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Porsche Tightens Grip on VW's Wheel

Posted by: Gail Edmondson on November 15, 2006

Since the surprise resignation of Volkswagen CEO Bernd Pischetsrieder Nov. 7, Supervisory Board Chairman Ferdinand Piech has tightened his control over VW almost daily. Porsche, which is controlled by Piech and his family, increased its stake in VW duing the past week from 21% to 27.45%. Today Porsche announced it aims to boost its holding to 29.9%.

Call it the “going private” of Volkswagen. For the past year, Piech has been engaged in a pitched battle to wrest control of the company from state hands — namely the State of Lower Saxony, which owns 20% and has long reigned as VW’s largest shareholder. And Piech, the wily engineer and grandson of Ferdinand Porsche, is now close to winning.

For those not up to speed on Germany’s most riveting industrial drama, Piech launched his attack a year ago, using his family’s control over Porsche to nab a controlling 21.3% share in Volkswagen for some $4 billion. He then installed Porsche CEO Wendelin Wiedeking and Porsche CFO Holger Haerter on VW’s supervisory board. In a mini-putsch last November, he also rammed through a new head of personnel, against the wishes of Pischetsrieder, provoking a firestorm of corporate governance criticism.

Piech nearly toppled Pischetsrieder last spring, but several board members rallied to the beleaguered CEO’s support. If Pischetsrieder had led a more forceful transformation at VW, he may have survived longer, but his legacy was one of dithering. On Nov. 7, Piech finally succeeded in forcing out Pischetsrieder and replacing him with his confidant, Audi boss Martin Winterkorn.

Plenty of questions still remain. Can Piech, Wiedeking and Winterkorn speed up VW’s lagging restructuring? How will they convince the unions that VW needs radical change? And will Piech’s putsch alienate VW brand chief Wolfgang Bernhard, the former DaimlerChrysler executive who was recruited to lead a massive cost-cutting drive? The betting is that a frustrated Bernhard, whom Piech once dubbed the crown-prince at VW, will resign this week.

More answers will come on Friday when Volkswagen’s supervisory board meets to approve a long-term strategic plan and the personnel changes. German magazine Der Spiegel reported Tuesday that Winterkorn aims to reorganize Volkswagen’s structure around premium brands and mass-market brands. The premium brand group would include Audi, Bentley, Bugatti and Lamborghini, and the high-volume brand group would include Volkswagen, Seat and Skoda.

That makes sense — the old constallation which grouped Volkswagen and Skoda with Bentley, was artificial and contrived. But analysts worry a corporate reorganization layered on top of VW’s current restructuring could bog down vital cost-cutting efforts.

One thing is clear. Volkswagen needs to get out of the slow lane. Virtually every European automaker has set Toyota’s production efficiency as its benchmark. Volkswagen costs are so high it loses money on every car made in Germany. Once the “value-for-money” brand, VW has lost its identity. The longer it waits to forge a new compelling strategy, the riskier.

No question Piech’s methods are autocratic and alienating to minority shareholders. But the status quo was also untenable. The model Piech is aiming for may be something like the benevolent Quandt family control over BMW, or the Porsche family control over Porsche — which favors long-term strategic investments but also demands rigorous management accountability. Family control of VW is actually a clever alternative to the currrent paralysis. But if that’s Piech’s goal, he will have to curb his domineering instincts, stop meddling and allow managers to manage.

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