Magazine

VW Needs a Jump


Volkswagen Chief Executive Bernd Pischetsrieder has laid low since taking the wheel of Europe's No. 1 auto maker a year ago from autocratic Porsche scion Ferdinand Pi?ch. But that's true to character. As former CEO at BMW, Pischetsrieder had a penchant for planning strategy secretly and painstakingly with a small core of trusted cohorts and then springing decisions on his managers -- including the surprise acquisition of Rover in 1994.

But investors feel they have waited long enough for the plotting Bavarian to make his bold move. After all, VW's problems were evident when Pischetsrieder took over -- aging models, shrinking market share, too many brands of cars built on too few platforms. And as Pischetsrieder mulls his strategy, the situation is deteriorating. Market share in Europe continues to slip. Vehicle sales in the first quarter in the U.S. dropped almost 11%. The Peugeot 206 recently dethroned the VW Golf as the best-selling car in Europe. Golf sales are expected to fall 21% this year before the new version hits European showrooms in November. Especially disappointing were sales of VW's new luxury model, the $62,000 Phaeton. Group revenues stalled last year around $95 billion, and net profit dropped 11.2%, to $2.7 billion. Tough competition was one reason, but so was VW strategy: Its brands, from Seat to Skoda and VW to Audi, are all built on a handful of underlying platforms, blurring brand image and cannibalizing sales within the group.

Pischetsrieder has no time to lose. On Apr. 24, the 54-year-old engineer warned that first-quarter profits will fall sharply. Analysts estimate the decline could be as much as 60%. Meanwhile, VW's stock is down more than 40% since Pischetsrieder took over. The VW chief insists that 20 new models will buoy unit sales in the second half of 2003, but a flush of younger cars alone will not fix VW's problems. The real challenge is rationalizing overlapping models across VW's four major brands. "Pischetsrieder is facing the mother of all marketing problems," says Stephen B. Cheetham, an analyst at Sanford C. Bernstein & Co. in London.

To speed change, Pischetsrieder needs to get his management team in place. "The time is now. These are the last months [for a new CEO] to channel energy in the right direction," says Christoph B. St?rmer, senior analyst at researcher Global Insight Automotive in Frankfurt. Pischetsrieder finally signaled a shakeup at the top on Apr. 8, with the abrupt resignation of Robert B?chelhofer, the board member in charge of sales and marketing. B?chelhofer disagreed with a plan announced by Pi?ch and Pischetsrieder in 2002 to divide VW brands into two families: the sportier Audi group, including Seat and Lamborghini; and the VW group, made up of VW, Skoda, and Bentley. Under the new groupings, Audi will become a rival to BMW. Volkswagen -- literally, "the people's car" -- aims to shed its plebian image and offer more comfort and class.

But remaking brands and untangling overlapping models is no easy feat. Some models may have to be cut, riling employees and managers. Workers at Skoda in the Czech Republic already are angry about being relegated to making a "lesser VW" after years of strong growth, which fueled fund expansion upmarket into a pricier sedan. Uncertain where they are headed and what products they will make, Skoda workers staged a strike in October to express their discontent. "Skoda, the rising star at VW, now has its wings clipped," says one Frankfurt-based auto analyst.

Dealers meanwhile are livid about plans to increase the number of VW-owned dealerships and the failure to revitalize its best-sellers, the Golf and Passat. Faced with falling sales of aging models, recalls, and increasingly thin margins, some dealerships may go bankrupt this year, the Association of Volkswagen Dealers warned.

The bright spot is Audi, which Pischetsrieder wants to build into the leading premium brand in Europe. Audi spent billions over the past decade on engineering innovation and is several laps ahead of VW in sharpening its image. Powered by its four-wheel-drive models, including the A4 compact and A6 sedan, Audi outsells BMW in Western Europe, ranking second behind Mercedes-Benz among premium brands.

Yet Pi?ch's vision of an upmarket Volkswagen has put it on a collision course with Audi. Pi?ch funded VW's multibillion-dollar expansion into luxury models, such as the Phaeton and the $41,000-plus Touareg SUV, which many say should have belonged to the Audi family. While funding direct challengers to its own Audi unit, the effort siphoned resources from VW's core mass-market products. "VW and Audi share dealerships and showrooms. There is inevitably going to be cannibalization," says George Peterson, president of AutoPacific Group Inc. in Tustin, Calif.

Pischetsrieder also needs to grapple with VW's high cost base. The government of Volkswagen's home state, Lower Saxony, controls 20% of VW shares and traditionally resists layoffs or plant closures and supports the industry's most generous pay agreements. As a result, margins remain under pressure. In March, Pischetsrieder pledged to focus more on profitability and to save $1.1 billion this year, slashing capital spending by 10% in tandem with expected lower sales. Lowering capital spending? It works for a time, but it could put future model development at risk.

A lingering question is whether VW's corporate culture will be resistant to needed change. A brilliant engineer credited with the makeover of Audi, Pi?ch routinely bypassed middle management at VW -- giving direct orders to engineers himself and terrorizing anyone who disagreed with him. Now, VW's traditional civil service-like bureaucracy is reestablishing its rule, setting up a plethora of councils and committees to oversee decision-making. What VW needs is a more market-savvy management that can leverage the company's exceptional strength in engineering. "The big danger is Pischetsrieder doesn't take the organization with him," says one analyst.

Pischetsrieder is starting to roll up his sleeves. B?chelhofer's departure is already the second boardroom reshuffle since the new CEO took the helm. In September, he appointed former BMW manager Hans Dieter Poetsch as chief financial officer to replace Bruno Adelt at the end of 2003. Adelt has been the focus of investor frustration over VW's opaque financial reporting. "VW is an enigma to analysts, its brands provoke questions in the minds of consumers, and its management earns the scorn of investors," says Jay N. Woodworth, president of consultancy Woodworth Holdings Ltd. in Summit, N.J. Not an enviable legacy. It's time for the Bavarian to act. By Gail Edmondson in Frankfurt


Burger King's Young Buns
LIMITED-TIME OFFER SUBSCRIBE NOW

(enter your email)
(enter up to 5 email addresses, separated by commas)

Max 250 characters

 
blog comments powered by Disqus