Volkswagen CEO Winterkorn to stay in defeat for Piech

Volkswagen Group CEO Martin Winterkorn won the backing of the automaker’s top-level committee to continue serving as chief executive in a defeat for Ferdinand Piech, the automaker's powerful chairman and patriarch of its founding family.

VW supervisory board's leadership committee said Winterkorn is the "best possible" CEO and it will propose extending his contract beyond its December 2016 expiry date at a board meeting next February.

In a statement released Friday, the committee said that it wants Winterkorn to continue doing his job "with the same vigor and success as before, and that he has the full support of the committee in doing so."

Piech, who is one of six members of the committee, was completely isolated at a meeting Thursday called to resolve the leadership crisis, with all other representatives on the panel backing Winterkorn, sources told Reuters.

VW's labor leaders, who control half of the supervisory board's 20 seats and the state of Lower Saxony, a major VW shareholder, issued statements supporting Winterkorn on Friday. "We will continue on our successful course with Martin Winterkorn," Bernd Osterloh, VW's labor union chief, said in an e-mailed statement after the panel's decision was announced. "He's the right man in the right place." Lower Saxony Prime Minister Stephan Weil said the state has great trust in Winterkorn.

In addition to Piech, who is also a member of one of the two families that control VW, the steering group is made up of Weil; Osterloh and his deputy, Stephan Wolf; Berthold Huber, representing the IG Metall union; and Wolfgang Porsche, Piech's cousin and a representative of the other shareholder family.

Daniel Schwarz, an analyst at Commerzbank, said: "Winterkorn has received pretty clear support. It is important that he is not only staying in his post, but also getting a contract extension."

Juergen Pieper, a Frankfurt-based analyst at Bankhaus Metzler, said: "Winterkorn is a different caliber than some of Piech's previous targets, if you look at the enormous development VW has taken under his tenure."

Under Winterkorn's direction, VW has expanded from eight to twelve brands, more than doubled the number of production plants to over 100 and boosted global vehicle sales by 64 percent to a record 10.1 million last year, placing the automaker within grasp of overtaking Toyota Motor Corp. as the No. 1 in the industry.

But the CEO has also faced criticism for the company's underperforming operations in the United States, its failure to keep pace with rivals such as BMW on fuel efficient technologies and the slowness of its push into budget cars. Another problem has been declining profitability at the core VW brand. In recent meetings of the supervisory board Piech had been vocal in his criticism of the automaker's weak U.S. operations and the VW brand's profit gap with rivals such as Toyota, Reuters reported.

Winterkorn's future was called into question after Piech told Der Spiegel magazine last Friday that he had distanced himself from his former confidant and no longer wants him as the next chairman.

Piech's future

Some industry observers believe a change in leadership would have benefited Volkswagen. “The lack of change at the top at VW is not a positive catalyst in our view,” said Arndt Ellinghorst, an analyst at Evercore ISI.

An Evercore ISI survey of investors found that 65 percent of respondents believed a change in CEO would have been positive for VW's equity. “It seems Piech has lost the battle and an apparent desire for change at the top of VW. What is not clear, however, is whether this puts an end to the war? We suspect Piech does not back down easily,” Ellinghorst said.

Piech, who turned 78 on Friday, was expected to retire when his term as chairman expires in April 2017 with Winterkorn stepping into the chairman's role. Piech's future wasn't addressed in the steering committee statement. Piech's future "is a separate issue" as he remains a key shareholder of the group, said Commerzbank's Schwarz.

It was clear on Thursday that at least some of Piech’s power remained intact. When Winterkorn was asked to step before the board’s leadership committee, they didn’t meet in Wolfsburg. They flew to Salzburg, Austria, where Piech has his office.

“If I want to achieve something, I approach the problem and push it through without realizing what’s happening around me,” the chairman, the grandson of Ferdinand Porsche, wrote in his autobiography. “My desire for harmony is limited.”

The pushback over Winterkorn was unusual in a corporate climate in which public worship of Piech is practically part of a VW executive’s job description. Last year the company’s entire top brass trekked across to Braunschweig, a small city near VW’s headquarters in Wolfsburg, to listen while Piech was made an honorary citizen of the city and heaped with praise for preserving jobs.

After a laudatory speech from former German Chancellor Gerhard Schroeder, Piech told the 150-person audience that Schroeder had “too many words of praise for my hobby: building the right cars for customers.”

Auto obsession

Building cars is for Piech, by all accounts, more of an obsession than a hobby. After studying mechanical engineering and writing a master’s thesis on Formula One engines, he started working at his grandfather’s company, Porsche, in 1963.

His appetite for both fast cars and risky business moves soon became clear. In 1968, he pushed forward development of the Porsche 917 race car, a costly process that could have triggered the small company’s collapse had the largely untested technology failed.

“He’s never been mainstream in any product decisions,” said Arndt Ellinghorst, an analyst with Evercore ISI in London.

The 917 was difficult to control at speeds faster than 300 kilometers (186 miles) per hour, and one of the first private buyers, U.K. race driver John Woolfe, died in 1969 when his car slid off the Le Mans track. Piech still refused to abandon the project, refining the 917 until it became one of the most successful race cars of the 1970s.

In 1972, the Porsche-Piech family decided to ban its members from working for the sports-car maker. Piech left and took a job with the VW unit Audi. It was around that time that Piech provoked his family to outrage as well. In his 2002 autobiography, he describes how between his two jobs, in Turin to visit VW Golf designer Giorgetto Giugiaro, he began an affair with Marlene Porsche, his cousin Gerhard Porsche’s wife. Though the pair never married, both divorced their spouses and had two children together. Piech has 12 children, including five with his first wife. His final three children are with his current wife, Ursula Piech, whom he met when she worked as a governess for his family in the 1980s. A lover of fast cars as well, she now sits alongside her husband on VW’s supervisory board.

According to his autobiography, he set his future wife an automotive test almost as soon as he met her. It was Christmas. The family was at a mountain cottage, and he asked her to drive a Volkswagen off-road vehicle up a steep hill. She stalled the engine twice. “He was standing there grinning, and I just thought, what a jerk,” the autobiography quotes Ursula Piech as saying.

When Piech took the helm at VW in 1993, he made a company plagued with quality problems and high costs leaner, with better vehicles and without large-scale job cuts, and won himself the allegiance of unions and shareholders alike. Arguably, however, it’s his obsession with cars -- and the desire to make the best possible cars, regardless of price -- that has also led to some of the expensive decisions VW has made under Piech’s lead.

Biggest money-losers

With the flopped Phaeton sedan, the Bugatti Veyron supercar and Audi’s A2 hatchback, the Volkswagen group accounts for three out of the ten biggest money-losers in modern automotive history, according to estimates from Max Warburton, an analyst for Sanford C. Bernstein & Co. That’s a worse track record than any other automaker.

A love for engineering is also always something that Piech and Winterkorn seemed to share, making the falling-out between the two executives that much more mysterious.

“For whatever reason, the trust between him and Winterkorn is broken,” ISI’s Ellinghorst said, calling the process one of creative destruction. “Maybe he sees things that we don’t see.”

Bloomberg and Reuters contributed to this report