Carl Hahn's High Octane Growth Plan For Vw

Somewhere in the Atlantic, 1,000 Volkswagen Corrado sports coupes are bobbing their way back home after failing to sell in the U. S. It's not just the $800 apiece VW is spending to return the cars that hurts, it's also the red faces at the German auto giant, which is still searching for a winning formula in the U. S. market.

On a grander scale, VW is also trying to score at home by launching the largest capital-spending program in its history. Over the next five years, Chairman Carl H. Hahn plans to lay out a stunning $34 billion on new, low-cost plants. He hopes the investment will bring VW at least 2% more of the European market, or about 17% of some 13 million cars a year. Many of the plants will be in Eastern Europe, where Hahn thinks growth will eventually boom.

Hahn is betting that his strategy will push VW way out in front in crowded Europe. The new factories will free him from costly German labor. With those savings, he can hold the line on prices and plow profits into fast-er product cycles. That way he will be able to meet the Japanese head-on while taking market share from his European rivals. VW launched a new, souped-up Polo in 1990, a new Audi convertible will make its debut later this year, and new versions of top-selling VWs are in the pipeline. If East-ern Europe takes off, VW will be sit-ting pretty. "We're already public enemy No. 1 for our competitors," boasts Hahn.

DEALING FRENZY. Hahn has been on a tear of dealmaking and big spending. In just over a year, he has splurged $3.3 billion to build capacity for 250,000 cars a year at Zwickau, in eastern Germany. He has agreed to spend $6 billion to buy Czech auto maker Skoda, with capacity for 180,000 cars a year. And he has boosted commitments in VW's Chinese factory to $1 billion. An additional $3.3 billion is going into Spanish unit SEAT, and Hahn is discussing a $2 billion deal with Ford Motor Co. to make small trucks in Europe. On Mar. 5, he signed a $590 million deal for a majority in a second Czech auto company, Bratislavska Automobilove Zavody. Bringing Eastern European workers and plants up to snuff will need big bucks. And new dealerships are in the works.

Ambitious it is, but Hahn's plan could leave VW with some deep dents if it goes awry. The timing is tricky. European carmakers now have the capacity to build 2 million more cars than they're selling. Recession is dampening demand further. And although Fiat and Renault are slowing, General Motors and Ford of Europe are no pushovers. Once the European Community rolls back import barriers in the mid-1990s, the heat from Japanese carmakers will intensify. Their market share is expected to rise from 11.4% now to at least 15%, analysts say. In the U. S., VW is just holding on. "VW is stretched pretty thin," says a top executive at a rival carmaker. "They've bitten off an awful lot."

If Hahn's plan stalls out, VW could be swamped by an ocean of red ink. Such fears have already rattled financial markets. VW shares now trade around $239, down from a $425 peak last year. Several brokerages, including UBS Phillips & Drew in London, have the stock on their sell lists.

STICKER SHOCK. That's because the total price tag for Hahn's program comes to an annual average of nearly $7 billion, bigger than VW's current reported $4 billion annual cash flow. And it's all happening as VW's net profit sags from its 1989 peak (chart). Though "profits may look small," Hahn says, "we are not getting nervous about it." VW has a cash hoard of more than $9 billion. Thanks to a conservative depreciation policy, "we have more liquidity than shown in the accounts," he adds. Insiders say true cash flow is more like $8 billion a year.

Still, Hahn must cope with his most chronic headache: high costs. Wages in Germany are $25 to $28 an hour, while in Spain and eastern Germany, they come to less than half that. Because leaving Germany is politically and economically out of the question, Hahn is doing the next best thing to reduce the drag on profits. He's cutting the proportion of VW cars built in Germany, and he's bargaining harder with Germany's powerful IG Metall auto workers' union.

Half of VW's 3.1 million production is made in Germany now, and if, as planned, the volume grows to 4 million over the next four or five years, nearly all the new vehicles will be made outside Germany. A cost-reduction plan, launched in 1987, has saved $2.6 billion through staff attrition, outside sourcing, and some work-rule changes. VW is now asking the unions for more. Still, analyst Joachim Bernsdorff at Bank Julius Baer says VW has "never succeeded in bringing down personnel costs. I don't think they ever will."

In the U. S., VW now seems stuck as a marginal player, jockeying with South Korea's Hyundai Corp. for less than 2% of the U. S. market each. Still, with VW and Audi sales up 2%, to 157,000 last year in a down market, Volkswagen of America Inc. executives are not downcast. They say the $70 million Fahrvergnugen ad campaign for VW and a $40 million effort to promote the AudiQuattro are paying off in better rec-ognition and more showroom visits. Hahn also plans to sink about $1.5 bil-lion in Mexico to boost North American sales.

For VW today, the real battle is in Europe. Last year, VW got a flush of success from reunification, when eastern Germans snapped up 200,000 new and 800,000 used cars, which in turn encouraged western Germans to trade in early. VW even has an order backlog. But Hahn will soon be facing harder times, and he takes the challenge personally. Although he planned to retire this year, Hahn is staying on after the VW board extended his contract for two years. And those years will be the crucial time to see if his bold gamblepays off.