Vw Figures Its Best Defense May Be A Good Offense

Relaxed and boldly confident, Volkswagen's embattled chief executive, Ferdinand Piech, finally faced off against General Motors Corp. on July 28. Since hiring former GM purchasing czar Jose Ignacio Lopez de Arriortua in March, spokesmen for the German auto giant have fumbled and stonewalled in the face of damaging GM allegations of industrial espionage against Lopez--allegations he denies. But at a packed press conference in VW's hometown of Wolfsburg, Piech charged GM with "mudslinging" and snapped: "We will join in this mudslinging, and we will emerge the victors." He proved his point by implying that GM may have tampered with evidence against Lopez, a charge GM dismisses as "absurd."

The German stock market immediately read Piech's tough response as a sign that the 55-year-old engineer will be able to limit any damage caused to VW by the Lopez affair: VW's share price jumped 3.4%, to 209, on the Frankfurt bourse in the hours after Piech's appearance.

Yet VW-watchers wonder if loyalty to Lopez isn't clouding Piech's judgment. He insists that Lopez is innocent--and that he's essential to VW's cost-cutting efforts, maybe to its survival. "Together with me, he'll implement the structural changes without which our company has no future," Piech says. But, warns George Taucher, a management professor at the IMD business school in Lausanne, Switzerland, "this very strong support of [Lopez] is extremely dangerous for the company and even for Ferdinand Piech himself" if the allegations against Lopez turn out to be true.

AUDI MISSTEP. Indeed, crisis-management experts question whether Piech is doing enough to stem a looming credibility crisis for VW and its management. Already, there are warning signs that public opinion is turning against VW: A survey of 1,000 Germans by Dortmund-based Forsa polling organization shows that 65% believe there is "something to" the allegations against Lopez. Just 7% say they think they are unfounded.

If Piech wins this battle of words only to lose in the marketplace, it won't be the first time. A scion of the Porsche family who has spent his career in the auto industry, Piech won just such a Pyrrhic victory in the last big crisis he faced. In the late 1980s, he was research director and then CEO of VW's Audi luxury-car unit when its Audi 5000 model faced allegations in the U.S. that it accelerated "unintentionally," causing accidents. Piech defended the car, blaming bad American driving habits for the problem. Eventually, studies by U.S. and Canadian highway-safety authorities found that the cars weren't faulty. But by then, bad publicity had caused Audi's U.S. sales to plummet disastrously. Piech's response, argues Karl Ludvigsen, chairman of London-based auto-industry consultants Ludvigsen Associates, "showed a certain arrogance in his attitudes."

This time around, Piech's stubbornness may reflect the enormity of his challenge. After a decade of headlong expansion that shot Volkswagen into the No.1 slot in the European market, VW was in deep trouble when Piech took over as CEO on Jan. 1. The company's costs were so high that at one point in 1992, it couldn't have turned a profit even if producing at 100% of capacity. Piech declared the company "in crisis."But by hiring Lopez to help him pare costs, Piech may have set himself up for one of the classic pitfalls in crisis management: "The solution to one difficulty puts you into even worse problems," says Ian I. Mitroff, head of the crisis-management unit at the University of Southern California.

DIFFICULT SELL. Although Lopez' cost-cutting is already helping VW, he has been dogged from the beginning by GM's complaint that he and others stole confidential GM documents. The district attorney's office in the city of Darmstadt seemed to confirm GM's accusations when it discovered GM documents at the former home of Jorge Alvarez Aguirre, a former GM executive who followed Lopez to VW. On July 22, the office confirmed that it is investigating Lopez, Aguirre, and two other former GM employees now on VW's payroll, though none has been charged and all deny wrongdoing.

By meeting with the press, Piech finally is facing the crisis head on. And experts applaud him for admitting that he has made some mistakes, such as attempting to silence the German weekly Der Spiegel with a gag order. But Piech must quickly change public perceptions, or VW could slip into the terminal phase of a corporate crisis--when nobody believes what a company and its executives say. And combativeness may not be enough. Piech may just have to start explaining what happened in much greater detail.

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