German Auto Industry Facing the Abyss

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Building the 1 Series with rear-wheel drive and the Mini with front-wheel drive is a complete waste of money, because it means that the two cars need different engines and transmissions, eliminating the savings that could be achieved with identical parts.

BMW CEO Reithofer and Daimler CEO Zetsche have long agreed that the two companies must work together. Daimler has the same problem with its A and B Class models, which are produced in numbers that are far too small. What would be more obvious than joint development of the platform for the next generation of entry-level models?

Engineers from both companies have been searching for possible joint projects for more than a year now. But everything they have turned up has only served as proof of why cooperation is impossible. Each of the partners is convinced that his development is the best. The companies have agreed to joint purchasing of windshield wipers, batteries and other parts, but nothing more.

'I Want to See Results'

In a recent board meeting, Reithofer was visibly irritated by this relative lack of cooperation. He told the group that he was no longer interested in hearing why things were not working. "I want to see results," he said.

The mood in Munich is tense, as layoffs have led to discord between the board of directors and the works council. Manfred Schoch, who heads up the BMW works council, complains that employees were simply left with no work to do, so that they could be bullied into signing a termination agreement. Schoch asks: "How low have we sunk?"

Ironically, BMW has probably the most flexible working hour models in the industry. Employees can accumulate up to 300 hours of overtime in working hour accounts or work up to 300 less than normal—and consistently receive the same wages. Only after an extended period of time are they required to balance out the working hour accounts. The result is that BMW can shut down a factory for two months without adverse effects on employees. Only after two months do workers face the threat of short-time work and further layoffs.

According to one senior executive, BMW would already have slipped into the red without this year's savings measures. The Quandt family, which owns a little less than 50 percent of shares, knows that this would immediately fuel speculation over a sale of BMW. To dispel such speculation, the reclusive Stefan Quandt appeared with BMW CEO Reithofer at a ceremony to award the "Golding Steering Wheel" at offices of the tabloid Bild am Sonntag. The clear message was that the family is sticking to BMW—for now, at least.

Daimler CEO Zetsche would welcome a major shareholder like Quandt. Zetsche's company, too, has a large Achilles heel: Daimler's shareholder structure. Because it lacks a major shareholder, the company is constantly at risk of being bought up and dismantled.

For this reason, the Stuttgart-based carmaker has to be managed using the same criteria that led General Motors to the brink of ruin: It must earn high short-term returns and pay large dividends. This is the only way to bring up the share price and thus prevent a takeover. But, under these conditions, how can the company be expected to continue designing cars that lead the world in technology, design and quality? And how can Mercedes-Benz justify its high prices in the long term?

The developers of the next A and B Class vehicles are feeling the brunt of this dilemma. Their investments must pay off at a planned sales figure of 350,000 vehicles a year. Of course, Mercedes charges higher prices for its models than VW does for its Golf. But VW sells almost twice as many Golfs, as well as using the same platform to build Audi and Skoda models.

"The Wolfsburgers can outfit the Golf with better equipment than we can provide with the A Class," complains one Mercedes developer. For this reason, Daimler's attempt to develop everything in the compact class internally could damage its brand image.

Distress at Daimler

VW has two major shareholders, Porsche and the state of Lower Saxony. Although the two are locked in a power struggle, they agree on one thing: Both are more interested in long-term development than short-term profits.