Boardroom Drama Overshadows VW’s Solid Sales, Financial Performance

Special Report

2006 Year in Review

“There must be an end to the power games.”

That lament, from shareholder representative and Lower Saxony Premier Christian Wulff, followed the announcement of Bernd Pischetsrieder’s impending resignation as CEO of Volkswagen AG.

Made just as 2006 was drawing to a close, the announcement was the culmination of a protracted boardroom drama that saw names and faces overshadow the auto maker’s performance.

On the strength of 20 new product launches, the auto maker’s core brand needed only 11 months to outpace 2005’s global sales total. Audi, Bentley, Skoda, Lamborghini and Volkswagen Commercial Vehicles also enjoyed record full-year sales.

Globally, total vehicle deliveries for all the auto maker’s brands hit 5.7 million units, a 9.4% hike over 2005.

Meanwhile, the world’s fourth-largest auto maker exceeded analysts’ expectations by recording an after-tax profit of €75 billion ($3.6 billion) – more than twice the amount it brought home in 2005, €1.1 billion ($1.3 billion).

Further illustrating the positive trend was the dramatic reversal of metrics such as net liquidity. Through three quarters alone, it had swelled to €8.5 billion ($11.2 billion) for an increase of €7.5 billion ($9.9 billion).

Still, the writing was on the wall for Pischetsrieder and, by default, his hand-picked VW-brand Chairman Wolfgang Bernhard. Despite their successful rollout of “ForMotionplus,” a dynamic plan to achieve a pre-tax profit of €5.1 billion ($6.1 billion) by 2008, their aggressive management styles alienated labor and clashed with Chairman Ferdinand Piech.

This set the stage for the ascension of Audi-brand chief and Piech protege Martin Winterkorn, who was named to succeed Pischetsrieder, effective Jan. 1, 2007.

Analysts viewed the move as testament to the influence of Piëch, who held a controlling interest in Porsche AG – the sports-car maker founded by his grandfather.

“Dr. Piech is certainly famed for playing the long game to get his own way,” Merrill Lynch analyst Stephen Reitman wrote in a research note.

Said a report by Global Insight: “Recurrent conflicts (with Piech) underpinned by the growing influence played by Porsche, which became VW’s single largest shareholder less than a year ago, may have accelerated Pischetsrieder’s decision. Coincidentally, VW’s CEO announced his departure a few days after Porsche confirmed it could raise its voting stake in Europe’s biggest car manufacturer to 29.9%”

That, in itself, was a major event in 2006 because it marked the beginning of the end for Germany’s so-called “Volkswagen Law,” which was designed to frustrate takeover attempts aimed at the Wolfsburg-based auto maker. The law, which declared no single stakeholder could exercise voting rights exceeding 20%, was enacted to ensure stability for VW, a major force in Germany’s economy.

But the European Union opposed the statute in a suit filed with the European Court of Justice, which was expected to rule in favor of the EU and overturn the Volkswagen Law in 2007.

The prospect that Porsche might own a larger share of VW fueled considerable speculation about the intentions of the sports-car maker. Porsche stakeholders, from Piech to CEO Wendelin Wiedeking, denied the auto maker was pursuing a takeover strategy.

In contrast to its tumultuous conclusion, 2006 began with a series of promising announcements.

January saw Bernhard preside over two key partnership agreements: one with DaimlerChrysler AG, his former employer, and the other with Royal Dutch Shell and Canada-based biotech firm, Iogen Corp.

DC’s Chrysler Group agreed to build VW-brand minivans based on the U.S. auto maker’s next-generation RT platform intended to shoulder the ’08 Dodge Caravan and Chrysler Town & Country minivans. The deal called for the VW vans to be sold only in North America, where the brand’s dealers were starving for a competitive product in that family-oriented segment.

The second agreement called for the three participating companies to study the potential viability of an ethanol plant in Germany. But this plant would be capable of producing the clean-burning fuel from non-food, so-called “cellulosic” sources, such as corn stalks.

Also in January, in the wake of a sex-and-money-skimming scandal that exploded on front pages around the world in 2005, Pischetsrieder created an ombudsman’s office to promote “the cause of an open and transparent corporate culture.”

“Corruption is not a trivial offence,” he added. “With both corruption and bribery, the self-seeking behavior of very few individuals harms many innocent people. That is why corruption of any form whatsoever must be rigorously and comprehensively exposed.”

Eleven months later, however, the scandal continued to haunt the auto maker as former works council chief Klaus Volkert was arrested for allegedly attempting to influence the outcome of court proceedings that stemmed from the original charges.

Authorities claimed Volkert and his lawyer sought to convince Klaus Joachim-Gebauer, also implicated in the investigation, to change statements he’d made with regard to the scam, which allegedly siphoned money from the company to pay for exotic trips and liaisons with prostitutes.

Such determination to polish VW’s image helped earn Pischetsrieder, ironically, a new contract to lead the auto maker through 2012.

By March, deals also were in place to jettison non-core businesses such as information technology unit Gedas AG and vehicle rental business Europcar. Gedas was acquired by T-Systems, while France-based investment group Eurazeo purchased Europcar, after lengthy negotiations.

About this time, several key product rollouts were under way. At the Geneva Auto Show, VW pulled the sheet off a Polo B-car bearing the “BlueMotion” tag denoting the auto maker’s sustainable mobility initiative. Central to the program was the promise that every new VW model would be more fuel-efficient than its predecessor.

Propelled by a 1.4L 3-cyl. TDI engine that promised 80 hp and peak torque of 144 lb.-ft. (195 Nm); the Polo BlueMotion was rated at 60 mpg (3.9L/100 km).

“We can’t ignore the signs of the times,” Pischetsrieder told journalists in Geneva. “Even if oil will remain the key source of energy for the foreseeable future, there is, nevertheless, growing evidence that the fossil-fuel era has passed its peak.”

Geneva also saw the debut of the Skoda Roomster, while the redesigned Audi TT coupe was unveiled the following month in Berlin.

In August, VW continued its exploration of the diesel market by introducing the first turbodiesel-powered SUV equipped with a particulate filter to appear on the U.S. market – the Touareg V-10 TDI. There was irony here, too, because VW – the leading seller of diesel-powered light vehicles in the U.S. – was temporarily pulling out of that market.

The auto maker said it needed a year to develop the technology required to meet the nation’s new-for-’07 emissions regulations.

The Paris auto show saw the unveilings of the new VW Touran, Audi R8 and Seat Altea XL. But among the vehicles that made the greatest impact was the CrossGolf – a more rugged version of the base Golf C-car that featured a taller stance.

The CrossTouran, unveiled at the Bologna auto show in December, picked up on the same theme, exaggerated further with the anxiously awaited debut of the Tiguan cross/utility concept vehicle.

Also based on the Golf, it featured all-wheel drive and a diesel powerplant. It was shown first at the Los Angles auto show, where VW also announced a technology sharing agreement with Mercedes-Benz.

The deal enabled VW and its premium sister brand, Audi, to obtain access to the emissions-reducing Bluetec aftertreatment system developed by Mercedes. The technology was intended to pave the way for diesel availability in all 50 U.S. states – but primarily California, the nation’s largest car market.

The Tiguan, intended for production as an ’08 model, also made waves because of its name. An amalgam of Tiger and Iguana, VW chose the name after it outpolled alternate suggestions published in European motoring magazines.

In a unique marketing ploy, readers in 10 European countries were asked to vote for their favorite moniker and Tiguan won by a considerable margin over alternatives Nanuk, Namib, Rockton and Samun.

While 2006 also saw the debut of the Lamborghini Murcielago LP 640, the all-new VW Eos literally blew the roof off the European market. Named for the goddess of the rising sun in Greek mythology, it won acclaim for its retractable hardtop.

On the production side, April 27 saw VW build its 14-millionth Passat at its plant in Emden, Germany. And contracts were signed in April and November, respectively, paving the way for the construction of plants in Kaluga, Russia and Pune, India.

Capacity utilization was top of mind for VW as Pischetsrieder and Bernhard who parlayed their hard-nosed attitudes into a series of victories against rising costs and inefficiency. Critical labor agreements were reached in places such as:

But the auto maker seemed to meet its match in Belgium, where workers rose up in defiance of a plan to consolidate Golf production at two plants in Germany: Wolfsburg and Mosel.

The auto maker proposed a plan that would have chopped 3,000 names from VW’s payroll, leaving a workforce just big enough to build versions of the lower-volume Polo. Almost immediately, however, workers staged a strike that began in November and was still raging when 2006 came to a close.

However, a deal brokered by the Belgian government held some promise for a resolution. It called for Brussels to build the Audi A1, reducing to 1,500 the number of jobs eliminated by VW’s consolidation plan.

About this time, Pischetsrieder’s star began to fade. Rumblings of labor unrest reached the ears of Piech, who enjoyed wide support from organized labor – support that manifested itself in VW’s boardroom through the auto maker’s works council.

Another irritant was a bid by Germany-based truck maker MAN AG to acquire Sweden-based rival Scania AB. And executives within VW, a major Scania shareholder, were deeply divided over MAN’s €10.3 billion ($13.6 billion) bid, to which was attached a deadline of Jan. 31, 2007.

In contrast to the hard-line Pischetsrieder and the mercurial Bernhard, who was reportedly contemplating his resignation, VW had an icon in Winterkorn.

His personal achievements earned a Golden Steering Wheel award from the prestigious German magazine Bild am Sonntag. On his watch, Audi introduced new models such as the Q7 cross/utility vehicle, in addition to the R10 race car, which became the first diesel-powered car ever to win the Le Mans 24 Hours.

“(Winterkorn) is certainly not lacking in self-confidence – the self-confidence of a winner who works hard for success and sets a pace which only the best can keep up with,” said Bild am Sonntag Editor Claus Strunz.

Still, the world was perplexed by the strife within VW.

“The situation at VW is rather delicate and provides little clarity,” observed Global Insight. “The carmaker’s share price is hovering at a historic high level, third-quarter results showed clear signs of improvements when restructuring charges are put aside and more importantly, the carmaker’s volume sales are growing despite a difficult market context. On the industrial side, VW has had a remarkable year, obtaining important labor concessions in Germany, preparing the restructuring of its Brazil operations and investing in Russia.

“Against this backdrop, Pischetsrieder’s motives to leave the company, just a few months after having secured a five-year contract extension, are obscure but outline the apparent difficulties in managing Europe’s largest carmaker.

“Martin Winterkorn has had a successful run at Audi and is a known protégé of Piëch,” the report added. “His arrival does not change the fact that the VW Group still has a number of challenges ahead.”

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