TOKYO – At Suzuki Motor Corp., “eco”’ equates with “mini” and little not only means big business but environmentally friendly.

As global auto makers recover from the worst recession in decades, Japan’s fourth-largest vehicle producer has remained profitable. Although earnings are down sharply, Suzuki still reported an operating profit of ¥31.8 billion ($361 million) in the April-September first half of fiscal 2009 and is conservatively projecting ¥40 billion ($454 million) for the full year.

And so far, in an automotive world bedazzled by a growing range of hybrids and a new wave of electric vehicles, Suzuki is relying on tried-and-true internal combustion engines, especially small ones.

In an exclusive interview with Ward’s just prior to the auto maker’s announced alliance with Volkswagen AG, Masamumi Yayoshi, managing executive officer, says specialty 0.66L “kei” cars that account for roughly three out of every four vehicles Suzuki sells in Japan are the most practical eco cars on the road.

“Minivehicles are lighter and smaller than standard cars,” he says. “They need less material to produce and are already eco-friendly.”

And because of their small price, Japanese consumers bought some 700,000 Suzuki minis in fiscal 2008, including nearly 140,000 made for Nissan Motor Co. Ltd. and Mazda Motor Corp.

Yayoshi admits it will be difficult and expensive to hybridize or electrify those models, although Suzuki tried with the Twin Hybrid earlier this decade and the Every EV several years before that. No sales data ever was revealed and clearly neither model made any hit list.

Consequently, Suzuki management will place greatest emphasis on improving the fuel efficiency of existing powerplants, reducing model numbers and grades, and cutting variants within model lines – all in hopes of lowering base prices below ¥800,000 ($9,088).

“And that won’t be easy,” Yayoshi warns. “Especially since kei-car owners increasingly want air- conditioning, power steering and automatic transmissions as standard features. It is very difficult to market under-equipped cars even in the mini segment.”

For example, Suzuki’s top-selling mini, the 0.66L Wagon R, starts at ¥995,000 ($11,385). Most other models are slightly more affordable but still priced above the ¥800,000 target, although the auto maker's new Alto, due out next week, is expected to hit that mark.

Yayoshi is a realist. He recognizes IC engines no longer are the only way to go and foresees moves beyond conventional powertrains, probably into hybrids first.

In announcing its deal with VW, in which the German auto maker agreed to take a 19.9% stake in Suzuki for a reported €1.7 billion ($2.5 billion), the Japanese company said it would use VW technology to build hybrid and electric vehicles, which would be prohibitively expensive for the auto maker to do on its own.

At the Tokyo Motor Show in October, Suzuki unveiled a plug-in hybrid version of the Swift subcompact that can run 12 miles (20 km) on battery power before a recharge from the car’s special 0.66L engine, a substitute for one of the four engines, ranging from 1.2L to 1.6L, normally fitted in the standard Swift.

But Suzuki has no current plans to introduce the car, because, even with substantial subsidies, Yayoshi believes Suzuki customers wouldn’t be able to afford it. Nor will he speculate about when hybrid technology might be introduced in the mini segment.

Although Suzuki is essentially on the sidelines in the current Japanese debate over reducing carbon-dioxide emissions and subsidizing EVs, Yayoshi is skeptical about the aggressive EV targets forecast by other car makers, notably Nissan.

Suzuki-Supplied Minis

Mazda AZ Wagon

• Mazda AZ Offroad

• Mazda Carol

• Mazda Scrum Wagon

• Mazda Scrum Truck & Van

• Nissan Moco

• Nissan Pino

• Nissan Roox

“Without a significant investment in infrastructure, it will be difficult for EV demand to grow rapidly,” he says. “And Suzuki won’t be able to bear the added cost of batteries for an EV and still maintain our current customer base – people attracted by our affordable prices.”

That said, the company has been moving steadily up-market. Sixteen mini models have been supplemented by 11 compacts and subcompacts, fitted with engines ranging from 1.2L to 2.4L. And in October, Suzuki launched the midsize 2.4L Kizashi sport sedan with full leather seating, cruise control and 10-way power driver seats.

The main market for the car will be North America where a left-hand-drive model will be priced between $18,999 and $26,749, depending on grade and features. Due out in December, the Kizashi will join the SX4, XL7 and Grand Vitara.

Even so, “our base will remain the kei,” Yayoshi says flatly, adding he expects Suzuki to hold on to about 35% of the shrinking Japanese market.

Mini sales peaked in Japan in fiscal 2006 at 2.03 million units, slid to 1.81 million last year and are expected to fall below 1.6 million in the current fiscal year.

Suzuki and Daihatsu Motor Co. Ltd. have continued to duel for market leadership since Daihatsu passed the once-perennial front-runner three years ago. Suzuki remains the top producer, thanks to its contracts with Nissan and Mazda, which account for one-fifth of the auto maker’s domestic sales and represent what Yayoshi calls a “win-win” operation for all concerned.

However, Suzuki is likely to lose the top-producer ranking when Daihatsu begins making 0.66L minis for Fuji Heavy Industries Ltd. in 2011 as part of Fuji's still-limited tie-up with Daihatsu parent Toyota Motor Corp.

Suzuki sales, like those of other auto makers, have stalled in Japan, where total industry demand has shrunk from a peak of 7.7 million units in 1990 to 5.1 million last year and may drop to as low as 4.5 million this year.

Clearly, today’s growth opportunity lies offshore. The company markets vehicles in more than 120 countries and produces in 16 of them. That includes India, the world’s second most populous country and already Suzuki’s biggest market, accounting for one-third or more of global profits.

In fact, Suzuki now builds more cars in India than in Japan: 476,000 units vs. 420,000 in the first half of the current fiscal year. And sales growth in India will be second only to that in China in the next decade as total annual demand nearly doubles to 4 million units, predicts Ashvin Chotai, managing director of London-based Automotive Intelligence Asia.

Conversely, industry analysts foresee as much as a 10% decline in the size of the Japanese market to 4 million units annually in the next few years and, longer term, no one is forecasting a recovery.

Suzuki began building cars in India in 1982, well ahead of other foreign auto makers, and that country gradually has become an irreplaceable market, production and profit center, export hub and more.

Sales of Maruti-Suzuki Co. Ltd., now controlled and 54.2% owned by the Japanese company, are forecast at about 820,000 units this year for a market share of roughly 42%, while exports, mainly to Europe, are expected to reach 130,000.

These do not include a 5-year contract signed with Nissan in 2008 to supply A Star cars, badged the Pixo, for export to Europe. Volumes, set annually, are expected to total 54,000 in 2009.

In 2007, the Indian subsidiary began a 5-year, $2.4 billion plan that includes expanded capacity and a 700-acre (283-ha) research and development center.

“Until now, all Maruti models have been designed in Japan, and Suzuki has decided that cars with engines up to 1.2L should be fully designed and developed in India,” Maruti-Suzuki Chairman R.C. Bhargava says.

Meanwhile, the details still are being worked out regarding Suzuki’s tie-up with VW, although Japanese analysts see many possible synergies.

Suzuki could benefit from Volkswagen's diesel engine technology and OEM production in Russia as well as cooperative marketing in North America, the Middle East, Africa and South America, says Koji Endo, managing director of Advanced Research Japan.

For Volkswagen, a possible OEM production arrangement in India, much like the one Suzuki has with Nissan, and perhaps VW-badged minicar production in Japan, would strengthen the German car maker's lineup.

And unlike many other automotive mergers over the past 15 years, this one involves two companies that are cash rich. Volkswagen's net liquidity as of Sept. 30 was E13.4 billion ($19.7 billion). Suzuki has ¥496 billion ($5.6 billion) in cash and cash equivalents. That comes to $25 billion, second only to the “Bank of Toyota.”

Not a bad foundation from which to build.