A Hard U Turn At Vw

When Volkswagen's new chief executive, Ferdinand Piech, toured the strategic planning department at the company's Wolfsburg headquarters in January, he asked a section leader how many people worked there. Eighty-nine, came the answer. "That's one `nine' too many," Piech remarked casually. Contemplating a 10% cut, the section leader breathed a sigh of relief. But it soon turned into a gasp of horror when he realized that Piech meant the manager would be left with a staff of only 8, not 80.

Since he took the wheel at sputtering VW on Jan. 1, Piech has been struggling to get Europe's biggest auto maker back on the road. His predecessor, Carl H. Hahn, pursued an expansion strategy while other key carmakers were slimming down. Now, faced with an urgent need to make VW more competitive, the 55-year-old former chief of VW's Audi unit has reversed Hahn's strategy--and then some. Piech has already trimmed 1993 investment outlays by a third, to $3.7 billion. On hold are plans to quadruple capacity at VW's $3 billion Zwickau plant in east Germany. In January, he won union backing to cut the German work force by 12,500, to 106,000, by 1996.

TRICKY TASK. Nor will Piech limit cutbacks to the rank and file. Many expect an executive bloodbath at a Mar. 16 board of supervisors meeting. Insiders say it will claim key executives in finance and operations.

But Piech's trickiest task will be reversing what has become a curious phenomenon at the $51 billion company: The more cars it sells, the more money it seems to lose. "The 1980s was the decade of volume. The '90s is for profit," says Daniel Goeudevert, Piech's deputy. Even so, VW is off to an inauspicious start. It fell into as yet undisclosed losses in 1992's final quarter. Analysts expect the company to post a loss this year (chart). VW declines to comment.

Such woes belie VW's strong market position. Last year, its share of the West European market rose a percentage point, to 17.5%. That put it far ahead of No.2 GM Europe, which logs in at a 12.6% share. Last year, VW sold 3.5 million cars.

So why the red ink? For one reason, VW has the highest costs and lowest productivity among Europe's volume carmakers. By some estimates, it needs to operate its giant assembly plant at Wolfsburg at 96% of capacity to turn a profit. "Wolfsburg is a vast industrial dinosaur," says Daniel T. Jones, a professor at the Cardiff Business School in Wales. "It is a huge bureaucracy and an unmanageable complex."

Piech is out to change that--and not just at Wolfsburg but throughout VW. Handing out pink slips could eventually cut VW's labor bill by $1.1 billion. For parts and components, VW, like General Motors Corp., has traditionally relied on a huge and costly in-house production. But now Piech wants to lower costs by making more use of outside suppliers and asking them personally to shave prices by at least 5%.

But such steps won't be enough by themselves. Piech will have to figure out a way to overcome the triple whammy that VW now faces. For starters, German demand, once robust, is down 20% from last year. Second, the soaring mark is increasing VW's cost disadvantage. And in the more profitable market for midrange cars, competitors are launching an avalanche of new products, such as Ford Motor Co.'s Mondeo, to challenge VW's Passat.

RECRUITING DRIVE. Even so, industry analysts seem to be confident about prospects for the Austrian-born Piech, whose grandfather, Ferdinand Porsche, put VW in the big leagues by designing its legendary "Beetle." Piech is already working on long-range improvements in the company, such as changing its corporate culture by recruiting top talent from his competitors.

Piech will have to tighten production and quality at VW's plants--a task he pulled off as head of Audi. But at VW, Piech is stuck with some of Hahn's questionable management moves, such as using dated technologies. Changing that will require severe measures, but many believe Piech is up to the task. For relaxation, he likes to push high-performance cars to their limit. And his independent wealth gives him the freedom to take unpopular steps fearlessly. "He certainly doesn't suffer heart-searching doubts when he has to make tough decisions," says the chief executive of a rival German auto company. That just may be what VW needs to shake it out of its complacency.

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