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Volkswagen's Hard Driving Boss (Int'l Edition)


International -- European Cover Story

VOLKSWAGEN'S HARD-DRIVING BOSS (int'l edition)

Ferdinand Piech is obsessed with making Volkswagen into a global powerhouse

Volkswagen's lovable New Beetle might have died an early death were it not for the fanatical ambition of Chief Executive Ferdinand Piech. In 1993, when VW was reeling from a $1.1 billion loss, many managers viewed the little car as an unaffordable plaything. One opponent, research and development chief Ulrich Seiffert, went so far as to hide the first full-size model from Piech for two weeks when it arrived at Wolfsburg headquarters from VW's California design studio. But Piech, whose grandfather had conceived the original Beetle at Adolf Hitler's behest, rolled over the naysayers, stuffed the car with the technology he loves, and drove it to popular acclaim.

Reincarnating the Volkswagen Beetle is just one part of Piech's all-consuming vision: to mold Europe's leading auto mass-marketer into one of the world's mightiest, most respected carmakers. Since taking the wheel at VW in 1993, the 61-year-old engineer has pursued that goal with obsessive zeal. He has consolidated power, sweeping out Seiffert and dozens of other top managers who didn't follow his lead.

More important, he has launched an aggressive product offensive, from the just-introduced, $10,500 Lupo mini-car to a 12-cylinder Super Passat sedan that could cost up to $85,000 and debut in 2001. Piech's goal: to shed VW's plebeian image and move the brand upmarket. "We're trying to redefine the status game," says Jens Neumann, a member of VW's management board and longtime Piech lieutenant.

Piech's latest gambit--an audacious move into the ultra-luxury market--pushes the boundaries of strategic risk. In just three months, he has bought Rolls-Royce Motor Cars for $640 million--only to lose the rights to the coveted Rolls brand to BMW; plunked down some $110 million for Lamborghini, the Italian maker of fire-breathing, $240,000 sports cars; purchased Cosworth, the British specialty engine maker, for $178 million; and snapped up Bugatti, a bankrupt Italian sports-car maker.

Piech's dramatic moves are often viewed with awe--and sometimes bewilderment--by everyone from competitors to VW shareholders. From his controversial hiring in 1993 of General Motors Corp.'s cost-cutting ace Jose Ignacio Lopez to his fathering of more than a dozen children by at least four women, Piech seems to Make up his own rules in life. He declined to be interviewed for this story. But conversations with former colleagues and classmates paint a picture of a combative yet insecure man who is driven by a deep desire to match his grandfather's mythical stature. "He wants to prove that he has been underestimated for years," says a former VW executive.

Whatever his personal quirks, Piech has steered VW into astounding success. When he took over, the carmaker was so inefficient that it could make a profit only by working factories overtime--a bad predicament when the industry is in a sales slump Piech hammEred VW into a company fit to compete with such giants as GM, Ford, and DaimlerChrysler. In just five years, he turned around the moribund SEAT and Skoda brands, widened VW's lead in Europe, engineered a comeback in the U.S., and strengthened the company's grip in emerging markets from Central Europe to Latin America. "He is the most brilliant and forward-looking CEO in the business today," says an analyst for a major VW investor who rarely praises the company.

In Europe, VW has grabbed 1.2 points of market share since 1993, bringing it to 17.5% (charts, page 55). Archrival GM, meanwhile has slipped nearly two points to a distant second, at 11.3%. In the U.S., the first market to get the New Beetle, the $16,500 Bug, launched this spring, is powering VW's revival. The perky car draws shoppers into showrooms, where they are suddenly buying every model in sight. VW's U.S. sales are up 61% so far this year, and the company expects to deliver 200,000 cars in 1998, the most since 1984.

Analysts expect VW to report about $1.3 billion in net income in 1998, on sales of $75 billion--an earnings jump of 60%. But conservative German accounting understates performance. VW will actually earn $2.1 billion in 1998, and $2.6 billion in 1999, based on international accounting rules, figures John K. Lawson, auto analyst at Salomon Brothers in London.

The danger with Piech is that his personal ambition could cause him to overreach. Moreover, his iron grip on VW means there are few checks and balances on his decisions. Piech has shrunk VW's management board to just five members, from nine before he took the top job. He holds personal responsibility for R&D, production, purchasing, and the VW brand--areas typically assigned to individual directors. Critics say the Rolls-Royce blunder, which leaves VW with only the lesser-known Bentley brand after 2002, shows the CEO has too much influence, especially over the company's 20-member supervisory board. "At VW, nothing happens without Piech," says a former colleague.QUANTUM LEAP. Piech's success has been fueled by engineering knowhow, a passionate love of cars, and enormous wealth. His family's sprawling, Salzburg-based business empire, which includes hotels and auto importers across Europe, is estimated to be worth more than $3 billion. That background, some say, gives Piech a psychological advantage in confrontations with ordinary mortals for whom job loss is a financial threat.

Former classmates say that as a student at Zurich's Swiss Federal Institute of Technology in the early 1960s, Piech threw himself into automotive studies with single-minded intensity. He tooled around in a Porsche and spent his spare time tinkering with it. Once, over Christmas vacation, he modified the engine, omitting the heater. Then he drove 500 kilometers from his family's home in Austria to Zurich, over the snowy, 1,800-meter Arlberg pass. "He almost froze to death," says Werner Kalin, a classmate who now works at the Swiss embassy in Washington. "I asked, `Don't you have a heater?' He said, `There was no room."'

Now, Piech mainly tinkers with new models that VW has under development. He joins routine test-drives of prototypes and orders changes--a task typically delegated to development engineers. While head of VW's Audi division in the early 1990s, for instance, Piech attended a test in northern Finland, where, in -35C weather, he was annoyed by squeaking rubber door gaskets and immediately ordered an expensive fabric covering to silence the noise.

After taking the helm of VW, he threw himself into work on the Passat, a $21,800 family sedan that made its debut in 1997. It was the first all-new car to be developed on Piech's watch, and he wanted it to help shake VW's image as a maker of solid but stodgy vehicles. Using Mercedes as a yardstick, Piech ordered a quantum leap in quality. He insisted interiors be outfitted with rich fabrics and high-quality plastics that mimic leather. In 1996, before journalists tested the first production models, Piech personally drove nearly 60 cars to be sure they were in tip-top shape.AUDI AWE. The car won rave reviews, beating Mercedes and BMW models in comparison tests by German car magazines. That helped make it a sellout, forcing VW to add capacity aT its plant in Saxony. Passat worldwide sales this year coulD hit 400,000, up from 370,000 in 1997. "VW was able to build up a [price] premium over other manufacturers, like Fiat, Opel, and Ford," says Dieter Zetsche, a Mercedes managing director. "That's quite an achievement."

Piech's lifelong fascination with cars gives him a nose for cutting-edge technology that wows customers. In the 1970s and early 1980s, while research director at Audi, he propelled such breakthroughs as full-time four-wheel-drive for passenger cars. The aerodynamic design for the Audi 100, launched in 1982, stunned the world with its curvy contours and record-low wind resistance. The car won awards and spawned copycats, including Ford Motor Co.'s Taurus, which quickly became the best-selling car in the U.S. And in the 1990s, Piech promoted a newly developed direct-injection diesel engine that combined the fuel economy of a diesel with the quiet, zippy performance of gasoline engines. Such competitors as GM and Renault are just now beginning to catch up.

Piech's visionary leadership has a dark side. VW's achievements since 1993 have come in a virtual autocracy. Piech's will prevails from the R&D center all the way up to the management board. Executives who question his ideas and decisions often get the boot. In his first three years at the helm, Piech tossed out more than 20 top managers, including two Audi CEOs. At meetings, "critical questions aren't asked, because people know things can rapidly get uncomfortable," says an executive who worked closely with Piech for several years.

Colleagues know immediately when the boss is upset. His blue eyes flash with anger, and he intimidates subordinates with long silences. Indeed, in an era when team-building and employee empowerment are in vogue, Piech prefers fear as a motivator. Former VW executives say Piech likes to keep people off-balance, making surprise visits to offices, VW's technical center, or the vast Wolfsburg factory.

Public put-downs serve the same purpose. In a management meeting shortly after he became CEO, Piech spelled out his plan to reduce the number of basic car platforms from 16 to just four. The idea, since implemented, meant that luxury Audis and ordinary VWs would share many parts. An engineering executive, Christian Hildebrandt, asked how to keep costs in check if engineers had to use expensive Audi parts for all models. Piech's pointed response: "I am going to remember your name." Hildebrandt retired two years later as planned. But the message to all who attended was clear: Don't question the boss.

Even when a loyal subordinate does well, Piech is stingy with compliments. Close ally Neumann has received little kudos from the boss for resuscitating VW's U.S. operations--which the company considered abandoning just five years ago. "He is not a man who expresses his praise," says Neumann of Piech. Piech's heavy hand so riled VW managers in late 1994 that they sent an open letter to supervisory board Chairman Klaus Liesen. "Herr Doktor Liesen," it began, "this company is run by a man with psychopathic traits." Liesen asked Piech to tone down his rhetoric.

If Piech seems to run VW like a personal fiefdom, the tendency may be in his genes. The year he was born, his maternal grandfather, Ferdinand Porsche, helped plan the factory in Wolfsburg that would build the first Beetles--along with parts for tanks, aircraft, and other weapons. His father, a Viennese lawyer named Anton, became CEO of the fledgling Volkswagen in 1941. At the height of World War II, Anton focused production on a few key products, such as Beetle-based Jeeps and aircraft engines, in an effort to make the state-owned company profitable. Many of the factory's workers were slave laborers from eastern Europe. In September, VW set up a $12 million fund to help support those who are still living.

The split between the Porsche and Piech clans dates to the same era. Perhaps sensing Germany's fate, in 1943, Anton and his wife, Louise Porsche, negotiated an agreement with Ferdinand Porsche and Louise's brother Ferry Porsche to take over Porsche's engineering businesses in Austria. The portion of the business located near Stuttgart remained with the Porsches. After the war, Ferry began developing sports cars based on the Beetle, products that would soon make Porsche world-renowned. The families have since agreed to joint ownership of both the German and Austrian companies, but friction has nonetheless smoldered between the two.HOT WHEELS. It rankles Piech that he can't bask in the glory of the Porsche name. He played a key role in burnishing the sports-car maker's image. Fresh from university, he joined Porsche's engine-test department in 1963, and by 1968, he was named head of development and of racing. Immediately and obsessively, he launched an all-out campaign to win the coveted Manufacturer's World Championship and its most famous race, the 24-hour Le Mans. "Nobody believed it could be done because of the financial strain and the manpower strain," says Brian Redman, a Briton who drove for Porsche in 1969 and 1970. Porsche invested millions in race cars, refining the existing 908 model and building a radically new, 350-km-per-hour car, the 917.

Piech let nothing stand in his way. In early 1970, he was determined to test a refined version of the 908 at Porsche's Weissach proving grounds near Stuttgart. It snowed seven inches the night before the drive. Undaunted, Piech had the track plowed and salted. On his first lap, Redman's car spun at 180 kph in the middle of a straightaway. When he clambered out of the stalled car, he slipped and fell on the ice. Only then did Piech reluctantly postpone the session.

Results were mixed at first. The 908s had clinched the Manufacturer's Championship in 1969. But the 917, though fast, was dangerously unstable and still needed much refinement. The car was so skittish in corners that Porsche's test drivers feared it. The first private buyer, John Woolfe, died on his opening lap at Le Mans when he lost control, smashed into several Ferraris, and the car burst into flames.

Piech persevered, and his efforts paid off grandly. With the bugs worked out of the 917 in 1970, Porsche won nine of the season's 10 races, including Le Mans for the first time. That cemented the company's reputation as a maker of world-beating race cars. In 1971, Porsche dominated again, winning 8 of 11 races. "In everything that [Piech] tackles, he wants to be No.1," says a former colleague.

Despite his success, Piech's domineering, free-spending ways angered some Porsche family members. When it became clear that he would never be CEO, Piech bolted, taking a job in Audi's R&D department. There, he began a 20-year climb to the top of VW, rising through the engineering ranks to become Audi CEO in 1988. With sporty cars and cutting-edge technology, he invigorated a brand that had been derided as the boring choice of retired civil servants. At the Geneva auto show in 1980, Audi unveiled the Quattro, a 200-horsepower coupe that was the first modern production car with full-time all-wheel drive. Soon, all Audi models were being offered with four-wheel drive, and rivals were scurrying to develop competing models. That success earned Piech the top job at VW in 1993.

There, one of Piech's pet projects was to update his grandfather's classic, the Beetle. The new version, now being launched in Europe, was initially based on the same platform as VW's small Polo. Piech believed it would be too cramped and ordered designers to shape it around the larger Golf. He also crammed it with the latest technical goodies, such as standard side airbags. There were plenty of skeptics inside VW who didn't understand how the car plucked at people's heartstrings and thought the company should pour its scarce resources into the more practical Golf. But, as usual, Piech prevailed.

Piech still maintains close ties with his 94-year-old mother, Louise. A savvy, domineering woman, she leveraged Salzburg-based Porsche Holding into one of Austria's largest companies after Anton died suddenly in 1952. Over the years, Piech has made regular pilgrimages to confer with her at the family's red-shuttered, lakefront home outside Zell am See, a pretty resort town in central Austria. He sits on the supervisory board of Porsche Holding, one of VW's largest importers, and is a board member of Stuttgart-based Porsche, in which the Piech family has a 34% stake.

There is more to his tremendous power within VW than family history, however. Ever since opposition from Audi's works council delayed for a full year his promotion to CEO of the division, Piech has forged a strategic alliance with VW's labor bosses. During the crisis of 1993, Piech avoided layoffs, even though he himself had estimated the company had 30,000 excess workers. Instead, he agreed to a 20% reduction in work time, to 28.8 hours a week, with a 16% pay cut. In return, VW's labor reps, who by law hold half the seats on VW's supervisory board, have backed Piech's power grabs and approved his expansion plans.

Like most workaholics, Piech has little time for recreation. One consistent pastime over the years, however, has been making children. He has three with his current wife, Ursula. She was nanny to his three children with his live-in companion during the 1970s. He also has five children from his first marriage. The German press claims he has a total of 13 children, a figure he has never disputed. Now, industry execs whisper that he is expecting his 14th child--and not with his wife. He was once quoted as saying that the more children he fathered, the greater the chance that his genius would be passed to the next generation.

Such odd fancies fuel Piech's reputation among many former VW executives and investors as an unpredictable, potentially dangerous chief. This is reflected in VW's stock, which recently stood at 3.9 times expected 1998 earnings, compared with six times earnings for Daimler Benz. The lack of critical debate within VW raises the risk of a major Piech blunder.

Critics point to the botched purchase of Rolls-Royce Motors from Britain's Vickers PLC as an example of how things can go seriously awry. Piech, who dreamed of buying Rolls for at least a decade, pushed the $640 million purchase despite two glaring risks. Rights to the Rolls-Royce name and trademark belonged to Rolls-Royce PLC, the aerospace company, which has no connection to the luxury car maker. Moreover, rival BMW, which supplied the engine, transmission, climate control, and electronics for the new $230,000 Silver Seraph model, threatened to halt deliveries if VW won Rolls.YES-MEN. Nonetheless, members of VW's supervisory board O.K.'d the purchase, partly because Piech assured them that these problems were minor. They were stunned in September when BMW won the rights for a mere $60 million, stealing the gold-plated brand from under Piech's nose. VW is left with the lesser-known Bentley brand. VW plans to develop a smaller, less expensive Bentley model that would slot in below the new $190,000 Arnage. The company is also trying to find a way to win Rolls-Royce back from BMW. "You haven't heard the last word on Rolls-Royce," says a company spokesman.

Piech's management style makes the issue of his succession a touchy one. Critics both inside and outside the company charge that, after so many purges, the CEO is now surrounded largely by yes-men. There is growing concern that if an accident befell Piech or he left the company suddenly, he would leave a giant power vacuum. Some supervisory board members want to expand VW's management board again to spread the workload more evenly. "At some point, those positions will have to be filled, because there will also be a time after Piech at VW," says Bernd Sudholt, deputy chairman of VW's works council.

With his track record, however, and with the New Beetle perpetuating the Volkswagen cult around the world, Piech can argue that there's little reason to reduce his power. His way of bulldozing any opposition means that restructuring VW's management would be uphill work. Piech is at his fiercest when he encounters resistance. It's likely that unless a serious mistake casts doubt on his skill, he will keep on doing whatever it takes to live up to his vaunted heritage.By David Woodruff in Frankfurt, with Keith Naughton in DetroitReturn to top


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