Volkswagen is to buy a 20% stake in Suzuki for $US2.5 billion as part of an effort to become the world's biggest car maker.
The move follows a $US5.8 billion purchase by the German carmaker of almost 50% in sports car maker Porsche.
Suzuki will invest half the $US2.5 billion in VW shares.
Analysts say VW wants to tap into the Japanese company's expertise in small cars and dominance in India.
VW chief executive Martin Winterkorn says VW can provide Suzuki with the technology to make the hybrid and electric cars it lacks in its line-up.
But Suzuki's chief executive, Osamu Suzuki says they will remain equal partners.
Volkswagen, whose brands include Audi, Skoda and Porsche wants to be the world's biggest car maker by 2018 - a goal it will reach with relative ease if Suzuki became a subsidiary.
In the first six months of 2009, Volkswagen sold 3.3 million vehicles and Suzuki sold 1.2 million, which combined is larger than Toyota's 3.6 million.