Ed Wallace

Volkswagen’s Game of Thrones Pt. 2

One can never overstate the accomplishments of Ferdinand Piech in keeping the Volkswagen empire alive; likewise, his errors in judgment are also legendary in the automotive industry. However, in just 22 years Volkswagen has gone from near bankruptcy to being the world’s second largest automobile manufacturer – and that, too, is a direct result of the vision, focus and arrogance of Ferdinand Porsche’s grandson.

That said, this royal automotive family has always been more fun to watch for their castle intrigues than for their vehicles. The reality is that at times the Porsche/Piech family battles have made the palace coups at the Ford Motor Company seem like reruns of Mr. Rogers’ Neighborhood.

Mischief Managed … Frequently

In 1970 – and as a direct result of Ferdinand Piech’s tenure at Porsche – the family decided to ban all Porsche and Piech descendants from working at the German sports car manufacturer. Piech went on to his own design company for a short period before moving on to Audi. And the most mischief he caused the family here seemed to be the affair he had with his cousin Gerd Porsche’s wife, Marlene, before stealing her away from him.

Worse, however, was that when she divorced Porsche to be with Piech, Marlene’s soon-to-be-ex was forced to divest of his stock in the family business. And now for the first time the equal balance of ownership started to shift. Piech and Marlene would stay together for 12 years, even have two children before she was replaced in Piech’s affections by their children’s nanny. Holy Arnold Schwarzenegger!

On the automotive side of things, Audi was doing infinitely better than it had in the early 70s, when Piech had moved in. Car & Driver’s annual Ten Best Lists frequently started featuring Audi products. Yet, in terms of German luxury cars, back then Audis were sold to people who cared more about car reviews than about real cachet.

Karma — Not Always Kind?

Then in 1983 another family crisis fired up; Piech’s older brother, Ernst, decided to sell his shares in the business to Arab investors. In order to stop that deal from going through and keep a huge chunk of their family business from going into Arab hands, the rest of the Porsche Piech clan had to find 100 million German marks to buy Ernst out. The net result was that the Porsche side of the family ended up with more than half of the shares – rebalancing the power structure, at least for the time being.

But then came the 90s, which at first swamped the group with a massive wave of near-death experiences. First, Audi had starred in a 1988 60 Minutes report all but accusing those vehicles of being demonically possessed and accelerating under their own power, which their owners were helpless to stop. Sales of their cars collapsed overnight, while resale values of the popular 5000 went from $18,000 for a one-year-old model to just $3,500.

At the same time sales of Porsche sports cars fell on hard times in the U.S. when the S&L scandals triggered a horrendous recession. And that was even more critical to the company because Americans purchased almost half of all Porsches produced each year.

And it almost looked as if Volkswagen could fail completely, also due in part to its failure here since the late 70.

“And a Haughty Attitude …”

Toyota offered to buy Porsche out of the group for over $2 billion, but family pride kept that from happening. Still, 1993 would become their pivotal year. Ferdinand Piech moved over to become CEO of VW, while Wendelin Wiedeking, former head of production at Porsche, took over that company.

Almost immediately VW announced that it would bring back the Beetle as a retro-inspired car, for those Baby Boomers who had somehow missed the 1967 migration to San Francisco. (Which fortunately was 99.999999 percent of them.) True, it would take five years to make that new Beetle a reality; but that excitement distracted the automotive media’s focus from the fact that by 1995, VW’s total sales in America had fallen to only 50,000.

Wiedeking was shaking up things at Porsche even more. This was a guy who would scream at his managers to make his point clear. He brought in Japanese engineers to find ways to improve quality and productivity at Porsche’s factories. He spoke out publicly against government support of industry, and he slammed Chancellor Helmut Kohl for not understanding how the economy worked. And, because Porsche had been in such desperate shape, the family promised Wiedeking a little less than 1 percent of the profits in the company as his compensation.

That little carrot dangling at the end of the stick was meant to encourage him to turn reasonable profits, thereby saving the sports car company. But no one could have ever foreseen that Wiedeking’s factory improvements would happen at the same time as America’s runaway stock market in the Nineties, which in turn drove Porsche’s profits to an incredible $11.4 billion a year. In a country where Jürgen Schrempp was being paid a few million a year to run Daimler-Benz, suddenly it was common knowledge that Porsche’s Wendelin Wiedeking was earning $114 million annually.

Hired Gun

Therein lay the beginning of the next and far more serious crisis at VW. There are people in the automobile industry, of course, who fix seriously troubled companies; but when they do so during a period of exceptional economic expansion, those executives are only partially responsible for the corporate turnarounds. And now, the object lesson in automotive hubris: These self-assured executives always ignore a skyrocketing economy as the real key reason profits turned around so quickly. Wiedeking was no exception.

In his mind the Dow Jones’ almost quintupling – from 2,442 in 1990 to almost 11,000 10 years later – or the NASDAQ moving from 416 to 2,978 in the same period, had no impact on Porsche’s success at all. In the same period, CEO pay went from 60 times that of the average worker to 300 times more. Preferring to take sole credit for the company’s new riches, Wiedeking quit acting like the hired gun running the famed sports car company and began acting as if he were the owner.

That attitude would certainly put him on a collision course with Ferdinand Piech at VW. Unlike Wiedeking, Piech knew his company’s history; certainly he knew that over the decades, had it not been for Volkswagen’s monetary and engineering support, Porsche would have ceased to exist.

Stay on the Porch

But before the two titans could collide, a new crisis knocked at the company door. In 2000 Chancellor Gerhard Schroder called to let Piech know that Jacques Nasser of Ford had approached the German government, asking whether they had any objection to his company’s taking a stake in the VW Group.

Piech was forced to call his extended family and ask them to purchase more shares in Volkswagen in order to fend off Ford’s overture. Turned out the family didn’t want to put their cash on the line for this one; they believed a new large investment in VW was just too risky. And that left Ferdinand Piech to his own devices to convince Ford’s Nasser to behave and leave the Germans alone. No one knows what Piech told Nasser that day, other than the fact that he was out of his league in not anticipating Piech as an adversary for Ford. What is known is that Ford’s Nasser beat a hasty retreat.

Next week: Now in another decade, Piech does in his own leaders and prepares to battle Wiedeking for his own survival.

Again, thanks to Dietmar Hawranek’s exceptional 2009 Der Spiegel series on the Porsche battles.

© Ed Wallace 2015

Ed Wallace is a recipient of the Gerald R. Loeb Award for business journalism. He hosts Wheels, 8:00 to 1:00 Saturdays on 570 KLIF AM. E-mail: wheels570@sbcglobal.net; read all of Ed’s work at www.insideautomotive.com.