Porsche and VW Battle It Out

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Czech carmaker Skoda is helping itself to the VW Group's accumulated technical know-how. For example, Skoda installs state-of-the-art double clutch drives into its cars and then sells them for substantially less than comparable Volkswagen models. Skoda has thus grown at the expense of VW -- leading Wiedeking and Härter to demand that Skoda be repositioned as the Group's entry-level brand.

When it came to VW subsidiary Audi, the Porsche men noticed that although the company has increased its sales from 650,000 to more than 900,000 vehicles in recent years, its return on investment is far too low. This suggests that Audi's main objective was to improve its sales figures but not necessarily its profits.

Veteran members of the VW supervisory board were also surprised to see Wiedeking imposing a new guideline for the entire group from the start: There could no longer be any models or brands that did not produce profits for the company in the long term. In Wiedeking's words, "the days of expensive toys are over."

He was apparently referring to brands like Bentley and Bugatti, which, despite earning profits in their current operations, are hardly expected to recoup their total investment costs, not even in 10 years. This sort of thing will likely cease to exist in the future, and the company's luxury class Phaeton model, one of Piëch's pet projects, could very well be the first and last effort by VW to produce and market a luxury car.

Economic Flop

Though well-built from technological standpoint, the Phaeton has been an economic flop. It will never earn back the investments of about €1 billion for the car's development and just under €190 million for the so-called Glass Factory -- so named because the facility is made almost entirely of steel and glass -- in Dresden. Investments will only be approved for a successor if VW CEO Winterkorn can provide figures to prove that the new model can also turn a profit.

Wiedeking and Härter responded with equal severity to the VW supervisory board's discussion of a possible bailout for ailing car body maker Karmann, based in the northern German city of Osnabrück. Their suggestion was that Volkswagen should have a special model built at Karmann, thereby securing jobs at the company.

The VW supervisory board was quick to approve these sorts of projects in the past. The representatives of the state of Lower Saxony sitting on the VW supervisory board were pleased to see jobs secured in their state, and so they supported the executive board's proposals. But then the two Porsche representatives decided to block the plan. As long as Volkswagen's plants were not being operated at full capacity, not a single car, they argued, should be built by another company. Their principle concern, they said, was to secure jobs at German VW plants.

This also explains Wiedeking's support for closing VW's plant in Brussels. The factory's production was to be distributed among German plants, but in this case VW CEO Winterkorn, Supervisory Board Chairman Piëch and Works Council Chairman Osterloh managed to sideline the dynamic Porsche CEO. Subsidiary Audi, on whose supervisory board Wiedeking does not hold a seat, decided to have its planned A1 small car built in Brussels, thus saving the VW plant there. It will now be officially reconfigured to serve as an Audi plant.

Tighter Rein

Whether this makes sense is doubtful. If Audi needs a new plant, it should be in the United States. A production facility there could help offset the company's losses caused by the weak dollar. It will likely be more difficult in the future to push through such decisions without the approval of VW's new inspectors, Wiedeking and Härten. The two men have prepared a carefully designed corporate structure that will allow them to keep a much tighter rein on VW in the future.

Porsche Automobil Holding SE will be the new center of power. The joint-stock company incorporated under European law belongs to the Porsche and Piëch families and holds all ordinary shares in sports car manufacturer Porsche along with Porsche's stake in VW. Wiedeking is the chairman of the holding company and Härter is its vice-chairman, but no seat on its management board was reserved for VW CEO Winterkorn.

Once Porsche owns 51 percent of VW shares, Volkswagen will officially be a subgroup of the holding company. Important decisions will then be made for VW. The Porsche holding company is subject to the approval of the supervisory board. Power in this holding company is distributed very differently than in the supervisory board of the VW Group.

Part 3: VW Workers Fight Back

The public perceives Ferdinand Piëch as the omnipotent controlling figure in the two families of owners. He is the auto guru who took the place of VW Beetle inventor Ferdinand Porsche, and he is the one who stands in the limelight as he strolls through the IAA. But he is only an ordinary member of the Porsche supervisory board and, in addition to his brother Michel, is the only representative of the Piëch family. The Porsche family, on the other hand, has three of its members sitting on the supervisory board. In fact, Wolfgang Porsche is the chairman.

This distribution of power reflects the ownership of capital. The Porsches hold an estimated 53.7 percent of ordinary shares, while the Piëchs own only 46.8 percent. How this distribution came about goes back to a little-known story from 1983. At the time, Ernst Piëch had secretly sold his shares to an investor. The two branches of the family then bought back the shares jointly. As a result, a portion of the former Piëch shares fell into the hands of the Porsches.

The stronger the Porsche holding company becomes, the more Piëch will have to fear for his power. He would only be able to stop Wiedeking by gaining the support of Porsche representatives. But they wholeheartedly approve of their man's strategy when it comes to the company's investment in Volkswagen. They want to see the management of VW to be more solidly rooted in the rules of economics.

One Vote for 100,000 Employees

In the VW Group's supervisory board, Ferdinand Piëch was often able to secure enough support from the employee representatives to assemble a majority of votes. But this is unlikely to happen in the Porsche holding company's supervisory board. Once Porsche assumes a majority at VW, only three Volkswagen employees will be represented on that board, as well as three Porsche representatives who fully support Wiedeking.

The labor representatives at VW are upset about this arrangement. They consider it undemocratic that VW's more than 300,000 employees will be represented by only three members of the supervisory board in the future, while Porsche's roughly 10,000 employees will also be represented by three members. They are especially upset about the fact that the agreement is practically irrevocable, and that it was concluded at a time when they were not yet permitted to participate in the negotiations.

These concerns have prompted VW chief labor representative Osterloh to file a complaint against the codetermination agreement. In Osterloh's assessment, Hück and Wiedeking signed an agreement under which the employees of the VW Group benefit the least. In addition, Osterloh this week blasted Wiedeking in an open letter sent to all VW employees worldwide. In the letter, he accused the Porsche CEO of steamrolling VW workers and ignoring their concerns.

One reason Osterloh has his dander up is that he has already demonstrated he has no intention of standing in the way of reforms at VW. Last year, for example, he agreed to a new collective agreement under which the workweek is increased from 28.8 to 33 hours without any wage adjustment. His support for the new agreement has brought him lasting criticism from some employees.

Wiedeking must be careful not to go too far. If VW employees gain the impression that Porsche is a hostile conqueror, it will be difficult to run the group successfully. "I don't want to attack VW employees' wages and salaries," he assured a union official, "nor do I intend to cut jobs." On the contrary, Wiedeking's goal is to make VW successful enough so that jobs in Germany can be secured in the long term, just as he has already done at Porsche.

Gradual Loss of Power

Wiedeking plans to quickly settle the brewing conflict with employees. Not even the Porsche boss can afford a war on so many fronts. He also has to expect that VW Supervisory Board Chairman Piëch will think of a way to put a stop to his gradual loss of power.

Wiedeking also has to treat Winterkorn with caution. He claims that he respects the VW leader. But if this is the case, he should not convey the impression that important decisions are all made in Stuttgart. This would not be helpful to Winterkorn's constant effort to eliminate weakness in the VW Group. Winterkorn, an engineer who would casually exceed budgets in earlier years to install the most costly technology in models, is now paying close attention to costs.

The heads of the individual brands -- SEAT, Skoda and Audi, for example -- will see their decision-making authority significantly reduced. Instead of competing with one another, as they have in the past, their new mantra is to join forces and compete with Toyota. Indeed, Wiedeking's foremost objective is to make VW as successful as the Japanese carmaker.

This is likely to be a long-term project. But conflict is still expected in the short term. Wiedeking's direct management style leaves a bad taste in the mouths of many in Wolfsburg.

"That's the way you can manage a company that produces 100,000 cars for a single brand," says a high-ranking VW executive, "but not a group with eight brands and six million vehicles."

Translated from the German by Christopher Sultan

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