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Volkswagen: Spinning Its Wheels?


International Business: Germany

Volkswagen: Spinning Its Wheels?

Price pressures and other woes threaten its recovery

No doubt about it: Volkswagen CEO Ferdinand Piech engineered one of Europe's greatest turnarounds. The grandson of auto pioneer Ferdinand Porsche inherited a loss of more than $1 billion and eroding market share in 1993. A battery of new models helped Piech seize European market share from Ford Motor Co. and General Motors Corp. With its Audi, Skoda, and Seat brands, VW now has nearly 19% of Western European car sales, up from 15% in 1994. Profits last year topped $1.2 billion on $71.4 billion in sales.

But no turnaround is eternal: Europe's largest carmaker is running into problems again. Profits of $799 million for the first nine months of 1999 are unchanged from a year ago, disappointing expectations. But that's not really what's worrying investors, who have bid the stock down 24% this year, making it the worst performer of Germany's big-cap stocks. What gives the market the chills is the prospect of increasingly tough conditions for the next two or three years: Unprecedented pressure on prices in Germany, persistent problems in big foreign markets, and revved-up rivals plotting comebacks.

The question is whether Piech has overreached in his drastic reengineering of VW. To ensure VW's dominance in the tough European market, Piech has expanded the model range dramatically. Its 1999 palette includes 51 cars, up from 42 two years ago. In the meantime, Piech has forced models to share parts. Eventually, all the company's cars will be built on four basic chassis and parts collections known as platforms.CANNIBALIZATION. Cutting platforms has saved billions, and expanding the lineup has scored brilliant market share gains. But now Volkswagen may end up eating its own lunch. No fewer than 11 models ride on VW's so-called A-Platform, ranging from the sporty Audi TT Roadster to the quirky VW New Beetle to the budget Skoda Octavia. Buyers are starting to wonder why they should pay $25,000 for an Audi A6 when it looks suspiciously like a $16,000 Volkswagen Passat. "Consumers have learned that they can get the same technology on lower-priced versions," says Helmut Panke, a member of the management board of rival BMW.

There are early indications Panke's right: Sales of the Skoda Octavia have soared more than 60% this year while sales of the similar VW Passat and Audi A6 are flat. That's not necessarily bad if the Skoda is stealing more buyers from competitors than VW's own brands. But it's bad if Skoda's appeal is eroding the upscale image of its pricier brands.

VW's push into the luxury market may aggravate this problem. As part of an effort to shed VW's middle-class image, the company is spending about $745 million in 1999 and 2000 developing a luxury car to compete with Mercedes-Benz and BMW. The risk: The car could steal as many customers from Audi as it does from the other German luxury brands.

Meanwhile, competitors are fighting back. GM's Adam Opel unit aims to boost its market share in Germany to 17% from 14.5% by offering buyers generous incentives. In September, Opel's Astra outsold VW's Golf Europewide. Competition is already squeezing margins, forcing VW to pass gains in manufacturing efficiency on to consumers.

VW can still point to triumphs. U.S. sales are soaring, rising 40% in the first nine months, to their highest level in 25 years. But the U.S. remains a secondary market. And gains there are offset by losses in economically troubled Brazil, a far bigger market for VW.

The 62-year-old Piech is expected to end nearly a decade at VW's helm in 2002. His product offensive is impressive. But critics also fear his dictatorial style has purged top management of independent thinkers. "The autocratic approach that serves companies in dire straits can bring negative consequences when it's applied too long," warns J.P. Morgan Securities Ltd. analyst Nick Snee. VW could find out that Piech's turnaround isn't a one-way street.By Jack Ewing in Frankfurt, with Bureau ReportsReturn to top


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