Volkswagen: auto-crats

Volkswagen chairman Ferdinand Piech and the German automaker's chief executive Martin Winterkorn used to get on like a house on fire. Now, far from describing their close working relationship, the term could herald a fiery unravelling of it. VW shares fell by 1.5 per cent on Monday after a report last week in Der Spiegel that the septuagenarian Mr Piech has distanced himself from the CEO, who was in line for the chairman's role.

Never mind Mr Piech's declaration, and the alarm bells that automatic elevation from CEO to chairman should trigger. The issue is whether Mr Piech, who has form in ejecting top VW executives, has grounds for undermining Mr Winterkorn.

The CEO may be able to count on Mr Piech's cousin, Wolfgang Porsche, who is chairman of Porsche Automobil Holding, which controls 50.7 per cent of VW's voting rights. He is backed, too, by VW's chief labour representative and even the state of Lower Saxony.

Mr Winterkorn's record is not the problem. Since he became CEO in 2007 sales have risen to a record €202bn, as VW shifts more than 10m units a year. Total shareholder return has beaten Ford in dollar terms (albeit spurred by a Porsche takeover attempt early in his tenure). Nor is a 14.9 per cent return on capital in its auto division shabby. And VW's operating profit has risen by 15.7 per cent a year to end-2014, more than twice the clip of volume growth.

Mr Winterkorn could do better: VW group's operating margin of 6.3 per cent lags behind the 8.9 per cent of Toyota. The German group last month guided to a margin of between 5.5 and 6 per cent. The problem is that the core VW brand's margin is below that. Too much production is still based in high-cost Germany - hence Mr Winterkorn's plan to save €5bn annually by 2017. Ambitious, with VW's entrenched unions. Then there is the issue of VW's flat sales in North America, despite market growth of 6 per cent.

Still, Mr Winterkorn is making a decent job of a tough market and knows what needs to be done. The argie-bargie is merely a reminder of the risks of investing in a company with an entrenched shareholder.

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