Germany's Volkswagen will buy a one-fifth stake in Suzuki Motor for $2.5 billion (Rs 11,675 crore), 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 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 auto sector," said Noritsugu Hirakawa, a strategist at Okasan Securities.
The latest deal 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 per cent in a weaker Toyko market on Wednesday. Volkswagen rose 2.3 per cent 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.