weeks" to abide by the contract. Neither have said what the consequences would be if the respective deadlines were not met, but the alliance is now seen as not being worth the paper it is printed on.

"This partnership did not bring us the benefits we expected, but turned out to be a 'ball and chain' for our managerial independence," Suzuki's CEO said in the letter.

Suzuki also rebutted Volkswagen's allegation by arguing that it had informed Volkswagen in writing in January of its decision not to use its partner's diesel engines as requested.

Volkswagen countered on Thursday, saying it did not understand why Suzuki saw the demand that it fulfil its side of the deal as damaging to its reputation.

"This is an internal letter sent between partners, and it should be handled as such. Such a blatant action is hardly helpful in the current situation," VW said, sticking to its demands.

Suzuki has been on the offensive since July, when its octogenarian CEO touched a nerve by questioning in a blog Volkswagen's intention of being an equal partner, as agreed when they sealed their equity tie-up in December 2009.

Volkswagen initially tried to smooth over the rift, but on September 11, it accused Suzuki of violating their agreement, prompting Suzuki's CEO to call a news conference in Tokyo the following day to publicly seek a breakup.

Suzuki offered to buy back at market prices the shares that Volkswagen owns to end an alliance that has failed to bear any fruit after almost two years.

Volkswagen's purchase of its stake in Suzuki for $2.5 billion (1.6 billion pounds) in December 2009 was welcomed by investors as it promised VW an inside track into Suzuki's leading small-car engineering while transferring VW's hybrid technology to Suzuki.

"We gradually realized that (...) Suzuki cannot have the initially promised access to their technology in reality," Osamu Suzuki wrote in the letter.

GO-IT-ALONE

Volkswagen, which reaffirmed its refusal to sell its stake, has struggled for years to offer competitive minicars powered by engines 1 litre in size or smaller, a specialty of Suzuki that has helped majority-owned subsidiary Maruti Suzuki (MRTI.NS) control nearly half of the rapidly growing Indian market.

But VW CEO Winterkorn said last week that Suzuki was only one option for gaining access to the Indian market and that VW could go it alone after expanding its dealer network there.

The Indian car market expanded by nearly 30 percent last year and is considered to be the next big car market as rising wealth standards create a new middle class.

Despite having roughly comparable populations, China's passenger car sales reached 11.5 million in 2010, while Indian sales totalled just 2.2 million, according to data from VW.

Volkswagen has so far barely made a dent in the market, capturing only 2.5 percent that year together with group brand Skoda, revealing a weak point amid an otherwise very strong footing in other BRIC countries like China and Brazil.

"The Indian car market is completely different from all others in the world," VW sales chief Christian Klingler said at the Frankfurt auto show last week, citing as one example the notchback version of the VW Polo subcompact that is sold there locally under the name Vento.

"We sell the Vento there as a chauffeur's car -- 80 percent of the customers are chauffeured -- whereas in Europe no one would ever think of doing that," he said.

(Editing by Edmund Klamann and Helen Massy-Beresford)

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