Commentary: Vw, Your Road Warrior Days Are Numbered

Volkswagen CEO Ferdinand Piech has powered the German carmaker out of a skid since he took over in 1993, the year VW lost $1.1 billion. The hard-nosed engineer pushed designers to produce a string of slick new products, bashed subsidiaries such as Seat and Skoda into shape, and squeezed steadily rising profits from the once lumbering behemoth.

Piech's aggressive style has produced results. But it's causing VW headaches, as well. A series of incidents is straining relations with regulators and investors. The latest flare-up has cost VW a record $110 million fine from the European Union for strong-arming Italian auto dealers. EU antitrust watchdogs patiently documented VW's efforts to keep dealers from selling cars to Austrians and Germans at much lower prices than they would have paid at home. The EU sent Piech two letters warning of the imminent fine and were shocked when he ignored them. "No company has ever treated us this way," says EU spokesman Willy Helin.

Thumbing one's nose at Brussels may be satisfying. But the price is too high if it means further tarnishing VW's reputation for honesty. The EU findings say VW resorted to tactics such as counseling dealers to lie to foreigners and axing bonuses for those who sold outside their territory. VW is appealing the decision and fines.

MALADROIT. VW's recent treatment of the financial community is even harder to fathom. Hoping to cash in on booming European stock markets, VW last September abruptly announced a $3.3 billion stock issue. But the announcement contradicted the company's repeated denials that it would seek a capital increase, which would dilute existing shareholder equity. At an analysts' meeting, VW officials acknowledged that the company's healthy cash flow seemed to make a new issue unnecessary. VW later delayed the proposed offer, without ever satisfactorily explaining why it had been initiated. "It was very maladroit," says an analyst at a large fund-management firm.

It was costly, too. Investors became suspicious, and VW's share price slumped from a high of $832 to around $500. Although the share price has since risen to $590, its gains have trailed the market.

Investors were already perturbed by VW's murky financial statements. For years, analysts have complained that they find it impossible to determine its true debt-to-equity ratio, cash flow, and profits. That's because VW exploits to the fullest German accounting rules that allow companies to squirrel money away in hidden reserves. It's a completely legal means of reducing reported profits--and thus, the tax bill--that makes it very hard for investors to assess a company's financial health.

VW looks even more out of step as top German companies from Daimler Benz to Veba switch to more transparent U.S. accounting standards. Bonn is now promoting legislation to make the changeover easier. But the message apparently hasn't yet reached VW headquarters in Wolfsburg: Only with more openness can VW shore up wobbly trust among international investors.

Change won't come easily to Piech's VW, which has a history of driving close to the edge. The most notable instance involved the wooing of cost-cutter Jose Ignacio Lopez de Arriortua away from General Motors Corp. in 1993. When GM charged the Spaniard with stealing company secrets, VW stood fully behind Lopez for years and was able to delay a criminal investigation long enough for him to work his magic. He was eased out only when GM demanded his ouster as part of a legal settlement. Lopez's pending trial in a German court on charges of industrial espionage could yet produce revelations that embarrass the company.

VW's run-ins with shareholders, regulators, dealers, and customers are sure to cause it more harm down the road. The company will be eyed warily when it next tries to raise capital. Angry EU watchdogs are likely to come down harder if VW steps out of line again.

Swashbuckling acts might have been acceptable 10 years ago within the cozy confines of German industry. When VW was drowning in red ink, any step must have seemed justified. But it is now a robust global giant with a new audience to please. It's time for VW to clean up its act.