The two-year old alliance between Volkswagen AG (VW) and Suzuki Motor Corp has collapsed with the Japanese car maker dissolving the partnership after the German firm accused it of violating their partnership contract by agreeing to buy diesel engines from Italy's Fiat S.p.A.

Wolfsburg, Germany-based Volkswagen, one of the world's leading automobile manufacturers, over the weekend, issued a notice to Suzuki for infringement of their agreement relating to the supply of diesel engines produced by another manufacturer, without naming the manufacturer.

Europe's largest car maker said in a statement, ''Volkswagen takes the view that this contradicts the terms of the cooperation agreement. Suzuki has now been given a period of several weeks to remedy the infringement. Volkswagen considers this step regrettable, but necessary, and has offered to discuss the matter with Suzuki. At the same time, the company stresses it still regards Suzuki as an attractive investment.''

With an eye on India, one of the fastest growing car markets, in December 2009 Volkswagen paid $2.5 billion for a 19.9-per cent stake in Suzuki, to develop and manufacture energy-efficient small cars in emerging markets. (See: VW acquires 19.9-per cent stake in Suzuki for $2.5 billion)

At the time of inking the pact, Suzuki, Japan's fourth-largest automaker, said it planned to procure diesel engines from Volkswagen, adding that the two companies would also look increasingly at possibilities of a common platform for parts.

But since then, their alliance has languished, and recently the two have taken their differences to the open with Suzuki's chairman, Osamu Suzuki saying in a July blog post in Japan's leading business daily, Nikkei that Suzuki "had found nothing that it wanted right away" from Volkswagen's portfolio of technologies.

Suzuki's outburst was in retaliation to VW naming Suzuki as its 'associate' in its March annual report, and said it could ''significantly influence financial and operating policy decisions'' at Suzuki.'' The term ''associate'' was used by VW because of its nearly 20-per cent in Suzuki.

However, the Japanese car maker had entered into a pact with Fiat earlier in 2005 for developing diesel engines for sale in Asia, and in June this year, expanded the partnership to buy engines from the Italian carmaker's plant in Hungary.

Suzuki today reacted angrily by ending the partnership, saying that it has not gained anything from the alliance and was concerned that it would cause negative impact on its autonomous decision-making in its operating policy.

In a statement released early today Suzuki said that it entered into a alliance with VW based as ''independent entities and equal partners,'' and its primary aim was to receive technology transfer from VW so that it could accelerate its own development of environmental technology cars to cope with intensifying competition of technology development in the global automotive industry.

Suzuki said that it ''had to realise that with VW's minor equity participation of 19.89 per cent in Suzuki, it was difficult to receive technology transfer at the same or higher level as Volkswagen Group companies where Volkswagen has nearly 100 per cent of voting rights.:

The Japanese carmaker said that from the beginning of this year, it has been accelerating the development of its own environmental technology and other engineering areas.

Suzuki said that it is crucial to secure ''independence'' in its operating policy decision for maintaining its competitiveness in the domestic Kei-car market and Asian markets including India.

Taking a dig at VW publicly saying that Suzuki was a ''company over which VW has significant influence on financial and operating policy decisions, Suzuki said that it concluded ''it is difficult to attain its primary aim for the partnership and also there is concern that the partnership would cause negative impact on Suzuki's autonomous decision-making in its operating policy.''

''Therefore, Suzuki's board of directors has officially determined dissolution of the comprehensive partnership and the cross-shareholding relationship with Volkswagen AG.''

Suzuki said that is will request VW to dispose of the shares held by it in Suzuki and if it does so, Suzuki will also dispose the share held by it in VW.

Suzuki said that it would make an announcement as soon as both companies reach final conclusion including timing of dissolution.