Beetles and Bloodletting Volkswagen Changes Course

Ferdinand Piëch is pursuing a great goal: the billionaire, co-owner of Porsche and supervisory board chairman of VW seems to want to transform Volkswagen into a family business -- with himself as the patriarch. Chief executive Bernd Pischetsrieder was a hindrance, and has given up.

Ferdinand Piëch is back in Salzburg. Last Monday he made a surprise visit to the western German city of Wolfsburg, where a new cold and climate test center was being opened at Volkswagen's main plant. That would not usually be a reason for Piëch, the supervisory board chairman of VW, to spend an hour inspecting the site with Chief Executive Bernd Pischetsrieder. The investment amounted to a paltry €30 million. But Piëch had his reasons. With him, nothing is coincidental.

Piëch, who owns a chunk of Porsche, already knew at this point that Pischetsrieder would lose his job the next day. The VW chief himself must have suspected what was going to happen. Pischetsrieder, who has been steadily undermined by his supervisory board boss over the past year, may have wanted to push him into the cold room and lock the door. But such behavior would be alien to the Bavarian. Instead, he maintained his composure, just as he has done his whole working life. The photographers weren't to get a picture of a crestfallen VW boss. Piëch took his time touring the site. It was his game, and he was enjoying himself.

On Tuesday, when the supervisory board gathered in the VW tower, everything went quickly. The "management issues" on the agenda were quickly ticked off after having been carefully prepared in talks ahead of the meeting. The three employee representatives on the board said they no longer had faith in Pischetsrieder's ability to restructure the company. Porsche boss Wendelin Wiedeking didn't contradict the statement and Piëch's opinion is well-known. Lower Saxony's governor, Christian Wulff, would have supported Pischetsrieder, but he gave up.

Pischetsrieder declared that if the overwhelming majority of the supervisory board no longer backed him, he would resign. The former BMW boss is the first manager to have headed two German car manufacturers and to have resigned prematurely from both.

Lord of the manor

Pischetsrieder's sudden departure is the story of a top manager who has a good reputation in the industry but is clearly too soft for the post of chief executive. There were good reasons to fire him. It's also the story of Ferdinand Piëch who thinks and lives in other categories than appointed executives or elected politicians.

For the billionaire and co-owner of Porsche, it wasn't about the next contract or the next referendum. He wasn't nervous when he was accused in the press of ruling like "the lord of the manor". At the annual shareholders meeting, Piëch bore the demands for his resignation as chairman of the VW board with stoic calm.

He had a bigger goal in sight, which he pursued with brutal consistency. The Volkswagen company, which had been a state company in the post-war years and 20 percent of which the state of Lower Saxony still controls, should be transformed into a family business -- with himself at the helm.

Piëch's grandfather Ferdinand Porsche developed the Beetle, and his father was the plant director at Wolfsburg, the VW headquarters. Piëch himself controls around 13 percent of the Porsche sports car business, which is the largest shareholder in VW, with over 20 percent. Porsche wants to up its share package to almost 30 percent. And investment bankers report that other investors who are seen as close to Piëch are currently acquiring between five and seven percent of VW shares.

The background to these moves is the so-called "VW Law," an exception granted to the state of Lower Saxony which caps the voting share of any single shareholder to a maximum of 20 percent. The law effectively gives the state a poison pill against any foreign takeover attempt of the company. The European Union now wants to scrap this law; its decision is expected next June.

However, the next shareholder meeting at Volkswagen will take place two months before. As is the case with Lower Saxony, Porsche will only hold 20 percent of the votes at the time this meeting takes place. If other shareholders control large amounts of shares, then they could help Porsche to a clear majority at the general meeting. The meeting will vote on the chairman of the board and on whether Piëch, who will be 70 years old by then, will once again be included in the supervisory board.

An inconvenience

Pischetsrieder hadn’t posed any significant obstacle in Piech's path towards taking power at VW. But he was an inconvenience.

Shortly after Porsche's entry as a shareholder, the VW boss commissioned J.P. Morgan to provide an expert opinion as to whether it could lead to a conflict of interests if Piech, as a co-owner at Porsche, would look to promote the interests of the sports car company as a member of the VW board. The investment bankers recommended that Piëch resign. Pischetsrieder submitted this advice to the board. And with that, his fate was more or less sealed.

Nevertheless Pischetsrieder held on for an amazingly long time. In May, his contract was even extended once again -- for five years. At that point Piech already wanted to replace him with his confidant, Audi boss Martin Winterkorn. But Wulff was against it because he feared that Winterkorn would run the company as Piëch's extended arm. And Porsche boss Wiedeking wasn’t convinced by Winterkorn, as he had caused a lot of problems as Volkswagen's head of development -- problems the company is still suffering from. More out of need than want, Wulff and Wiedeking pushed through the extension of Pischetsrieder's contract.

Looking out for themselves

Over the following months Pischetsrieder did everything to confirm the doubts about him -- he dithered and hesitated. To a large extent he allowed Winterkorn, the boss of the Audi, Seat and Lamborghini brands, and Wolfgang Bernhard, head of the other group of brands -- Volkswagen, Škoda and Bentley -- to work autonomously of him. The two, who are locked in a mutual animosity, only developed their own brands. For example, despite the fact that Audi has a new six-cylinder diesel engine, Volkswagen wanted to construct its own and invested €300 million in doing so.

As Volkswagen CEO, Pischetsrieder should have forced the bosses of these groups to work together. But he didn’t have the power, or he didn't use it. The VW boss just relied on the representatives he had appointed to these companies, who were supposed to coordinate the work at the separate brands. Bernhard and Winterkorn listened to what these representatives had to say -- and then just went ahead and did what they had already planned to do.

Employee representatives on the company's supervisory board often expressed their pleasure as Porsche chief Wiedeking constantly made unflattering comparisons to Toyota. Why, he asked, does the best car company in the world only have three different engine variations compared to 10 different motors for the VW Polo? Why is Toyota making money in the US at a time when VW is close to posting a billion-euro loss there? For union boss Peters and his colleagues, this served as proof that wage costs weren't the only areas responsible for the company's weak returns.

Brands adrift

Porsche boss Wiedeking and his chief financial officer Holger Härter also asked in the VW supervisory board if the organization of the firm was still appropriate. In the two brand groups, brands were coupled that didn't belong together -- Bentley and Volkswagen, Audi and Seat, luxury and mass-market. But Pischetsrieder didn't change the organization. Instead, he allowed the two brand groups to continue to drift apart. Additionally, he approved decisions that many supervisory boards would have found hard to understand. For example, the Golf was to be laboriously re-designed so that it could be assembled faster in the future. Investments of more than €530 million were envisaged for the plan, but the return on this investment was estimated to be a piddling 1.9 percent.

Pischetsrieder apparently didn't notice that something was brewing. Piëch recently met with VW works council chairman Bernd Osterloh and union boss Peters for a confidential meeting at the Frankfurt airport. Piech also moderated a meeting between Winterkorn and Wiedeking, during which the Audi boss managed to persuade the Porsche CEO, that he would, as chairman of the firm, do away with the expensive conflict between the brands, making it possible for VW to save billions.

Piëch brought Winterkorn from Bosch to Audi in 1981, and the two have been confidants for decades. As a developer for VW, Winterkorn was not always successful; he was responsible for the Phaeton luxury sedan, for example, which has failed to find its footing in the marketplace. However, since he became the head of Audi in 2002, he has gone from one triumph to the next. Sales, turnover and profit are all increasing, and Audi has long been seen as an equal competitor to BMW and Mercedes-Benz.

Winterkorn, who studied metallurgy and metal physics, is in many respects the opposite of Pischetsrieder. He is detail-oriented; he prefers to look at models of new designs in the early morning because his eyes are not yet tired from a long working day. He demands a lot from his colleagues; and if they don't produce what he wants, he's been known to shout until his face turns red.

Reorganizing VW's brands

Winterkorn has been preparing himself for the top job in Wolfsburg for some time, and he has already groomed his own successor at Audi. Chief Financial Officer Rupert Stadler will take over the job, provisionally at first. Winterkorn has also already prepared the most urgent changes for Volkswagen. He wants to reorganize the distribution of the brands -- a new premium group comprising Audi, Bentley, Bugatti and Lamborghini and a mass-market group for Volkswagen, Seat and Škoda. In a second step, there will also be a new division of labor on the board. The company will once again have a head of development, who will be responsible for all brands and who will prevent companies from going it on their own and building their own motors. There is also talk of creating heads of production and of marketing. In this way, Winterkorn wants to end the situation of parallel and opposing brands.

Life in Wolfsburg will get tougher for restructuring expert Bernhard. The new organization of the board means he will cede some power as head of the Volkswagen group of brands. Besides, he doesn't get on with Winterkorn. For this reason, he is likely to quit the company soon.

For Pischetsrieder depature will be bitter. He has to make an unpleasant decision at this Friday's meeting of the board -- between 3,000 and 4,000 jobs have to be cut at the VW factory in Brussels. And his departure will not be sweetened with a golden handshake of up to €14 million, as some have been predicting.

As CEO he still has five years to go on a contract that runs until 2012. But there is no way the executive committee of the supervisory board will pay him that money in a lump sum -- especially after he tendered his own resignation. Instead, he will continue to work for the company and earn that money month by month. He will complete the merger of truck makers Scania, MAN and VW's own Brazilian truck business and will then oversee the resulting company as its chairman of its supervisory board.

Pischetsrieder will have to continue pulling himself together. And he certainly won't be letting a negative word about Piëch cross his lips.

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