Volkswagen AG will buy a 20 percent stake in Suzuki Motor Corp. for $2.5 billion, forming one of the world's biggest auto alliances and giving the two carmakers a boost in fast-growing Asian markets.

Suzuki, which makes small cars such as the Swift and the Splash, said Wednesday it will also purchase shares in Volkswagen worth up to half the amount the German maker buys, solidifying the partnership through cross-holding of equity.

The Japanese automaker said the companies plan to complete the deal, which would make Volkswagen its top shareholder, by mid-February.

The two companies said their combined global sales surpassed 8.6 million cars last year, exceeding the 7.5 million sold around the world by the Toyota Motor Corp., the world's no. 1 automaker.

The alliance will encompass product development, production and sales and focus on hybrid and electric cars, Suzuki said.

Suzuki, which is smaller than domestic peers such as Toyota and Honda, said it was difficult to stay competitive given quickly developing automotive technology and the need for cost cuts, making a partnership necessary.

"The world automotive industry is in the midst of significant changes," Suzuki said in a statement. "It is difficult to adapt to these numerous issues on our own."

"We must move with the times," Suzuki Chairman and Chief Executive Osamu Suzuki said in a joint news conference with his new partner.

The tieup will allow the two companies to concentrate on each other's strengths while compensating for each other's weaknesses, Suzuki said, without elaborating.

For the German company, the alliance is "a big step forward in the compact car segment, particularly on the emerging markets in Asia," Volkswagen Chief Executive martin Winterkorn said. "In turn, Suzuki can benefit from our experience with efficient and environmentally friendly vehicle technologies."

They could also boost their presence in expanding markets, Suzuki said. Suzuki has nearly half the market share in India, while Volkswagen is strong in China, as well as South America and Europe, the Japanese company said.

Suzuki's alliance with Volkswagen replaces its earlier partnership with General Motors Co.

Cash-strapped GM sold a 17 percent stake in Suzuki in 2006 and its remaining 3 percent stake last year amid the global slump, ending an affiliation that dated to 1981. Suzuki and GM also agreed to end their joint venture in Canada last week.

Suzuki shares rose 3.5 percent in Tokyo, even as the broader market fell. Shares of Volkswagen were up 1.7 percent at $118 in Frankfurt late Wednesday morning.

Meanwhile, Volkswagen says it has purchased an initial 49.9 percent stake in fellow car maker Porsche, carrying out a move that it had been expected to make this week.

VW, based in Wolfsburg, said Monday that it paid $5.9 billion for the stake. It has said that it hopes to take over Porsche in full in 2011.

VW's shareholders last week approved plans to issue up to 135 million new shares, generating income to help finance the move.

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