Volkswagen: Gear change

When Ferdinand Piech stepped down as Volkswagen chief executive in 2002 to become chairman he was determined to go out in style.

Mr Piech planned to drive a prototype fuel-efficient vehicle from the carmaker's headquarters in Wolfsburg to Hamburg, where VW was holding its annual shareholder meeting.

To reduce drag, the car dispensed with wing mirrors and the twin-seats were positioned one in front of another and accessed via a gull-winged door, similar to a fighter jet.

In theory the car could travel 100km using only one litre of diesel, but it had never left the test track and a rainstorm threatened to scupper his plans in front of the world's press. Undaunted, Mr Piech set off. In spite of the bitter cold he turned the heating off to save on fuel and completed the 237km run using just 0.89 litres of diesel per 100km - an extraordinary feat of engineering and willpower.

The 78-year-old VW patriarch's departure from his role at the top of the company last Saturday was no less dramatic.

Two weeks earlier Mr Piech had triggered an undignified power struggle by stating that he was "at a distance" from VW chief executive Martin Winterkorn.

What prompted the outburst remains a mystery. VW generated €11bn in net profit last year and although the pair still addressed each other with the formal "Sie" they had worked closely together for years.

Top directors, including VW's labour chief, the premier of the state of Lower Saxony and Mr Piech's cousin Wolfgang Porsche, rallied to Mr Winterkorn's side but the chairman refused to back down. At a tense showdown with senior members of the supervisory board, he was presented with an ultimatum: either resign or be voted out when the full board met in May.

The chairman and his wife Ursula announced they would quit all their VW directorships with immediate effect.

Auto power

Thanks largely to Mr Piech's vision during more than two decades as chief executive and then chairman, VW is a formidable automotive group, with more than €200bn in annual revenues, almost 600,000 employees and 118 production plants.

Its stable of 12 brands spans the entire automotive range - from truckmaker Scania , to volume brands Seat and Skoda and motorcycle company Ducati.

But though VW reported a 17 per cent rise in first-quarter earnings this week, it is struggling to raise the low-profit margin at the core VW brand, sales are plunging in Russia and Brazil and it faces a slowdown in China, which accounts for more than a third of its car sales. A costly attempt to crack the US has also come unstuck and its sales there are declining.

In spite of the tangled web of family, labour and local government interests that govern Volkswagen, Mr Piech kept the company on track. His exit leaves a leadership void at the top of the world's second-largest carmaker by sales, which now faces a period of uncertainty.

"An era has come to an end. Mr Piech left a huge imprint on the company and because of that a big change lies ahead," says Stefan Bratzel, a professor at the Center of Automotive Management, a research institute. "A new balance of power must be found."

Mr Piech was born in 1937 in Austria with "petrol in his blood" as the grandson of Ferdinand Porsche - the inventor of the VW Beetle. He started his career at Porsche in 1963 and won the admiration of racing fans by creating the 917, a frighteningly fast car that gave the company its first victory at the Le Mans 24 hours race but put a huge strain on its finances.

Infighting prompted his uncle Ferry Porsche to ban family members from operational management, so Mr Piech joined Audi in 1972 where he rose quickly to become chief executive. Again he inspired a succession of engineering firsts such as the four-wheel drive Quattro. The innovations helped to burnish the brand so it could compete with BMW and Mercedes-Benz, rather than Opel or Ford.

When he joined Volkswagen (Audi's parent) as chief executive in 1993, he restored the sclerotic volume carmaker to profitability without slashing jobs, which won him the loyalty of VW's workers - at least until last week.

Mr Piech had an eye for trophy brands - Bugatti, Bentley and Lamborghini joined the VW stable in 1998 alone - and he transformed VW's headquarters into a temple to carmaking. At the 250,000 sq m Autostadt, robotic platforms fetch new vehicles down from a pair of cylindrical towers before they are collected by customers.

But the expensive dealmaking, questionable corporate governance and grandiose engineering projects did not endear him to shareholders.

"Piech's view was: for the sake of testing my engineers I'm going to give them engineering tasks that are close to impossible just to see whether they can do it - which isn't what you want from a shareholder point of view," says Max Warburton at Bernstein Research.

Meanwhile, his icy stare, impatience and perfectionism drove fear into the hearts of underperforming managers.

"My need for harmony is limited," Mr Piech, a collector of ceremonial daggers, wrote in his autobiography. "I was convinced it was better to fire a top manager who was unsuitable for a certain situation than risk a weakening of the company, which could ultimately cost a couple of thousand jobs."

The father of 12 children could also be charming and self-deprecating in public and always had his eye on a much bigger prize. He was determined that VW would overtake Toyota as the world's biggest carmaker by sales. Last year VW sold 10.1m vehicles, only a fraction behind its Japanese rival.

"The facts are that he's grown the company dramatically, it makes a lot more money now and its equity value is a lot higher," says Mr Warburton. "The debate is: what could VW have been without some of the nonsense?"

Yet while Mr Piech enjoyed huge success as a manager, it took an outsider to help turn the chairman and other family members into billionaires.

Until Wendelin Wiedeking, the Porsche chief executive, began a creeping takeover of VW in 2005, the two clans owned a comparatively small sports car company - Porsche. But when the takeover attempt came unstuck in 2009 and VW rescued Porsche, the Piech and Porsche families were left controlling 51 per cent of the voting shares in VW, which sold around 80 times as many vehicles that year.

Today the family stake is valued at more than €13bn and its influence is rivalled in European automaking only by Fiat's Agnelli family and the Quandts at BMW.

Following Mr Piech's departure investors hope VW will cut back on dealmaking and vanity projects and take the opportunity to overhaul governance. Mr Winterkorn in December consented to give up direct management of the underperforming namesake VW brand. From July it will be run by Herbert Diess, a former BMW executive whose task will be to complete a €5bn cost-cutting plan.

Mr Bratzel says VW should take further pressure off the chief executive via "stronger decentralisation", possibly by bundling together the truck, premium and volume brands under separate management structures.

The outsiders

However, investors are also keen that VW picks a strong chairman to counterbalance the influence of Lower Saxony, which holds 20 per cent of the voting shares at VW, and employee representatives, who hold half of the seats on the supervisory board.

Both have been strengthened by the leadership crisis and are strongly motivated to protect local jobs. Compared with Toyota, VW requires far more employees to build the same number of cars, its profit margins are lower and it builds more components in-house.

"In that constellation of a strong union and local government, [Mr Piech] was a strong counterweight," says Ferdinand Dudenhoffer, automotive expert at the University of Duisburg-Essen. "He could get things done."

The most efficient solution, analysts say, would be for Mr Winterkorn, 67, to become chairman and make way for a new chief executive. But for the time being Mr Piech retains a stake in the family holding company, leaving him free to try to block Mr Winterkorn's appointment, if he so desires.

"It is possible Mr Piech continues to pull the strings behind the scenes," says Mr Bratzel. On Thursday VW's management board said it had asked two of his nieces to fill the empty seats on the supervisory board. VW's works council welcomed the appointments but Bild, the tabloid newspaper, reported that Mr Piech was opposed. His office declined to comment.

VW also may try to look outside its own ranks for a new chairman. Wolfgang Reitzle, the vastly experienced chairman of Holcim, the cement maker recently involved in a multibillion-euro merger with rival Lafarge, has been touted as a possible candidate.

But given the complex power relations at VW, an external candidate might think twice before accepting the role, Mr Dudenhoffer says. "Why would someone like that join the board only to be outvoted by the works council and Lower Saxony as soon as they backed something unpopular?"

For the time being it falls to Berthold Huber, an experienced trade unionist and now interim VW chairman, to manage a tempestuous annual shareholder meeting in Hanover on Tuesday.

Although the fallen chairman is expected to stay away this year, nervous VW managers may keep half an eye on the car park, just in case Mr Piech springs one last surprise.

© The Financial Times Limited 2015. All rights reserved.
FT and Financial Times are trademarks of the Financial Times Ltd.
Not to be redistributed, copied or modified in any way.
Euro2day.gr is solely responsible for providing this translation and the Financial Times Limited does not accept any liability for the accuracy or quality of the translation