Power Struggle between Auto Giants Porsche and VW Battle it Out

Porsche is slowly taking over VW, and the benefits for both sides are numerous. But so far it has not been an easy courtship, with two radically different corporate cultures going head to head.

It was last Wednesday afternoon when two broad-shouldered men with shaved heads disappeared into a conference room. VW works council chairman Bernd Osterloh and Uwe Hück, Porsche's labor representative, were both stone-faced when they entered the Porsche booth at the International Automobile Exhibition (IAA) in Frankfurt. When they closed the door to the conference room, it almost seemed as if they were about to settle their dispute with their fists. The money would have been on Hück -- a two-time European champion in Thai boxing.

By all accounts, the discussion came off peacefully, but the dispute between the two labor leaders is only one of many conflicts between the Volkswagen Group and its new major shareholder, Porsche. Now that it's been two years since Stuttgart-based Porsche first acquired a stake in Volkswagen, the gloves appear to be coming off.

The whole thing began when Porsche CEO Wendelin Wiedeking, alarmed about the considerable influence of VW's labor representatives and the company's internal wage agreement, said that nothing could be considered sacred. According to Wiedeking, all things should be questioned to determine whether they are still timely and in keeping with corporate strategy.

Scenes of a Power Struggle

The statements brought the wrath of Germany's IG-Metall metalworkers' union down on Wiedeking. One labor representative even threatened that unionized workers at VW could hold up the delivery of car bodies to Porsche.

Structure of the new Porsche Holding Company.

Structure of the new Porsche Holding Company.

And last week, both sides were using the Frankfurt car convention as an opportunity to exchange barbs. VW CEO Martin Winterkorn started off by standing up for his employees, thereby positioning himself against Wiedeking. "We are not discussing the wage agreement at the moment," he said, adding that it is important "not to discourage employees."

Wiedeking responded sharply to Winterkorn's statements. The VW Group, he said, still has many areas that need attention. The product line could be expanded and the brands could be coordinated better, Wiedeking said, adding: "There is a still a lot to be optimized."

A VW executive upped the ante by accusing Wiedeking of, in his capacity as a member of VW's supervisory board, pushing for a contract extension for former VW CEO Bernd Pischetsrieder -- before approving his dismissal just six months later. The decisions have cost the group millions in severance payments to Pischetsrieder, who went into early retirement.

These are scenes of a power struggle. Now that Porsche has acquired a stake in the VW Group, there are two burning issues: Who is running the Wolfsburg-based automotive group, VW CEO Winterkorn, Porsche CEO Wiedeking or VW Supervisory Board Chairman Ferdinand Piëch, also a co-owner of Porsche? And how much influence do VW's labor representatives have on the power structure?

A Midget Swallows a Giant

The ownership relationship is relatively clear. Porsche owns 31 percent of VW shares. Currently, the so-called VW law is still in effect, which limits an individual shareholder's percentage of voting rights to 20 percent regardless of the stake. But that law is currently sitting in front of the European Court of Justice and observers expect it to be struck down. Once that happens, Porsche plans to increase its holding to 51 percent.

At that point, VW, a global corporation with close to €105 billion in sales and almost one third of a million employees, will become a subsidiary of Stuttgart-based Porsche, a much smaller company with sales of only €7 billion and 11,400 employees. Instead of the giant acquiring the midget, Porsche will be swallowing VW -- a rare occurrence in the history of corporate takeovers.

But it is potentially beneficial to both. Porsche can go a long way toward protecting VW from being bought out by hedge funds, while Porsche needs VW capital to help in the development of new models. Without VW, Porsche could also face difficulties with potential new environmental regulations as it doesn't currently have energy efficient models to offset its gas-guzzling performance roadsters.

To some extent the current power struggles stem from the fact that executives and labor representatives at VW are still having trouble comprehending what is happening to Europe's largest and the world's fifth-largest automaker. Besides, the two corporate cultures that are now colliding couldn't be more different.

Each Plant Must Be Profitable

After teetering on the brink of bankruptcy in 1993, Porsche introduced a tough but widely-praised restructuring program. The changes paid off, turning Porsche into the world's most profitable automaker. Even in years of record profits, Wiedeking continues to keep costs down. "He's so tightfisted," says Porsche labor representative Hück, "that he stands in front of the mirror with a candle on the second Sunday of Advent" (when Germans traditionally light a second candle on their Advent wreaths).

Wiedeking's cost-cutting efforts make the conflicts between management and labor all the more heated. Porsche's Hück says that this is "nothing for wimps." But the works council boss also accepts that each model and each plant must be profitable. Otherwise, he says, "jobs cannot be retained in the long run."

In the VW Group, on the other hand, the works council and board have observed a non-aggression pact for years. Management left the costly wage agreement alone, and in return, the labor representatives gave the board free rein for its luxury projects, Lamborghini, Bentley, Bugatti and the Volkswagen Phaeton. The principle of combined costing was applied at VW's plants. A profitable plant had to subsidize other plants and make up for their losses. The same principle was applied to the group's various brands.


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