VW/Porsche: What’s Next as Piech Holds All the Cards?

VW/Porsche: What’s Next as Piech Holds All the Cards?

By Mark Bursa

If there were a king of German automaking, Dr. Ferdinand   Piech has crowned himself as such.

After much legal wrangling, Piech now essentially has control of Volkswagen as well as Porsche. He is also trying to create Europe’s biggest truckmaker by merging MAN and Scania.

At 69, Piech appears to be writing a legacy to rival that of his grandfather, Dr. Ferdinand Porsche, the man who created VW and Porsche in the first place.

But, now that Piech controls both, what’s in store for mass-market VW and highly profitable niche Porsche?

Piech Gains Upper Hand

The European Union’s landmark ruling, declaring Germany’s so-called "Volkswagen Law" illegal, effectively put the giant German automaker under the control of Porsche.

The ruling ends an increasingly bitter struggle for control of Volkswagen between its chairman Piech, also principal Porsche shareholder, and Christian Wulff, the premier of the German state of Lower Saxony, VW’s second-largest shareholder who intensely opposed Piech.

Wulff caved in as soon as the European Court of Justice ruled that the German law that protected Volkswagen from takeovers was illegal. The regulation was originally passed in 1960 in order to ensure the newly privatized Volkswagen survived. It capped any shareholder’s voting rights at 20 percent -- even if the shareholding was more than 20 percent. It also limited the number of seats on the VW board. The plan now is set to be scrapped as it infringes EU anti-protectionist rules.

Porsche will be able to proceed with its plan to increase its stake in VW to 29.9 percent. Any more and it will have to launch a full takeover bid. But Piech really doesn’t need to do this, he’s effectively in complete control. Most analysts believe a 29.9-percent stake is enough voting power to block -- or force through -- strategic decisions such as plant closures, takeovers or mergers.

Buying VW would also be very expensive –- even for cash-rich Porsche. VW’s market capitalization is more than $40 billion. The court’s ruling of the Volkswagen Law as illegal and recently announced increased profits at VW group saw share prices surge by 8 percent. Net income in the past year more than doubled to $3.6 billion, while sales rose 12 percent to $137.6 billion, on the back of strong performances from Audi and Skoda brands in particular.

Opposition Purged

Within the VW management, Piech’s opponents have been ruthlessly purged –- former group CEO Bernd Pischetsrieder, forced out three months ago, was seen as a supporter of Wulff. VW boss Wolfgang Bernhard was seen as Pischetsrieder’s man –- so he was ousted, too. Bernhard has joined the private equity firm Cerberus Capital Management in an advisory capacity to consider the purchase of the Chrysler Group from DaimlerChrysler.

In their place comes a safe pair of hands, loyal Piech lieutenant Martin Winterkorn, who moves from chairman of Audi to chairman of VW brand.

Winterkorn has brilliantly expanded Audi’s sales by extending the brand into niches –- it’s gone from an eight-model range to a 24-model range in a decade, with more models to follow, and is on target to overtake BMW and Mercedes as the No. 1 luxury brand in terms of sales by the end of the decade.

But Winterkorn looks like he’s taking a more cautious approach at Volkswagen. Insiders claim that niche models, such as the Scirocco coupe, Tiguan SUV and the planned Passat coupe, might have been axed if their development hadn’t already been so far down the line. Designs are being reworked and projects are being delayed.

Meanwhile, Winterkorn has set his engineers the task of designing a rival to Renault’s Logan "world car." This would be a cheap sedan aimed at emerging markets, based on the Brazilian VW Fox platform. It’s a much-needed car for VW. In China, the hottest car market in the world over the past few years, VW has lost out massively through a lack of low-cost, entry-level models in its range.

Piech’s Challenges

The challenge for Piech will be to move loss-making VW toward the high profitability levels achieved at Porsche. It’ll be interesting to see what role Porsche CEO Wendelin Wiedeking will assume. Wiedeking has turned Porsche into the most profitable car manufacturer in Europe. Could he do the same for VW? Will Piech let him?

Piech, of course, spent most of the 1990s at the helm of VW group, with mixed success. He introduced a platform strategy that allowed the group to leverage economies of scale in mainstream markets and give some shape to the group’s four volume brands: Audi, Seat, Skoda and VW.

But he also blew vast amounts of money on "white elephant" projects such as the acquisition of supercarmakers Lamborghini and Bugatti, and the poor-selling VW Phaeton luxury car, very much Piech’s pet project. But criticism of these flops is tantamount to writing your resignation letter –- as a number of senior executives have found to their cost.

While Volkswagen Group is performing well, the VW brand is not. VW still needs to go through the pain barrier –- a 20-percent headcount reduction plan is underway, which will see the elimination of 20,000 factory jobs. VW Group also ruled out a bid for Chrysler Group -– in the current state of turmoil at Wolfsburg, such a deal would be the last thing VW needs.

Could anything derail Piech and Porsche? The Porsche deal is not popular among many of VW’s smaller shareholders, who feel Piech has railroaded the deal through without paying any premium for the VW shares.

Christian Wulff also remains a key player. He knows he can’t fight the EU ruling on the "Volkswagen Law," but he can still be a nuisance to Piech. There are rumors that he might try and mobilize support from the disaffected small shareholders and try to have Piech voted off the board at the next VW AGM.

However, this would risk alienating Porsche and ultimately Wulff knows it is more acceptable in Germany for VW to be taken over by another German company than by a non-German one -– like, say, Toyota, which has often been linked with VW, and would have the resources to execute such a deal –- if it wanted to.

Despite these mutterings, it appears Piech has all the cards. He’s effectively in control of Porsche and Volkswagen, and is also trying to create Europe’s biggest truckmaker by merging MAN and Scania. VW has a substantial stake in both. At 69, Piech’s legacy is starting to look almost as impressive as that of his grandfather, Dr. Ferdinand Porsche, the man who created VW and Porsche in the first place.

Michelle Krebs:  is Editor-in-Chief of AutoObserver.com. Follow @AutoObserver on Twitter.