[Economics] Volkswagen Chief Piech Consumed By The Fire He Started

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Volkswagen Chief Piech Consumed By The Fire He Started
From Forbes

VW board chairman Ferdinand Piech set the crisis running that led to his downfall by threatening to fire his number 2, Martin Winterkorn.

Piech has been a fearsome, powerful and highly successful leader of Volkswagen, Europe’s biggest car company which wants to be the world leader. In the past when under pressure, Piech always managed to force into line the group of family members, unions and politicians who control VW. Not this time.

 VW is controlled by a complicated corporate structure that includes unions. The Porsche and Piech families control 50.7 per cent of VW votes on the board. The state of Lower Saxony has 20 per cent, while unions have half of VW’s 20 supervisory board seats. When it became clear that Piech was seeking to oust VW Group CEO Winterkorn, some members of the Porsche family and union boss Bernd Osterloh supported him, suggesting the chairman couldn’t carry votes on the board. That led Piech to attempt to back-off earlier this week. It appeared that he was outnumbered on the board, but veteran VW watchers weren’t convinced that this wily old campaigner was on his way out. Surely, he wouldn’t pick a fight he couldn’t win. There must be some subtlety they were missing and he would get his way.

On Saturday, VW announced Piech had resigned, and his wife Ursula, tipped by some to replace him as board chairman, had gone too.

It was never made clear why Piech suddenly decided to get rid of Winterkorn. After all, the company has been hugely successful in terms of sales. But reports suggested Piech had become impatient with the lack of progress making the VW brand profitable, and fixing the dismal failure in the U.S.

Piech, grandson of the producer of the VW Beetle, has been a powerful figure at the company for more than 20 years.

According to the Center for Automotive Research (CAR) at Germany’s University of Duisberg-Essen,the profit margin earned on VW brand cars is pitifully low compared with rivals like Toyota. CAR calculates that Toyota’s global profit margin is more than three times higher than the VW brand â€" at around the equivalent of $1,783 or 8.6 per cent per car compared with VW’s $585 or 2.5 per cent.

VW’s group profit margin, including all the brands, is closer to 6.5 per cent.

CAR pointed to VW’s pitiful performance in the U.S.. VW redesigned its Passat sedan especially to appeal to U.S. buyers by removing some of the expensive, high-tech content which Europeans demand, and by making it in America. Result? A dismal flop, says CAR. The factory in the U.S. can produce between 150,000 and 200,000 Passats a year, but this year will likely only sell around 80,000, said CAR.

In its pursuit of the crown as world number one auto maker, VW has been on a brand buying spree and now has 12, including the upmarket luxury Bentley, Lamborghini supercars, Audi , Porsche, Ducati motorbikes and MAN trucks. It sells cheaper versions of VW brand cars using the Skoda and SEAT brands.

Winterkorn’s contract as VW CEO expires next year. Winterkorn, 67, has been in place since 2007, and was expected to take over from 78 year old Piech when he retired in 2017.

During Winterkorn’s tenure, VW has expanded rapidly, but hasn’t managed the transition well. Volkswagen is said to employ too many people, doesn’t make enough money, and is relying on raising sales to flex its muscles rather than focusing on the bottom line. VW has earned the ire of investors by increasing sales by 30 per cent in five years while profits remained relatively flat.

The company is in the midst of $11.8 billion cost cutting program. Some say the efficient administration of the company is hampered because it is dominated by the state government of Lower Saxony and the trade unions.