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VW's Piech Is Out. Bottom Lines Are In.

Edward Niedermeyer, an auto-industry analyst, is the co-founder of Daily Kanban and the former editor of the blog The Truth About Cars.
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Under any circumstances, the departure of Volkswagen Chairman Ferdinand Piech would have been a tectonic event for the auto industry. Piech's pedigree, experience and legendary ego made him the last of the old-school auto barons; the marriage he arranged between Volkswagen and Porsche reunited the two firms born from his grandfather's most famous vehicles. But that same massive ego -- which willed monumental cars, brands and companies into being -- was also behind Piech's sudden downfall.

The bewildering showdown between Piech and VW Chief Executive Officer Martin Winterkorn just doesn't add up. Winterkorn's alleged failure to make progress in the U.S. market is hardly a recent development, nor is it one for which he holds special responsibility. And claims that Winterkorn failed to develop a low-cost car don't seem like a plausible stumbling block in his relationship with Piech.

Such an absence of a clear clash on management strategy only deepens the mystery around Piech and Winterkorn's battle for Volkswagen. Piech's 2007 palace coup against Bernd Pischetsrieder put Winterkorn in power, seemingly entrenching Piech's control. Whatever came between the mentor and his prize pupil, it was either so important as to remain totally secret or it was embarrassingly inconsequential. Given Piech's tendency toward imperious grandiosity, the latter can't be dismissed.

But the Volkswagen board's frustrations with Piech's volatile ego also reflect a fundamental transition in the auto industry, from a tradition of romantic, product-focused leaders back toward a more rational, process-focused approach. Piech's Volkswagen is a throwback to the General Motors that swept aside Ford's utilitarian Model T in the 1920s and 1930s: a dizzying constellation of brands, crowned by breathtakingly engineered luxury vehicles and underpinned by masterful parts-sharing.

As head of Audi, Piech transformed the carmaker into a global powerhouse by embracing the brand's catchphrase "Progress Through Technology"; he then took that philosophy to epic lengths at Volkswagen, mandating ambitious engineering projects such as the Phaeton and Bugatti's Veyron. But when it came to the rational, process-oriented side of the business, Piech looked to Toyota to improve Volkswagen's historically lagging margins.

"When he came up with the platform-sharing strategy at VW in the 1990s, that was really just Toyota's strategy," one Volkswagen executive explained. "Only Toyota didn't have a name for it." Piech's appropriation of Toyota's process and strategy innovations made him a rationalizing force at VW, yet his string of ego projects and boardroom clashes forged a very different legacy.

With a period of historic middle-class prosperity apparently receding, the emotive, brand- and product-driven "romantic" tradition that Piech exemplified appears to be on the retreat. A return to the process-focused, mobility-as-commodity approach once championed by Ford's Model T -- and now exemplified by Toyota -- appears to be emerging from the brutal competition engendered by maturing automotive technology.

Despite its aspirational halo vehicles and brands, its strong position in China, and a much-hyped modular architecture "kit" system, Volkswagen's margins still lag the Toyota that Piech admired and emulated. And while VW's new kits have caused consternation on the production floor of its giant plant in Wolfsburg, Germany, Toyota's latest production overhaul is focused on further improving the process innovations that have already made it such a dominant force in the global auto industry.

As maturing markets and technology and the rise of private mobility services continue to drive the commodification of the automobile, the romance of product innovation will continue to become less important than process rationalization. Executives like Piech, who embodied the auto industry's swashbuckling character, are now an endangered species, almost completely replaced by risk-averse acolytes of the bottom line. Though the passing of such an era might seem tragic to car enthusiasts, the industry's long record of breathtaking capital destruction indicates that a more boring period of maturity may not be a bad thing for investors.

There are indications that the new power behind Volkswagen may be more interested in maintaining German jobs than anything else, in which case Piech's ouster may not necessarily be a victory for VW's finances. But as the industry wrestles with economic and cultural changes that challenge its most fundamental values, unyielding, old-line executives like Piech are clearly becoming a liability. Appealing products and inspirational brands are still key to success, but not when they come at the expense of consistent leadership, collaborative relationships and continuous improvement -- a lesson Tesla is painfully learning as it scales up.

Piech's efforts were critical to bringing Volkswagen into competition with Toyota for the top spot among global automakers, but his strategy won't help it beat the master at its own game. If any good is to come of Piech's wrenching downfall, Volkswagen's leaders must refocus on steadily improving processes and margins, and let the bombast and hubris fade into history.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the author on this story:
Edward Niedermeyer at edward.niedermeyer@gmail.com

To contact the editor on this story:
Brooke Sample at bsample1@bloomberg.net