Germany's Volkswagen AG will buy a one-fifth stake in Suzuki Motor Corp <7269.T> for $2.5 billion, tapping the Japanese firm's expertise in small cars and dominance in India as VW seeks to become the No.1 automaker.

The move is the second coup this week for ambitious VW Chairman Ferdinand Piech, coming on the heels of the German carmaker's 3.9 billion euro ($5.8 billion) purchase of a 49.9 percent stake in sports car maker Porsche AG.

Piech's top lieutenant, VW Chief Executive Martin Winterkorn, was hopeful the Suzuki alliance would help catapult the Wolfsburg-based carmaker past industry leader Toyota Motor Corp <7203.T> ahead of plan.

If that succeeds faster (than 2018), we're happy, a grinning Winterkorn told reporters as he sat next to Suzuki's nearly 80-year-old CEO Osamu Suzuki at a Tokyo press conference.

CEO Suzuki repeated that he did not intend the company he has led for three decades to come under VW's control.

I don't want you to misunderstand: Suzuki is not becoming a 12th brand for Volkswagen, Suzuki said when asked whether the company might get a German CEO in the future. I don't want other folks telling me how to do things.

With the global car industry facing still fragile demand, chronic overcapacity and stricter environmental regulations, automakers are joining forces to save billions each would need to develop state-of-the-art powertrains.

PSA Peugeot Citroen of France and Japan's Mitsubishi Motors Corp <7211.T> said this month they were exploring deeper ties, which have so far been limited to a project-based partnership.

The latest deal, confirming an earlier Reuters report, will see Suzuki invest up to half the proceeds in a cross-shareholding through the roughly 100 billion yen ($1.13 billion) purchase of a 2.5 percent voting stake in VW.

This comes right after the Mitsubishi deal and shows that foreign carmakers are coming to take stakes in Japanese firms, raising expectations of a reorganization in the autos sector, said Noritsugu Hirakawa, a strategist at Okasan Securities.

News of backing from the world's No.3 carmaker sent Suzuki shares up 3.5 percent in a weaker Tokyo market <.N225>. Volkswagen rose as much as 2.9 percent in Germany and were up 1.5 percent by 1153 GMT, the leading gainer among German blue chips.

VW, which is also the No.1 carmaker 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.

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, Winterkorn said. In turn, Suzuki can benefit from our experience with efficient and environmentally friendly drivetrain and vehicle technologies.

CHANGING LANDSCAPE

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.

In the first six months of 2009, Volkswagen sold 3.265 million vehicles and Suzuki sold 1.15 million. Their combined sales of 4.415 million units would be larger than top-ranked Toyota's <7203.T> 3.564 million.

Suzuki lost its equity ties to General Motors Co a year ago, having bought back the U.S. automaker's 20 percent stake in it, now worth about 257 billion yen ($2.9 billion).

In contrast to a potential pair-up between PSA and Mitsubishi Motors, which many regard as a union of the weak, Volkswagen and Suzuki are regarded as being among the stronger automakers thanks to their big exposure to China and India.

While major Western markets have suffered one of their worst years on record, booming sales in China and India are providing a lifeline. GM and SAIC Motor <600104.SS> said last week they will make small cars and commercial vehicles in India, taking a successful 12-year Chinese partnership into one of the world's fastest growing auto markets.

Shares in Maruti Suzuki Ltd , India's top carmaker and 54 percent-owned by Suzuki, rose as much as 3.8 percent on Wednesday.

Another Franco-Japanese auto alliance, between Renault SA and Nissan Motor Co <7201.T>, is stepping up its push to achieve bigger synergies after 10 years of partnership, considered one of the industry's few success stories.

The bankruptcy of Chrysler this year was twinned with a link-up with Italy's Fiat SpA , while Chinese automakers are looking to buy into brands on sale from GM and Ford Motor Co .

Japan's Mazda Motor Corp <7261.T> has also come under some scrutiny given its diminished equity ties with Ford, whose stake has dropped to 11 percent from one-third.

(Additional reporting by Jan Schwartz and Elaine Lies; editing by Karen Foster.)

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