Europe July 22, 2009, 1:55PM EST

Family Feuds Behind VW-Porsche Deal

The troubled history between the Porsche and Piëch families underpins Volkswagen's pending takeover of its German rival

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Sports car maker Porsche entered a severe crisis in the early 1990s. There had been a sharp slump in the US market, where Porsche sold half of its vehicles. Toyota offered the equivalent of €1.5 billion ($2.1 billion) for the company, but the family was unwilling to sell.

In 1993, the previously unknown head of production, Wendelin Wiedeking, was promoted to CEO. The first five or six years in the position were Wiedeking's best. He was able to shine as the man who turned Porsche around—even if his methods were sometimes unpopular.

He brought Japanese consultants into the plant, which the proud Porsche assembly workers in Stuttgart perceived as an insult. On one occasion, the young chief executive walked into the plant, angle grinder in hand, and destroyed iron shelving, to show the suspicious employees that streamlined Japanese-style production required no excess inventory. Wiedeking also shouted at managers, and when someone refused to cooperate, he would threaten to "cut off his balls."

Even Ferdinand Piëch, who by then had moved from the top post at Audi to the chairmanship of the VW Group in Wolfsburg, was impressed. He admitted that he couldn't imagine having reorganized Porsche as thoroughly as Wiedeking did.

The families proved to be generous. They guaranteed Wiedeking that in the future he would receive roughly 0.9 percent of the company's profits as a bonus. No one could have imagined that the small carmaker's profits would balloon to more than €8 billion ($11.4 billion), earning Wiedeking more than €80 million ($114 million) in annual compensation.

Then the second phase of Wiedeking's tenure began, as the Porsche CEO established himself as an outspoken critic of all and sundry. He accused then-Chancellor Helmut Kohl of failing to understand the economy, and he railed against government subsidies, saying: "Luxury and support are incompatible." He was also sharply critical of the wave of mergers in the industry. "If size were the decisive criterion," he said, "the dinosaurs would still be alive."

Bigger Cigars, Wider Pinstripes

He expressed what many people were thinking. Nevertheless, Wiedeking remained an outsider in the industrial sector, someone who was only allowed to get away with saying the things he said because he was merely the head of a relatively small company. Wiedeking himself portrayed this approach as the secret of his success. He even published a book called "The David Principle," a reference to the Biblical story of David and Goliath.

Gradually, the pinstripes on his suits became wider and the cigars bigger. Wiedeking increasingly spoke in the first person when he was talking about the company. He behaved like a business owner and not like a paid manager whose contract could be terminated at any time.

This couldn't possibly go over well with someone like Ferdinand Piëch, for whom Wiedeking had become too successful. Perhaps it was because Piëch was unwilling to tolerate anyone being as powerful as he was, or perhaps it was simply due to the fact that the billionaire does not like people who are overly cocky or loud.

When Piëch wants to give a manager his opinion, he says, very quietly: "Now that wasn't a good idea at all." Then he is silent for what seems like an eternity, until sweat begins to appear on the other person's forehead. At that point, the manager might as well start packing up his desk.

As the head of VW, Piëch also knew that Porsche owed a large share of its success to its cooperation with Volkswagen. For example, the Zuffenhausen-based company would never have managed to develop the Cayenne SVU on its own. And the families' dealership in Salzburg, which had a low public profile, experienced a sharp upswing when VW gave it the import rights for the VW brands Volkswagen, Audi, Skoda and Seat in many Eastern European markets.

Other carmakers handle this kind of business themselves, which led to the suspicion that VW had effectively given the Porsche and Piëch families' commercial enterprises a license to print money.