Who's behind the Wheel at Audi?

The industry expects a bloodletting before VW Chief Piëch exits

Audi CEO Franz-Josef Paefgen doesn't seem like a candidate for the ax. In the first nine months of this year, Audi, Volkswagen's (VLKAY ) premium auto brand, was the group's most profitable unit by far, contributing more than a fourth of earnings. It boosted European sales by 10% in the same period, capturing a record 3.6% of the sluggish market to overtake rival BMW in Europe. And with the successful launch a year ago of the elegant, $29,000, A4 sedan, Audi looks set to clinch a sixth consecutive annual sales rise.

That apparently isn't enough to satisfy Volkswagen CEO Ferdinand Piëch, who ran Audi before being promoted to the top spot at VW. Paefgen is likely to be swept away in a final bloodletting at the Volkswagen group before Piëch turns over the reins to his successor, Bernd Pischetsrieder, on Apr. 17, industry insiders say. The talk is that Paefgen's job will go to research and development chief Martin Winterkorn, one of Piëch's loyal lieutenants, as part of a reorganization of the group's nine brands. It's unclear whether there will be room for Paefgen, 55, anywhere in the group. Neither Paefgen nor VW is commenting on the rumors, but officials say a reorganization might be approved as early as the supervisory board's next meeting on Nov. 23.

This little piece of corporate intrigue gives VW watchers some interesting clues about the carmaker's future. First is the question of Piëch's role after he steps down as CEO and takes up the nonoperating role of supervisory board chairman. The speculation in German car circles has always been that Piëch would put his trusted aides in key positions before his departure, to make doubly sure VW's progress adhered to his own precise vision. Winterkorn's promotion would confirm this thesis.

OVERDUE. The second conclusion to be drawn from this likely changing of the guard is that Piëch finally is coming to grips with problems he helped to create. A new brand strategy for all of VW--not just Audi--is long overdue. Unfettered competition among the auto company's 60-plus models has hindered VW's potential. In particular, the Czech-based, bargain-priced Skoda (DCX ) cars have lured customers from VW and other marques.

Piëch plans to divide VW's car brands into two main groups, conservative and sporty. VW, Skoda, and the aristocratic Bentley brand will be in the conservative camp. Audi, Lamborghini (VLKAY ), and the struggling Spanish brand Seat will make up the sporty set, expected to turn out sexy, head-turning models.

Audi stands to gain from the reorganization. Its A4 faces stiff competition from VW's slightly less expensive Passat. Paefgen's defenders say he has been hamstrung by Piëch's own maneuvers in favor of the VW brand. Case in point: Volkswagen will launch a luxurious, high-performance VW-badged car, code-named D1, next spring in Europe, before replacing the seven-year-old, $64,000 Audi A8 sedan. Industry sources say a new A8 had been scheduled for launch in spring, 2002, but has been delayed by a year--perhaps to give the $65,000 D1 a clear shot at capturing customers.

Volkswagen officials riposte that the D1 is chasing the thousands of buyers each year who leave the VW brand to move upmarket but opt instead for BMWs and Mercedes (DCX ). "The clientele for the D1 and A8 are different," says Thomas Bieler, sales chief at the Audi Zentrum Stuttgart dealership. VW tends to attract customers who are looking for traditional, family cars, while Audi evokes sporty, technologically innovative cars. "They won't get in each other's way." But car analysts say the D1 will cannibalize the next-generation A8. "I can't think of another product that attacks it more directly," says Christopher Will at Lehman Brothers in London.

Piëch's maneuvering doesn't mean the VW chief isn't plenty ambitious for Audi, which he ran from 1988 to 1993. Earlier this year, he lambasted Paefgen for the marque's bland product offering. Paefgen's advocates in the industry point out that recent Audi concept cars, such as the Steppenwolf coupe and the spacious Avantissimo station wagon, show that Audi designers have the kind of flair customers crave. True or not, Piëch still gets the final say.

By Christine Tierney in Frankfurt, with Katharine Schmidt in Stuttgart

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