Corporate Germany left baffled by VW chairman's outburst

There was only one question on everyone's lips in corporate Germany on Monday: just what is Volkswagen chairman Ferdinand Piech up to?

By saying publicly on Friday that he was "at a distance" from his long-serving chief executive and loyal acolyte Martin Winterkorn, Mr Piech destabilised VW and triggered an undignified power struggle.

Mr Winterkorn, who quickly won the backing of key shareholders and employee representatives, signalled at the weekend that he had no intention of stepping aside in a hurry.

Management infighting is the last thing that VW - the world's second-largest carmaker by sales - needs at this juncture. It is in the midst of executing a €5bn cost-cutting plan to lift the profitability of the core VW brand, and it is battling falling sales in the US and emerging markets.

On Monday, Mr Winterkorn put on a brave face as he welcomed German chancellor Angela Merkel and Indian prime minister Narendra Modi to VW's stand at the Hannover industrial fair. He responded to a reporter's question about his "future", by smiling and saying: "There is one."

He has been weakened by Mr Piech's intervention, but it is the VW chairman who looks isolated. He does not have the votes on the VW supervisory board to force the chief executive out and a prolonged impasse now seems likely.

A person close to the company said currently no face-to-face meeting between Mr Winterkorn and Mr Piech is planned. VW declined to comment.

The stock fell 1.5 per cent on Monday as investors priced in further uncertainty. But having complained bitterly over the years about Mr Piech's costly engineering projects and acquisitions, investors know the share price has never been his top priority.

Instead his chief concern has been to cement his own automotive legacy - a group that now encompasses 12 brands and is poised to surpass Toyota as the world's largest carmaker.

Mr Winterkorn's supporters maintain that no one has done more to advance that goal in recent years than the chief executive.

Since 2007, when he became the group's top manager, VW's revenues have almost doubled to more than €200bn and net profit has quadrupled.

However, these large sales and earnings are largely thanks to three perennial cash cows: the Audi and Porsche premium brands, plus VW's market leading position in China.

Such strengths have helped paper over several problem areas likely to displease the perfectionist Mr Piech, and these difficulties may go some way to explaining his surprise intervention on Friday.

Having for years struggled to crack the US market, VW mounted a renewed challenge in 2011 by opening a factory in Chattanooga.

VW enjoyed an initial sales fizz but its sales fell last year because it failed to produce new models. Its goal of achieving 800,000 in annual US vehicle sales by 2018 now looks hard to reach.

Meanwhile, the low margins at the core VW passenger car brand last year forced Mr Winterkorn to admit to some painful home truths. "Let's be honest: we have a lot of catching up to do with our core competitors in terms of productivity," he said.

Perhaps the biggest blow to Mr Piech's pride though has been in the realm of technical innovation. As head of Audi, Mr Piech oversaw a succession of advances, including the four-wheel drive Quattro.

But lately competitors have tended to outshine VW. For example, BMW has launched the carbon-fibre i3 electric vehicle.

"[Piech's Friday] comment might indicate his belief that VW has become overly complacent" says Arndt Ellinghorst, an analyst at Evercore ISI. "Audi's 'Vorsprung durch Technik' seems to have been left behind in the 2000s."

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Mr Winterkorn is expected to fight to see out his contract that expires at the end of 2016. But his chances of succeeding Mr Piech as chairman - he is due to step down in 2017 - are slim.

Potential successors also know what is expected of them. On Friday, Mr Piech, 77, made clear that the chairman and chief executive positions must be filled by engineers.

Analysts say the successor to Mr Winterkorn could be Matthias Mueller, head of Porsche, or Winfried Vahland, Skoda's top manager. Ulrich Hackenberg, 64, head of technical development across the VW brands, is seen as a possible contender for chairman.

Just how Mr Piech's intervention will help to smooth that difficult transition remains unclear and Max Warburton, an analyst at Bernstein Research, cautions the chairman not to overplay his hand.

"By doing this he risks damaging, not burnishing, his legacy and it could even mark the beginning of the end for Ferdinand Piech. From a shareholders' perspective that would be no bad thing," he says.

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