After recent developments in Porsche’s pursuit of Volkswagen and the attempted merger of truck makers MAN and Scania it’s time to take a look at the vision that Ferdinand Piëch has for Germany’s motor industry in the 21st Century. By Karl Ludvigsen
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How’s this for a scenario: Ferdinand Piëch deliberately puts sand in the gears of Volkswagen, striking out in all kinds of money-losing directions with Phaetons and Veyrons while neglecting its volume core business so VW’s share price stays in the doldrums. Meanwhile at money-spinning Porsche he encourages the salting away of billions of euros while the share price is on the up thanks to league-leading profitability. Then in 2005 he strikes, engineering wealthy Porsche’s raid on VW shares to make the Stuttgart company the Wolfsburg’s automaker’s largest shareholder.
Some people in Germany — notably acerbic observer Prof. Dr.-Ing. Hans-Joachim Selenz — are saying things like this about the way that Ferdinand Piëch, chairman of VW’s supervisory board, is plotting Porsche’s invasion of VW’s ownership. Whether true or not, it’s easy to see why many people are complaining that Ferdinand Piëch’s board positions at VW and Porsche are in conflict, that Volkswagen’s shareholders can hardly be confident that their best interests are being looked after in a robust and independent manner.
No secret of its concerns is being made by credit-rating agency Standard and Poor’s. When Bernd Pischestrieder was running VW, S&P raised the company’s credit-outlook rating from ‘negative’ to ‘stable’ in recognition of the ex-BMW man’s cost-cutting abilities. Now that Pischetsrieder is gone from the top job — though still earning out his five-year contract at Wolfsburg with unspecified services — S&P is nervous about a possible return to free-spending ways under new VW chief Martin Winterkorn, a Piëch protégé. It will, said an S&P official, ‘clearly monitor the strategy that Piëch would impose.’
Meanwhile Porsche’s raid on VW shares is running with the well-oiled thrust of a Carrera Turbo. The Stuttgart minnow first took a strong position in the shares of the Wolfsburg whale in September of 2005 with a 20 percent holding. This equalled the ownership of the State of Lower Saxony, where VW resides, while also matching the maximum voting rights available to any shareholder under the ‘Volkswagen Law’ dating from 1960.
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By GlobalDataChristian Wulff, premier of Lower Saxony, has stated that it has no plans to sell its stake in VW. Indeed, he has said that he will ‘defend any dilution of the state’s share to less than 20 percent.’ Such a threat looms from an offering of three million shares that VW is making to its employees this summer from a general capital increase. A good take-up was expected with the shares costing only 42.50 euros while selling on the market for more than 114 euros. Wulff put Lower Saxony’s money where his mouth is. From its treasury he shelled out 41 million euros to buy enough shares to bring its ownership of VW to 20.36 percent, giving a margin of safety.
For its part Porsche has reason to hope that a larger shareholding will be rewarded by increased voting rights in VW. The restrictive aspects of the Volkswagen Law, which effectively blocks any takeover of the company, have long been under attack by the European Union. In February the EU’s advocate general gave his ruling that the law was anti-competitive, saying that it ‘restricts the free movement of capital’. The law has yet to be struck down by the European Court of Justice, but it’s thought likely to act on its advocate general’s advice. A ruling is expected before the end of 2007.
Bolstered by this outlook, Porsche has continued to stock up on VW shares. During 2006 it gradually bought more. At the end of March 2007 it owned 27.3 percent of Volkswagen AG. Then it exercised an option to buy 3.6 percent more, bringing its total to 30.9 percent. Under German law this triggered an obligation to make a bid for the entire company, a prospect that had led many pundits to suggest that Porsche wouldn’t breach the 30-percent barrier.
‘Once again a cunning move from Mr. Piëch,’ said a German analyst of Porsche’s next step. It made an offer, but only for the minimum amount per share allowable under law. Since its offer of 100.92 euros per share was well under the market price of 114 euros, Porsche was obliged to make few purchases. When the offer expired on 29 May fewer than one percent of the company’s shares had been acquired under these deliberately discouraging terms. Indeed, some analysts were rightly surprised than any at all were offered. Was it respect for the Porsches and Piëchs that led holders to sell their shares to them at 11 percent less than the market was offering?
Now, however, the coast was clear. ‘With the increase in the holding above 30 percent,’ said Porsche chief Wendelin Wiedeking, ‘we have already obtained our desired goal of deepening our traditionally close relationship with Volkswagen.’ Having fulfilled its obligation to make a bid for VW, Porsche is now free to buy more of the Wolfsburg company’s shares whenever it wishes without having to make an offer to all its shareholders, said Porsche spokesman Frank Gaube: ‘We want to be able to act to increase our stake when it suits us.’ The Stuttgart company has a 35-billion-euro line of credit to fund its raids on VW shares.
In the interim Porsche’s investment in VW was revealing itself as that favourite outcome of Wendelin Wiedeking, the ‘win-win situation’. When in March of 2007 Porsche released its half-year results, covering the last of 2006, they disclosed that its VW shares, which had cost Porsche four billion euros, more than five billion dollars, had increased in value by more than one billion euros since its share purchases began.
Adam Jonas, a Morgan Stanley analyst in London, opined that ‘Piëch and Wiedeking are looking at this as a 100-year investment. They’re saying, “Leave it with us and we’ll watch out for it.” This isn’t a hedge fund making a trading investment that they’ll get rid of in a few years. Porsche’s motivation is to stay in control so Germany does not lose’ Volkswagen at a time when cash-rich private-equity groups are snapping up vulnerable companies like Chrysler.
Such ideas struck a positive note with VW’s shareholders, who were much less hostile to Ferdinand Piëch’s stewardship of their supervisory board at this year’s annual meeting than they’d been at the chaotic 2006 gathering. Some 4,000 owners of VW shares crowded into Hamburg’s Congress Center on 19 April. In a marathon affair running from breakfast to mid-afternoon, dissident groups representing shareholder blocs and pension funds again declared themselves opposed to Piëch’s re-election as chairman of the supervisory board. Nevertheless the following day found the 70-year-old unanimously elected to chair that board for a further five years, his second term of office.
‘Thanks to the pivotal role played by Mr. Piëch,’ said analyst Thomas Ryard of Global Insight, ‘the sports-car manufacturer is moving slowly but surely to gain effective control of the VW group. It may look like a subtle takeover move from Porsche, but it clearly signals Ferdinand Piëch’s ambition to preside over a powerful automotive group.’ Having served as head of VW’s management board from 1993 to 2002, Piëch was widely forecast to retire to a life of sunning and sailing. He has defied any and all such expectations.
Piëch has his hands full at Volkswagen. He must decide whether such costly boutique operations as Bugatti and Lamborghini are assets or anchors. Bentley looks safe as it is profitable and well integrated into the VW mainstream. For the VW brand Piëch is determined to follow though on an ultra-low-fuel-consumption vehicle, saying that he has a supplier who can slash the cost of the needed components by an order of magnitude. Ferdinand Piëch’s hand as well as that of ex-Audi man Martin Winterkorn can be seen in the Golf GTI W12-650, a mid-engined version of the classic Golf powered to 202 mph by a twin-turbo W12 engine.
Piëch’s VW faces more risks than opportunities. Sales are down in the US where annual losses approach a billion dollars. The great opportunity of the Russian market has been muffed; Ford’s sales there are six times Volkswagen’s. The Chinese are not clamouring for more Golfs. In the vital home market sales are down in spite of a booming economy. Germans are buying, but no longer putting a car purchase at the top of their shopping list. An unwelcome distraction are the court cases against VW works-council representatives who lied to courts about their use of company money to arrange sex parties with prostitutes.
Nevertheless Ferdinand Piëch is not devoting all his energies to the automobile company that his grandfather co-founded. A substantial amount of his time is dedicated to creating consolidation in the truck industry. One flank of his pincers movement is Volkswagen’s shareholding in leading Swedish truck maker Scania. Its acquisitions have given VW 20 percent of Scania’s capital and 35 percent of the voting rights in its affairs. Volkswagen’s Martin Winterkorn chairs Scania’s supervisory board.
The other flank is German truck maker MAN AG, which has cooperative projects with VW. Already the holder of 20 percent of MAN’s shares, VW upped its stake early in 2007 to 29.9 percent — just under the trigger point that would require it to bid for the whole company. ‘This level of participation in MAN,’ said Volkswagen, ‘is both helpful and adequate to allow all parties to find a friendly and mutually agreeable solution for combining MAN and Scania. Realising the high synergy potential remains the objective.’
MAN already tried to achieve a hostile takeover of Scania, a failed grab that left it with 14.8 percent of the Swedish company. Thus relations between the two proud truck makers are not exactly warm. Nevertheless their merger is the declared aim of Ferdinand Piëch, who wants to add to the group VW’s truck operations in Brazil. He has already discussed the consequences of such a tie-up with the powerful representatives of the unions of both companies.
In spite of a significant number of votes against his appointment, Ferdinand Piëch was elected chairman of MAN’s supervisory board in May of 2007. His elevation, together with that of two other VW people added to the board, is being contested in a Munich court by a body representing the interests of shareholders. In a now-familiar refrain, they are concerned that Piëch’s many other industrial links may cause him not to act in the best interests of MAN.
With the Piëch juggernaut now reaching flank speed, he and his allies are looking ahead to a structure that will better protect their future interests. Being set up in Stuttgart is a holding company – Porsche Automobil Holding SE – that will jointly control Porsche’s investments both in Volkswagen and in the ownership of Porsche itself. To be headed by Wendelin Wiedeking and his finance chief Holger Härter, this new Porsche Holding is not to be confused with the group that manages the Porsche and Piëch interests in car-distribution companies in Austria.
This will provide an important advantage. An aim of Porsche could well be to increase its investment in VW AG to 51 percent of its shares. Were it to do so, Porsche could fold its thirsty, CO2-generating sports cars and SUVs into the Volkswagen corporate fleet. This would give much-needed protection from the declared aim of Europe’s legislators to impose strict limits on greenhouse-gas emissions by motor vehicles.
A drawback of such an investment, however, would be that under EU law the workforce representation on Porsche’s supervisory board would switch to VW’s union, ousting the works council at Porsche that has hitherto been highly co-operative. Were the investment to be made by the new Porsche Holding, however, this problem does not arise. The members representing the workforces would be equally divided between men from VW and from Porsche, sitting across the table from board members with Porsche’s best interest at heart. That must be the preferred solution.
Thus the Ferdinand Piëch steamroller has momentum. It’s difficult to see anything forestalling the creation of a motor-vehicle group which, with both cars and trucks, could be the global number three behind GM and Toyota, now that DaimlerChrysler is breaking up.
The juggernaut has hit the occasional speed bump, however. Ferdinand Piëch was not best pleased by a profile in Manager Magazin in October of 2005 that said he wore ‘garish ties with hunting scenes’ and also stated that he didn’t know how many children he had. ‘Around a dozen,’ he said in answer to a question. ‘I don’t know exactly.’ Not accustomed to Piëch’s desert-dry wit, the reporter took this literally.
Early in 2006 Piëch took the magazine to court over its statements. The tie in question, said his lawyer, depicted hunters and elephants against a yellow background. The court in Düsseldorf agreed that since the elephants could be seen to be equipped with goods carriers they could not be the object of a hunt because working elephants are not hunted. The court also concluded that ‘Mr. Piëch knows how many children he has’ — twelve, to be exact.
Unbowed, Manager Magazin decided to take the defence of its text to a higher court. In March of 2006, however, Piëch withdrew his objections. No correction in the magazine was required and Piëch met all court costs of both parties. It was a rare setback for the remarkable man both determined and able to bestride Germany’s motor industry in the 21st Century.
– Karl Ludvigsen
Karl Ludvigsen is an award-winning author, historian and consultant who has worked in senior positions for GM, Fiat and Ford. In the 1980s and 1990s he ran the London-based motor-industry management consultancy, Ludvigsen Associates. He is currently an independent consultant and the author of more than three dozen books about cars and the motor industry, including Creating the Customer-Driven Car Company
