Is Vw Revving Too High?

Piech's grand plans could stall the carmaker's comeback

You would never pick Ferdinand Piech for a dreamer. The pragmatic, 60-year-old chief executive has had Volkswagen in the repair shop for five years. Now that it's running again, however, Piech plans to add a supercharger and lots of flashy chrome. To take VW into ultraluxury cars, he wants to buy Britain's Rolls-Royce. He hopes buying Scania, the Swedish truckmaker, will haul VW into the heavy end of the vehicle market. Piech even entertains plans for a V8-powered Volkswagen to compete directly with Mercedes-Benz. The goal: overtake Toyota Motor Corp. as the world's No.3 carmaker.

Piech's skills as a fixer are clear. A fleet of hot new models, including the stylish new Passat, has rocked rivals such as Adam Opel and Ford Motor Co. Profits continue to rebound from the heavy losses of the early 1990s, hitting $748 million last year on sales of $62.2 billion. In Europe, SEAT and Skoda, once-weak subsidiaries, are growing briskly. Its luxury brand, Audi, is going strong. In the U.S., Beetlemania is powering a VW comeback. Even in Asia, VW's sales have been barely dented by the economic crisis, thanks to its market leadership in China.

The risk in Piech's dreams: He may push too far, too fast. VW still faces a host of problems. The launch of a new version of the best-selling Golf has been a disaster. Factories in western Germany rank among Europe's least efficient. VW's quality is middle-of-the-road. Management is overtaxed, and adding more tasks could short-circuit VW's turnaround. "They just don't have the human resources," worries an executive at a large institutional investor.

Nonetheless, Piech envisions a grand future for the company his grandfather, Ferdinand Porsche, co-founded before World War II to build "the people's car." The iron-willed Piech wants to distance VW from its mass-market heritage and mold a brand with a Mercedes-like reputation--and Mercedes-like margins. He has already set new industry standards for luxurious interiors in mid-market models such as the Passat and the Golf. Next, he plans to point new models squarely at Mercedes. One, informally called the Passat Plus, likely will make its debut in model year 2000. There's even talk of a top-end V12 model. But persuading consumers to pay Mercedes prices for a VW badge would be tough.

BIDDING WAR. Rolls-Royce would crown the product range--if Piech wins the bidding war against BMW and others. That could be clear within a few weeks. "When a brand like this is available, it's a one-time opportunity," says Robert Buchelhofer, VW's managing director for sales and marketing. And buying Scania would give VW a strong global presence in heavy trucks, a segment VW has explored only in Brazil. It's unclear, though, whether a deal can be struck. Scania officials say that they have discussed only joint projects.

With $11 billion in cash and an imminent rights offering expected to raise $3 billion more, VW can afford a spree. But it comes up short, say former executives and others close to the company, in top-notch managers. Pointing to BMW's difficulty in digesting Rover Group Ltd., these sources warn that acquisitions can be distractions. That's particularly true in segments where VW has little experience. Analysts fear VW could ruin RR's exclusive cachet in its effort to boost efficiency.

VW still has repairs to finish at home. Although the new $14,300 Golf has been praised by the motor press, the cars weren't ready when VW began turning them out last September. Glitches now keep production at 2,000 a day--against a target of 3,300. Still, VW officials insist the Golf is on course. "You can't measure success or failure in four to six months," says Buchelhofer.

LOW RANKING. Perhaps not. But the Golf underscores flaws in the development process that could take years to fix. That's true, too, of VW's quality performance. Three surveys in Europe rank VW well behind industry leaders such as Honda, Toyota, and Mercedes. A quarter of the old-model Golfs have had mechanical problems after three years of driving, vs. 17% of Toyota Corollas and 16% of C-Class Mercedes, according to German auto inspection data.

VW trails in productivity, too. Its Wolfsburg plant still operates on a four-day, 28-hour workweek. Analysts estimate that the plant, which employs 45,000, has 20,000 to 30,000 workers too many. The Economist Intelligence Unit ranked VW's plant in Emden last in a 1997 productivity study of European auto plants. Emden produced 21.3 cars per employee per year, compared with 73.2 at the top-ranked Nissan Motor Co. plant in Sunderland, England.

Gains have come slowly. VW's workforce grew 5.4% last year--nearly as fast as unit sales. Piech admits it takes 30 hours to build the new Golf, vs. the goal of 20. VW officials say many recent hires are temporary workers who will be let go once the bugs are eliminated.

Despite improved profits, VW's difficulties are still reflected in the bottom line. Net earnings as a proportion of sales in 1997 were 1.2%, compared with 5.1% for Ford. That should improve as VW shifts models onto four main vehicle platforms. But rivals are pursuing the same strategy, so VW has to hit a moving target if it wants to compete.

Piech, for all his bravado, knows well that VW's situation is still delicate. He was made CEO in 1993 to clean up the mess left by the overexuberant expansion plans of Carl H. Hahn. The irony is that if he isn't careful, he could find himself caught in a similar bind.

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