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Power Play At VW


Even for Volkswagen, a company accustomed to high-stakes management intrigue and boardroom drama, it has been a wild month. On Nov. 7, Chief Executive Bernhard Pischetsrieder stepped down after an unexpected no-confidence vote by VW's board. On the same day, rumors started swirling that VW brand chief Wolfgang Bernhard, who has been at the center of the automaker's efforts to restructure, would soon follow Pischetsrieder out the door. Then on Nov. 15, Porsche (PSEPF) upped its holdings in VW from 21% to 27%, fueling speculation that the giant carmaker might be taken over by the smallest player in Europe's auto industry.

The man behind all these developments is VW Chairman Ferdinand K. Pi?ch, one of the most controversial and powerful chieftans in the car business, scion of the legendary Porsche family, and a tycoon in his own right with a net worth of some $7 billion. Insiders at VW say that Pi?ch contrived the ouster of Pischetsrieder to reassert his grip on VW and speed change. Pi?ch, as the controlling shareholder at Porsche, also instigated the sports car maker's move on VW.

Is all this just a Machiavellian power play by Pi?ch to put himself back at the center of Volkswagen, perhaps at the expense of the company's future? Or is this Pi?ch's last act, a serious bid to restore VW's lost competitiveness?

A brilliant engineer but an obstinate and irascible manager, Pi?ch, who declined to comment for this story, already has a checkered legacy. During a 20-year stint at Audi, he pioneered breakthrough technologies and came up with hit cars. Moving to Volkswagen as CEO in 1993, he worked a turnaround but also over-engineered VW's autos, spent billions buying and retooling luxury brands, and misread the market. In the late 1990s he stumbled badly trying to take VW upmarket in a bid to challenge Mercedes-Benz (DCX). VW even built a billion-dollar plant for Pi?ch's pet project, the $70,000 Phaeton luxury sedan. The Phaeton has never sold well, and today that plant is operating at a disastrous 10% of its production capacity, says one consultant.

The sting of those missteps may be driving Pi?ch to reassert control at VW. Auto industry executives say Pi?ch is determined to match the oversized legacies of his grandfather. Ferdinand Porsche created the VW Beetle and was the founder of Porsche, the most profitable automaker in the world. Like his grandfather, Pi?ch is intensely competitive. Now that Toyota Motor Corp. (TM) is the industry benchmark, Pi?ch wants to ensure VW can keep pace with the Japanese superstar. Says a top German manager: "Pi?ch wants to be revered as an auto industry legend."

Pischetsrieder andBernhard have already made progress fixing the worst of VW's problems. Bernhard, who joined the company in 2005 after a management dispute at DaimlerChrysler, (DCX) where he was slated to run Mercedes, has been widely praised for overhauling VW's complex approach to building cars. A ruthless cost-cutter, Bernhard, 46, has a favorite technique: He routinely locks staffers in meeting rooms, then refuses to open the doors until they've stripped $1,500 in costs from a future model.

LOSING MONEYYet VW has a long way to go. The company is saddled with inefficient production lines and the highest wages in the industry. It loses money on every Golf and Passat built in Germany. "VW is still in deep trouble," says a consultant who has worked closely with VW.

Key to Piëch's success will be a massive drive for improved productivity. Much of the heavy lifting will fall to Martin Winterkorn, newly appointed head of VW and a close Piëch confidant. Formerly chief of VW unit Audi, Winterkorn replaced Pischetsrieder, who clashed with the autocratic Piëch one time too many. Bern?hard is still widely expected to depart, since Piëch passed him over for the CEO job in favor of Winterkorn, but insiders say Piëch and Winterkorn are seeking to persuade him to stay.

Piëch must whittle a still-bloated workforce, shutter unneeded plants, and introduce the kind of flexible labor practices that make Toyota's plants the yardstick in productivity. In addition to the 20,000 voluntary departures negotiated this year by Pischetsrieder, the company needs to get rid of another 20,000 people from the remaining 80,000-strong workforce, says Garel Rhys, professor of motor industry economics at Cardiff University in Wales. VW also has to develop processes that make cars easier to assemble. "Piëch has to grasp that nettle," says Rhys.

To do that Piëch has to learn from his mistakes. During a decade at the helm of VW, he led a turnaround by introducing models that customers craved. He was able to avoid layoffs, thanks to a cut in work shifts to 28.8 hours a week. But he also coddled labor leaders to ensure their support in power clashes with other board members. And he allowed costs to get dangerously out of control.

Managers close to VW say Piëch's obsession with scoring a win before he bows out may finally help him shed his engineering blinders and bear down on VW's lagging competitiveness. "Piëch is very intelligent. He understands that VW has to improve its cost structure and chase Toyota," says Ferdinand Dudenhoeffer, director of the Center for Automotive Research in Gelsenkirchen. So Piëch is unlikely to reverse Pischetsrieder's focus on mass-market cars. CEO Winterkorn plans to regroup the carmaker's seven brands into two, more logical, clusters: a mass-market division for VW, the Czech brand Skoda, and Spain's SEAT, and a premium cluster comprising Audi, Bentley, Lamborghini, and Bugatti.

One thing seems clear: Piëch isn't likely to use his family's control of Porsche to engineer a complete takeover of VW by the luxury carmaker anytime soon. Yet Porsche is already in the driver's seat at VW. And Porsche CEO and VW board member Wendelin Wiedeking will prove an important player. Wiedeking rescued Porsche from near-bankruptcy in the early 1990s. The Stuttgart-based sports car maker now has the highest margins in the industry, thanks in part to Wiedeking's embrace of Toyota's lean production techniques. To tackle German complacency at Porsche, Wiedeking sent planeloads of managers and shop floor workers to Toyota's plants and imported Toyota managers to train Porsche workers in Stuttgart.

Wiedeking is determined to make sure Porsche's $5.8 billion-plus investment in VW pays off. At recent board meetings, Wiedeking has peppered Pischetsrieder and Bernhard with detailed questions about VW's production processes, seeking comparisons to benchmark against Toyota.

Can Piëch and his team transform VW into a German Toyota? VW's 20% of the European market gives it massive leverage if it can produce more efficiently. It also has a 17.5% share of the fast-growing Chinese auto market. "If VW can get its costs down," says economics professor Rhys, "it would start to create a war chest to match or trump Toyota in every segment."

By Gail Edmondson


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