VW's struggles in key markets threaten momentum as post-Piech era looms
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During his two-decade reign, Volkswagen Group Chairman Ferdinand Piech has created an automotive giant that threatens to steamroll every competitor in its path. VW Group has a broad geographic reach, a diverse portfolio that offers everything from heavy trucks to motorcycles and a huge pile of cash it can tap to finance further growth.
Revenue nearly hit 200 billion euros last year and underlying profit rose to a new record despite vehicle sales falling to a 20-year low in its European home market.
Piech's right-hand man, CEO Martin Winterkorn, pledged to shareholders that nothing would stop VW on its steady climb to the summit of the automotive industry. "We have the necessary financial solidity and strength – and a convincing strategy for the future," he told the automaker's annual meeting in May.
However, VW's seemingly impervious armor is starting to show cracks. It has failed to gain traction in the United States and India; it faces higher-than-expected costs from introducing its new MQB architecture; and it has a delicate balance of power among core shareholders that risks splitting the group and its 12 brands apart once 77-year-old Piech is no longer there to unite the separate factions under his iron grip. Auto analyst Philippe Houchois of UBS worries that VW Group is becoming a conglomerate that is too diversified and difficult to control. He compared the group to the former DaimlerChrysler.
Once Piech is no longer in charge, Houchois believes that VW Group’s complicated ownership structure could lead to infighting among its main trio of shareholders – Porsche Automobil Holding, the German state of Lower Saxony and Qatar Holding, which together control almost 90 percent of the votes. “Piech is clearly the ‘glue’ at VW, the person who can make decisions in a shareholding structure where nobody really has control. Succession is therefore a meaningful challenge,” Houchois said.
Volkswagen has grown rapidly since Winterkorn took over as CEO at the start of 2007. During his reign the company has grown to 12 brands from eight, nearly doubled annual revenue to 197 billion euros from 105 billion euros, more than doubled its manufacturing footprint to 106 plants from 46 while boosting its model lineup threefold to about 315 vehicles from more than 100. Currently, nothing seems capable of slowing down the company, which will invest 84.2 billion euros from now through 2018, by which time it aims to supplant Toyota Motor Corp. as industry sales leader, earning a pretax profit margin of more than 8 percent.
Despite such a large commitment of cash to pay for plants, products and technology, the company plans to significantly boost the share of profits it returns to its shareholders in the midterm. By the end of 2018, VW expects to have almost 32 billion euros in surplus cash that it can add to the nearly 18 billion euros already on its books at the end of the first quarter. By comparison, Renault’s last reported automotive net liquidity is only about one-tenth of that.
Because of its solid balance sheet, VW can look beyond 2018 to prepare itself for coming challenges as the industry moves toward self-driving cars and new personal mobility models. It can do this even as many of its cash-strapped competitors in Europe are still busy cutting jobs and downsizing production in response to a six-year slump in new-car sales. With its Future Tracks initiative, Winterkorn aims to accomplish nothing less than answer the challenges that the CEO calls “one of the greatest upheavals since the invention of the automobile.”
Yet history suggests even the strongest empires have an uncanny tendency to crumble, as complacency, bloated bureaucracies and internal power struggles eventually weaken competitiveness. VW’s boardroom has been the stage for so much intrigue that it might even rival popular TV series “Game of Thrones.” A sex scandal centered around union leaders rocked the company in 2005, leading to the resignation of Piech’s boardroom ally, Klaus Volkert. Hoping to clean house, former VW board member and ex-Lower Saxony head Christian Wulff attempted a coup against Piech. The move failed because Wulff failed to secure the support of trade unions.
In the years that followed, former VW board member and Porsche CEO Wendelin Wiedeking tried to acquire VW Group and use its cash reserves to pay for the hostile takeover. This sparked a feud between the Porsche and Piech families over control of VW that lasted until Wolfgang Porsche capitulated unconditionally to Ferdinand Piech, his cousin, in 2009.
Both a gifted engineer and lightning rod for controversy, Piech has devoted his life to VW in a bid to emulate the success of his grandfather, Ferdinand Porsche – the intellectual father of the company and creator of the Beetle. But the indomitable VW chairman, who himself has claimed the scalp of many a manager that crossed him, including Wiedeking, seems to fear his legacy may not be safe. The septuagenarian’s chief lieutenant, Winterkorn, has remained VW Group CEO even though he turned 67 in May (most CEOs in Germany serve until their early 60s). Piech also used his considerable influence to install his own wife, a kindergarten teacher with no discernable experience in the auto industry, onto the VW supervisory board.
John Wormald, managing partner of automotive consultancy firm Autopolis, fears that managing a smooth succession at a company so singularly built around one man’s dream could be extremely tricky given the shifting alliances and feuding interests of the past. “It may be somewhat of an exaggeration but it’s reminiscent of Yugoslavia under Marshall Tito, where all the various factions battling it out internally for control created these centrifugal forces that eventually tore the country apart,” he said. “Who’s there that could really take charge? Is Winterkorn really strong enough? He is not an engineer of the caliber of Piech, who does have elements of genius about him,” Wormald said, adding that he fears Winterkorn does not have his mentor’s same level of authority.
Analysts warn that Volkswagen is becoming too massive and unwieldy to manage effectively, and Fitch complained in May about conflicts of interest as well as a “lack of independence and diversity” in the board as a key weakness in VW’s corporate governance. Meanwhile minority investors are powerless, since the bulk of public stock does not confer the right to vote at annual meetings. In other companies, activist shareholders often play a valuable role by challenging boardroom decisions, pushing for change and putting pressure on management to unlock value by focusing their strategy and selling non-core assets. VW for example still owns a 19.9 percent stake in Suzuki Motor Corp. that is strategically questionable given that the Japanese company wants to divorce. Suzuki filed for international arbitration in November 2011, after Volkswagen refused to sell back its stake. VW also operates companies that produce steam turbines and container ship engines, which are leftover from its acquisition of MAN, and even owns 8.3 percent of German soccer club Bayern Munich through its Audi brand.
The problem with such an expansive empire is execution risk. VW is generally considered the world’s most successful multibrand automaker, but it also has struggled to get a grip on some chronic problems. VW has failed to make its Spanish subsidiary Seat profitable despite multiple restructuring and repositioning bids. VW Group’s efforts to use its MAN and Scania heavy truck brands to end Daimler’s dominance in commercial vehicles have produced few results so far.
Analysts say Volkswagen should concentrate on solving some of its existing problems, which include a weak position in key regions and the lack of enough crossovers and SUVs in its model range. Audi may enjoy unrivaled success in China, but it remains a distant third in the United States after Mercedes and BMW, while volumes for the core VW brand are shrinking at a double-digit rate in a growing U.S. market despite VW lowering its price point through the removal of content. VW replaced the head of its U.S. operations at the start of this year in an effort to reach its target of 1 million vehicles sold there by 2018, having sold only 612,000 cars in 2013.
‘Not a global player’
“In the strictest sense, Volkswagen is not a global player,” said Helmut Becker, head of the Munich-based think tank IWK and author of several books on the industry. He feels the company is becoming too dependent on China, which accounted for a third of VW Group’s sales last year.
“They are strong in China, Europe and Brazil, but they continue to struggle in the U.S. market, are a latecomer to Russia, and they are not at all present in India. It also suffers from gaps in its model line,” Becker said.
Even Brazil is starting to cause problems with sales dropping 16 percent last year and falling another 18 percent in the first quarter. VW also has yet to break into key emerging markets. The automaker’s 2013 deliveries in India declined by 19 percent to 92,561. The drop was almost three times the rate of decline of the overall market, which dipped 7 percent to 2.4 million. And after repeated attempts at establishing a foothold in Southeast Asia – initially with Malaysia’s Proton – it still has failed to gain traction there.
Volkswagen also appears to suffer from higher costs related to the rollout of its new MQB front-wheel-drive architecture, which is supposed to generate significant cost savings by achieving greater economies of scale across brands and, more significantly, across entire segments.
This mass standardization of components brings with it the risk of maintaining a clear differentiation among the cars sold under the various group brands, according to Fitch. Furthermore the ratings agency warned in May that MQB “poses the risk of a flaw or quality issue with that platform, which could have major repercussions” should parts potentially prove faulty. Barclays Capital auto analyst Michael Tyndall believes margins will eventually improve on the back of MQB-related savings as more cars underpinned by the architecture are gradually launched in the market. However he remains unconvinced as to whether the standardized production method can help make VW agile enough to bring new products to market faster.
For the moment, VW seems to have steered clear of the recall problems that befell Toyota after its growth spurt under former CEO Katsuaki Watanabe, and the German carmaker’s current success goes a long way toward masking some of the underlying problems at the company. Said IWK’s Becker: “No other carmaker in the world has been able to increase its production by 4 million cars during the time since Winterkorn took over. Achieving that kind of growth while safeguarding quality is a real accomplishment. You can’t do everything at the same time.”