MARKET TRENDS

In August of 2001, Suzuki and Kawasaki announced their intent to form a product-development alliance for recreational products. The official reasons given by the companies at that time were to "bolster [the] growth and competitiveness" of both organizations. Confronted with ever-increasing component costs, new competitors from China and Taiwan , and an increasingly unfavorable exchange rate, formation of an alliance was a very logical thing to do.

The initial plan was to focus on high-volume models and the companies anticipated three key benefits:

1. Production platforms for motorcycles and ATVs could be shared, and capacity allocated at plants to meet demand for the new products.

2. Suzuki and Kawasaki could share parts sourcing to help both companies remain competitive in the global marketplace by reducing purchasing costs.

3. Suzuki and Kawasaki could co-develop future motorcycle and ATV models to fill product line gaps and create new sales opportunities.

The points outlined above were rather vague, and at the time of announcement were subject to a lot of industry interpretation and speculation. Neither company ever really said why they needed to form this alliance. The recreational products divisions of Kawasaki and Suzuki are parts of larger industrial conglomerates, and neither Kawasaki nor Suzuki was officially claiming to be in a particularly weak financial position. Indeed, both companies played the alliance deal very "close to the vest."

Now, almost four years later, Suzuki and Kawasaki have announced that they will dramatically alter the terms of the alliance agreement. According to news releases, Kawasaki and Suzuki say the alliance will now focus on potential exchanges of indirect resources, rather than on direct OEM product exchanges. In short, they plan to limit the alliance agreement to a sourcing strategy only, and this represents a dramatic shift.

Our review of each company's financial statements indicates that Kawasaki had the most to gain from an alliance arrangement. Back in 2001, Kawasaki 's core industrial businesses were struggling under a slowing Japanese economy, and the strengthening yen/dollar exchange rate was crimping overall profitability.

Looking to cut costs, the company clearly viewed its high profile (yet relatively small --; it accounts for only about 3% of parent Kawasaki Heavy Industry's [KHI] total revenue) recreational product division as a place to achieve these cost reductions. Sharing development costs and resources with Suzuki Motor Corp. (SMC) would be a measure that would benefit the KHI conglomerate at large.

At the early stages of the alliance, some benefits for both Suzuki and Kawasaki were becoming more clear. Suzuki finally would have an opportunity to improve its weak cruiser bike range, and might be able to replace models using Kawasaki 's engine technology for a fraction of what it would cost to do this on its own. Suzuki would also have access to Kawasaki 's ATV technology, especially its automatic transmissions, which are popular in the American ATV market.

Kawasaki would get several key benefits from the alliance, as well. In the early part of this decade, Kawasaki was struggling to keep up with the R&D expenditures of larger rivals Honda, Yamaha, and Suzuki. The Kawasaki sport bikes were not up to the standards of competitors' bikes, and the company was slower than competitors to adopt necessary performance upgrades. This product development alliance was intended to enable the Kawasaki brand to regain a competitive stature while still maintaining a reduced level of investment by the corporate parent.

On the product side, the Kawasaki–Suzuki alliance had very tangible benefits in the showroom. There were weaknesses in each OEM's lineup, and the alliance was structured to address specific segments: