Is VW's CEO On The Skids?

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For a CEO whose job is on the line, Volkswagen AG Chief Executive Bernd Pischetsrieder shows little outward sign of strain. But there was every reason for the trim, 58-year-old executive to worry when, on Mar. 7, he presented another year of admittedly "unsatisfactory" financial results. A warring faction on the supervisory board is now threatening to oust Pischetsrieder or stall his slow-moving restructuring drive, making Volkswagen virtually ungovernable. "The board-level conflicts risk crippling the entire company," says Arndt Ellinghorst, auto analyst at Dresdner Kleinwort Wasserstein in Frankfurt. "It could even end up hurting the VW brand."



Volkswagen, Europe's largest auto maker, is on the rebound from several disastrous years. It boosted net profit in 2005 by 61%, to $1.3 billion, while revenues rose 7.1%, to $114 billion. But behind that superficially upbeat news, VW's problems loom large, and its competitiveness continues to erode.



Financial services and the premium-car unit Audi accounted for nearly the entire net profit for 2005, while the VW car group barely broke even. Stripped of its two profitable sister brands, Bentley Motors and Skoda, VW is still losing money on every car it sells, analysts say. Industry experts estimate Volkswagen needs to shed at least 20,000 workers and close several plants to get competitive.



FAMILY FORCE.

Pischetsrieder knows well what ails VW. The auto maker is suffering from "the lowest productivity, shortest working hours, and the highest pay in the industry," he said at the Mar. 7 conference. Despite shaving several billion dollars in costs over the past three years, VW's German factories remain as much as 50% less productive than rivals' plants.



Pischetsrieder has set an ambitious target of a pretax profit of $6.1 billion by 2008 -- more than triple the $2 billion pretax profit the company logged in 2005. "It's a long way to go," he admits.



On top of all these problems, Pischetsrieder must also contend with VW's mercurial Supervisory Board Chairman Ferdinand Piech. As the former CEO of VW and the grandson of Volkswagen founder Ferdinand Porsche, Piech continues to wield great power at the German auto maker. And that power has only increased since Porsche, which is controlled by Piech's family, became VW's largest investor, with a 18.53% stake.



The move unleashed howls of anger from investors about Piech's conflict of interest [he's also supervisory board chairman at Porsche]. U.S. fund manager Tweedy, Browne Co. even threatened to seek Piech's ouster at the upcoming VW shareholder meeting in May.



CHAOS THEORY.

Piech now seems to be using his enormous influence to undermine Pischetsrieder. At this month's Geneva auto show, VW's chairman lobbed a bombshell when he stated publicly that he doubted whether Pischetsrieder's contract would be extended when it comes up for renewal in April, since all 10 labor representatives on VW's board would vote against him.



In the event of of a 10-10 deadlock, Piech as chairman would be in a position to cast a decisive extra vote. Piech's timing and message seemed to put Pischetsrieder on notice that his job was on the line.



At the results meeting, Pischetsrieder sought to downplay the boardroom drama, parrying questions about his rapport with Piech and VW's warring factions with Chinese proverbs and quips about chaos theory. But with Pischetsrieder now looking like a lame duck, there is concern that the VW turnaround could lose traction. "He's no longer a leader. Everyone tolerates him because they can control him," says one German auto analyst.



SHIFTING GEARS.

That's a surprising turn of events, considering Piech hand-picked Pischetsrieder to succeed him in 2002. Industry insiders say Pischetsrieder's recent move to steer Volkswagen down-market -- reversing the premium strategy that Piech himself carved out for the German auto maker during his tenure as CEO in the 1990s -- has bred resentment between the two men.



The last straw might have been Pischetsrieder's recent decision to yank Piech's pride and joy, the $70,000 Phaeton luxury sedan, from the U.S. market, where it suffered from dismally low sales.



Analysts fear that if Piech gets to crown a new CEO -- some believe it could be Audi boss Martin Winterkorn -- he could shift gears again, investing in more up-market models in a bid to rival BMW and Mercedes. There's also a concern that, to secure the votes of the union representatives on VW's board, Piech might offer labor concessions that could further erode the auto maker's competitiveness.



WAKE-UP CALL.

Another victim of Piech's maneuvering may be turnaround ace Wolfgang Bernhard, the ex-DaimlerChrysler (DCX) executive who was placed in charge of restructuring the VW brand a year ago. Piech unofficially anointed him just last year as Pischetsrieder's obvious successor. If another CEO steps in ahead of him, a frustrated Bernhard may see little reason to stick around.



"There's a clear risk that Bernhard departs and the old VW system is put back in place," says Dresdner's Ellinghorst, referring to Piech's autocratic reign of the 1990s, which led to several strategic blunders, including the Phaeton and an overengineered Golf compact.



That's a scenario that should keep investors who are banking on a turnaround awake at night.