UPDATE 2-Suzuki shares surge on possible Volkswagen tie-up

Published: 25 Jun 2009 23:09:53 PST

(Adds return of full schedule at Japan car plants, closing share price)

* Suzuki shares rise as much as 7.7 pct

* Technical cooperation with VW would help Suzuki-analyst

* Small-car tie-up would be 2nd attempt between VW, Suzuki

* CEO Suzuki says will do best to work with GM in green tech

* Suzuki to return to full schedule at Japan car plants

* Some investors wary, waiting for official decision

TOKYO, June 26 - Shares of Suzuki Motor raced to a 10-month high after a source said Volkswagen is exploring a deal to cooperate with the Japanese automaker to boost its presence in ultra-small cars.

Cooperation with Suzuki, which dominates Japan's 660cc minivehicle market along with Toyota unit Daihatsu Motor Co, could yield a new model for Volkswagen below the upcoming "New Small Family" range of small cars, the source said.

Such a tie-up would mark the second attempt for Europe's top automaker and Japan's No.4 carmaker, which in 1992 signed an agreement to jointly develop small cars, although that deal ultimately fell through.

Volkswagen is looking to secure a cooperation deal by taking a 10 percent stake in Suzuki, reported manager magazin, a German magazine. A spokesman for Suzuki could not comment, saying he had not heard anything about a potential tie-up, while Volkswagen declined to comment.

Investors cheered the prospects of ties between the two automakers, which have weathered the global industry downturn better than many rivals due to their heavy presence in emerging markets. Volkswagen is China's top seller, while Suzuki is No.1 in India through majority-owned unit Maruti Suzuki India.

"I think it's certainly possible," said Mitsuru Kurokawa, an analyst at IHS Global Insight.

"It could help Suzuki pick up its pace in the hybrid and electric vehicle field as those segments look set to grow faster than expected now. Meanwhile, Volkswagen could gain a partner in Asia that it always wanted and develop smaller cars as consumers downshift more and more from bigger cars," he said.

Suzuki is cooperating with former top shareholder General Motors in the field of hybrid and fuel-cell vehicles despite the U.S. automaker's bankruptcy filing this month.

At its annual general meeting on Friday, Chief Executive Osamu Suzuki told shareholders Suzuki would continue to do the best it can with GM in developing cleaner cars, a spokesman said.

Still, Suzuki has repeatedly said he would welcome any calls for cooperation, acknowledging that his company lagged in hybrid and other fuel-saving technology.

Suzuki already has a broad range of projects with rivals, including an original equipment manufacturing deal with German brand Opel. It also produces diesel engines using licensed technology from Italy's Fiat.

Shares of Suzuki ended up 5.5 percent at 2,195 yen after rising as much as 7.7 percent to a 10-month high. Tokyo's auto index gained 0.3 percent.

OUTPERFORMER

Some took a more cautious view.

"If they are really going to make cars together, bringing together production facilities and linking their logistics, this could help both," said Kazuyuki Terao, director at investment fund RCM Japan.

"But a capital tie-up by itself will not stimulate demand."

Vehicle demand, especially in developed markets such as North America, Japan and Europe, has yet to recover as a recession and job losses have tightened customers' purse strings.

"A deal would not be a negative, as there is a limit to doing things on one's own in an auto market like this," said Naoki Fujiwara, a fund manager at Shinkin Asset Management. "But I would have to take a look at what they actually do."

Suzuki has fared much better than its domestic rivals thanks to its focus on the relatively steady 660cc microcar segment in Japan, and its dominance in India, its biggest market.

A day earlier, Suzuki said its overseas production grew 1.4 percent in May from the year before for the first rise in 10 months, as production in India grew for the fourth straight month.

Global output in May fell 14 percent but that was much better than a 27 percent to 55 percent drop at the seven other Japanese carmakers.

During the July-September quarter, Suzuki will return to a full schedule at its domestic car plants for the first time since December, a spokesman said. The factories had taken extra days off since January to work down inventory.