Porsche and VW Battle It Out

The sports car maker's slow takeover of Volkswagen mixes two radically different corporate cultures, and a power struggle has emerged

It was last Wednesday afternoon when two broad-shouldered men with shaved heads disappeared into a conference room. VW works council chairman Bernd Osterloh and Uwe Hück, Porsche's labor representative, were both stone-faced when they entered the Porsche booth at the International Automobile Exhibition (IAA) in Frankfurt. When they closed the door to the conference room, it almost seemed as if they were about to settle their dispute with their fists. The money would have been on Hück -- a two-time European champion in Thai boxing.

By all accounts, the discussion came off peacefully, but the dispute between the two labor leaders is only one of many conflicts between the Volkswagen Group and its new major shareholder, Porsche. Now that it's been two years since Stuttgart-based Porsche first acquired a stake in Volkswagen, the gloves appear to be coming off.

The whole thing began when Porsche CEO Wendelin Wiedeking, alarmed about the considerable influence of VW's labor representatives and the company's internal wage agreement, said that nothing could be considered sacred. According to Wiedeking, all things should be questioned to determine whether they are still timely and in keeping with corporate strategy.

Scenes of a Power Struggle

The statements brought the wrath of Germany's IG-Metall metalworkers' union down on Wiedeking. One labor representative even threatened that unionized workers at VW could hold up the delivery of car bodies to Porsche.

And last week, both sides were using the Frankfurt car convention as an opportunity to exchange barbs. VW CEO Martin Winterkorn started off by standing up for his employees, thereby positioning himself against Wiedeking. "We are not discussing the wage agreement at the moment," he said, adding that it is important "not to discourage employees."

Wiedeking responded sharply to Winterkorn's statements. The VW Group, he said, still has many areas that need attention. The product line could be expanded and the brands could be coordinated better, Wiedeking said, adding: "There is a still a lot to be optimized."

A VW executive upped the ante by accusing Wiedeking of, in his capacity as a member of VW's supervisory board, pushing for a contract extension for former VW CEO Bernd Pischetsrieder -- before approving his dismissal just six months later. The decisions have cost the group millions in severance payments to Pischetsrieder, who went into early retirement.

These are scenes of a power struggle. Now that Porsche has acquired a stake in the VW Group, there are two burning issues: Who is running the Wolfsburg-based automotive group, VW CEO Winterkorn, Porsche CEO Wiedeking or VW Supervisory Board Chairman Ferdinand Piëch, also a co-owner of Porsche? And how much influence do VW's labor representatives have on the power structure?

A Midget Swallows a Giant

The ownership relationship is relatively clear. Porsche owns 31 percent of VW shares. Currently, the so-called VW law is still in effect, which limits an individual shareholder's percentage of voting rights to 20 percent regardless of the stake. But that law is currently sitting in front of the European Court of Justice and observers expect it to be struck down. Once that happens, Porsche plans to increase its holding to 51 percent.

At that point, VW, a global corporation with close to €105 billion in sales and almost one third of a million employees, will become a subsidiary of Stuttgart-based Porsche, a much smaller company with sales of only €7 billion and 11,400 employees. Instead of the giant acquiring the midget, Porsche will be swallowing VW -- a rare occurrence in the history of corporate takeovers.

But it is potentially beneficial to both. Porsche can go a long way toward protecting VW from being bought out by hedge funds, while Porsche needs VW capital to help in the development of new models. Without VW, Porsche could also face difficulties with potential new environmental regulations as it doesn't currently have energy efficient models to offset its gas-guzzling performance roadsters.

To some extent the current power struggles stem from the fact that executives and labor representatives at VW are still having trouble comprehending what is happening to Europe's largest and the world's fifth-largest automaker. Besides, the two corporate cultures that are now colliding couldn't be more different.

Each Plant Must Be Profitable

After teetering on the brink of bankruptcy in 1993, Porsche introduced a tough but widely-praised restructuring program. The changes paid off, turning Porsche into the world's most profitable automaker. Even in years of record profits, Wiedeking continues to keep costs down. "He's so tightfisted," says Porsche labor representative Hück, "that he stands in front of the mirror with a candle on the second Sunday of Advent" (when Germans traditionally light a second candle on their Advent wreaths).

Wiedeking's cost-cutting efforts make the conflicts between management and labor all the more heated. Porsche's Hück says that this is "nothing for wimps." But the works council boss also accepts that each model and each plant must be profitable. Otherwise, he says, "jobs cannot be retained in the long run."

In the VW Group, on the other hand, the works council and board have observed a non-aggression pact for years. Management left the costly wage agreement alone, and in return, the labor representatives gave the board free rein for its luxury projects, Lamborghini, Bentley, Bugatti and the Volkswagen Phaeton. The principle of combined costing was applied at VW's plants. A profitable plant had to subsidize other plants and make up for their losses. The same principle was applied to the group's various brands.

Part 2: The Pesky Managers from Porsche

It was a business model that weakened the company, but the system allowed both management and labor representatives to live high on the hog. Indeed, it's a wonder that management ever felt compelled to woo over the group's labor representatives with luxury trips and prostitutes -- an unsavory scandal that tarnished the VW image in 2005.

After Porsche's entry into VW, the general impression in Wolfsburg was that there would be little change, especially after Wolfgang Bernhard, an advocate of restructuring, was forced out of the group. For years workers had had good experiences with VW CEO Winterkorn and Supervisory Board Chairman Piëch. And when the two men, together with works council chairman Bernd Osterloh, strolled into the Detroit Auto Show in January of this year, it seemed clear that they represented a triumvirate of power at the VW Group.

But it was a different story altogether in the VW Group's supervisory board. Wiedeking and his chief financial officer, Holger Härter, disapprove of the practice of resolving controversial issues in small groups in advance of board meetings. They showered the executive board with questions in front of the assembled supervisory board. Why has the Group simply accepted billions in losses in the US and Brazil for years without developing a concept for these markets? Why is SEAT doing so poorly? And why does the VW Group, aside from China, have such a weak presence in Asia?

Not as Successful as Claimed

Often, the two new members of the VW supervisory board, Wiedeking and Härter, would bring along more PowerPoint slides to meeting than the entire executive board. They presented comparisons with Toyota that were not flattering to VW. And they questioned whether subsidiaries Skoda and Audi were really as successful as was claimed.

Czech carmaker Skoda is helping itself to the VW Group's accumulated technical know-how. For example, Skoda installs state-of-the-art double clutch drives into its cars and then sells them for substantially less than comparable Volkswagen models. Skoda has thus grown at the expense of VW -- leading Wiedeking and Härter to demand that Skoda be repositioned as the Group's entry-level brand.

When it came to VW subsidiary Audi, the Porsche men noticed that although the company has increased its sales from 650,000 to more than 900,000 vehicles in recent years, its return on investment is far too low. This suggests that Audi's main objective was to improve its sales figures but not necessarily its profits.

Veteran members of the VW supervisory board were also surprised to see Wiedeking imposing a new guideline for the entire group from the start: There could no longer be any models or brands that did not produce profits for the company in the long term. In Wiedeking's words, "the days of expensive toys are over."

He was apparently referring to brands like Bentley and Bugatti, which, despite earning profits in their current operations, are hardly expected to recoup their total investment costs, not even in 10 years. This sort of thing will likely cease to exist in the future, and the company's luxury class Phaeton model, one of Piëch's pet projects, could very well be the first and last effort by VW to produce and market a luxury car.

Economic Flop

Though well-built from technological standpoint, the Phaeton has been an economic flop. It will never earn back the investments of about €1 billion for the car's development and just under €190 million for the so-called Glass Factory -- so named because the facility is made almost entirely of steel and glass -- in Dresden. Investments will only be approved for a successor if VW CEO Winterkorn can provide figures to prove that the new model can also turn a profit.

Wiedeking and Härter responded with equal severity to the VW supervisory board's discussion of a possible bailout for ailing car body maker Karmann, based in the northern German city of Osnabrück. Their suggestion was that Volkswagen should have a special model built at Karmann, thereby securing jobs at the company.

The VW supervisory board was quick to approve these sorts of projects in the past. The representatives of the state of Lower Saxony sitting on the VW supervisory board were pleased to see jobs secured in their state, and so they supported the executive board's proposals. But then the two Porsche representatives decided to block the plan. As long as Volkswagen's plants were not being operated at full capacity, not a single car, they argued, should be built by another company. Their principle concern, they said, was to secure jobs at German VW plants.

This also explains Wiedeking's support for closing VW's plant in Brussels. The factory's production was to be distributed among German plants, but in this case VW CEO Winterkorn, Supervisory Board Chairman Piëch and Works Council Chairman Osterloh managed to sideline the dynamic Porsche CEO. Subsidiary Audi, on whose supervisory board Wiedeking does not hold a seat, decided to have its planned A1 small car built in Brussels, thus saving the VW plant there. It will now be officially reconfigured to serve as an Audi plant.

Tighter Rein

Whether this makes sense is doubtful. If Audi needs a new plant, it should be in the United States. A production facility there could help offset the company's losses caused by the weak dollar. It will likely be more difficult in the future to push through such decisions without the approval of VW's new inspectors, Wiedeking and Härten. The two men have prepared a carefully designed corporate structure that will allow them to keep a much tighter rein on VW in the future.

Porsche Automobil Holding SE will be the new center of power. The joint-stock company incorporated under European law belongs to the Porsche and Piëch families and holds all ordinary shares in sports car manufacturer Porsche along with Porsche's stake in VW. Wiedeking is the chairman of the holding company and Härter is its vice-chairman, but no seat on its management board was reserved for VW CEO Winterkorn.

Once Porsche owns 51 percent of VW shares, Volkswagen will officially be a subgroup of the holding company. Important decisions will then be made for VW. The Porsche holding company is subject to the approval of the supervisory board. Power in this holding company is distributed very differently than in the supervisory board of the VW Group.

Part 3: VW Workers Fight Back

The public perceives Ferdinand Piëch as the omnipotent controlling figure in the two families of owners. He is the auto guru who took the place of VW Beetle inventor Ferdinand Porsche, and he is the one who stands in the limelight as he strolls through the IAA. But he is only an ordinary member of the Porsche supervisory board and, in addition to his brother Michel, is the only representative of the Piëch family. The Porsche family, on the other hand, has three of its members sitting on the supervisory board. In fact, Wolfgang Porsche is the chairman.

This distribution of power reflects the ownership of capital. The Porsches hold an estimated 53.7 percent of ordinary shares, while the Piëchs own only 46.8 percent. How this distribution came about goes back to a little-known story from 1983. At the time, Ernst Piëch had secretly sold his shares to an investor. The two branches of the family then bought back the shares jointly. As a result, a portion of the former Piëch shares fell into the hands of the Porsches.

The stronger the Porsche holding company becomes, the more Piëch will have to fear for his power. He would only be able to stop Wiedeking by gaining the support of Porsche representatives. But they wholeheartedly approve of their man's strategy when it comes to the company's investment in Volkswagen. They want to see the management of VW to be more solidly rooted in the rules of economics.

One Vote for 100,000 Employees

In the VW Group's supervisory board, Ferdinand Piëch was often able to secure enough support from the employee representatives to assemble a majority of votes. But this is unlikely to happen in the Porsche holding company's supervisory board. Once Porsche assumes a majority at VW, only three Volkswagen employees will be represented on that board, as well as three Porsche representatives who fully support Wiedeking.

The labor representatives at VW are upset about this arrangement. They consider it undemocratic that VW's more than 300,000 employees will be represented by only three members of the supervisory board in the future, while Porsche's roughly 10,000 employees will also be represented by three members. They are especially upset about the fact that the agreement is practically irrevocable, and that it was concluded at a time when they were not yet permitted to participate in the negotiations.

These concerns have prompted VW chief labor representative Osterloh to file a complaint against the codetermination agreement. In Osterloh's assessment, Hück and Wiedeking signed an agreement under which the employees of the VW Group benefit the least. In addition, Osterloh this week blasted Wiedeking in an open letter sent to all VW employees worldwide. In the letter, he accused the Porsche CEO of steamrolling VW workers and ignoring their concerns.

One reason Osterloh has his dander up is that he has already demonstrated he has no intention of standing in the way of reforms at VW. Last year, for example, he agreed to a new collective agreement under which the workweek is increased from 28.8 to 33 hours without any wage adjustment. His support for the new agreement has brought him lasting criticism from some employees.

Wiedeking must be careful not to go too far. If VW employees gain the impression that Porsche is a hostile conqueror, it will be difficult to run the group successfully. "I don't want to attack VW employees' wages and salaries," he assured a union official, "nor do I intend to cut jobs." On the contrary, Wiedeking's goal is to make VW successful enough so that jobs in Germany can be secured in the long term, just as he has already done at Porsche.

Gradual Loss of Power

Wiedeking plans to quickly settle the brewing conflict with employees. Not even the Porsche boss can afford a war on so many fronts. He also has to expect that VW Supervisory Board Chairman Piëch will think of a way to put a stop to his gradual loss of power.

Wiedeking also has to treat Winterkorn with caution. He claims that he respects the VW leader. But if this is the case, he should not convey the impression that important decisions are all made in Stuttgart. This would not be helpful to Winterkorn's constant effort to eliminate weakness in the VW Group. Winterkorn, an engineer who would casually exceed budgets in earlier years to install the most costly technology in models, is now paying close attention to costs.

The heads of the individual brands -- SEAT, Skoda and Audi, for example -- will see their decision-making authority significantly reduced. Instead of competing with one another, as they have in the past, their new mantra is to join forces and compete with Toyota. Indeed, Wiedeking's foremost objective is to make VW as successful as the Japanese carmaker.

This is likely to be a long-term project. But conflict is still expected in the short term. Wiedeking's direct management style leaves a bad taste in the mouths of many in Wolfsburg.

"That's the way you can manage a company that produces 100,000 cars for a single brand," says a high-ranking VW executive, "but not a group with eight brands and six million vehicles."

Translated from the German by Christopher Sultan

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