Ferdinand Piech has been a master at wooing customers since he became Volkswagen AG's chief executive in 1993.
He has doubled annual sales to 5.06 million vehicles, making Volkswagen the largest automaker in Europe, Brazil and China as well as the biggest European brand in the US.
In the second quarter of this year, Volkswagen's sales rose 9.6 percent to 23.7 billion euros(US$20.9 billion).
PHOTO: BLOOMBERG
Profit was 624 million euros under International Accounting Standards.
Piech has failed to generate the same level of excitement among shareholders. In the 12 months through July 26, Volkswagen common shares rose 14 percent to 52.08 euros (US$45.83), while the DAX Index fell 22 percent. Yet Volkswagen's market value is just US$15.6 billion -- 32 percent less than that of German rival Bayerische Motoren Werke AG, even though it sells seven times more cars.
Because of that low market value, Piech, 64, is spending his last year before retirement shoring up antitakeover defenses, even as the European Commission is moving to strip them from German law.
PHOTO: BLOOMBERG
"Before I leave, I see it as my task to see to it that with or without the statutes, no one can swallow our group without choking on it," Piech told business weekly WirtschaftsWoche in May.
Volkswagen would not make Piech available for interviews for this article.
Piech's campaign to cement control runs counter to a rising tide of shareholder discontent. In June, officials of Frankfurt-based Union Investment GmbH confronted Piech on the floor of Volkswagen's annual shareholder meeting in Hamburg. They pressed him to buy back nonvoting preferred shares instead of ordinary shares, which are 53.2 percent more expensive.
"They've done a few things in the interest of shareholders, but they need to do a lot more," says Rolf Drees, spokesman for Union, which manages US$102 million worth of Volkswagen common shares and US$68 million in preferred shares.
Though guards kept a lookout for food missiles and other projectiles as shareholders entered the meeting, the outcome of the vote wasn't in doubt. Volkswagen's home state of Lower Saxony, protected by a 1960 law giving it an effective veto over most strategic decisions, cast 52 percent of all votes represented at the meeting.
Shareholders approved Piech's buyback and authorized him to sell new shares in a potential US$$2.2 billion capital increase -- even though he refused to say how he'd use the money.
In June, the European Commission began examining whether the German law that protects Lower Saxony's influence is blocking the flow of capital across borders.
It's investigating similar laws in five other countries.
The Volkswagen case could wind up before the European Court of Justice in Luxembourg within two to three years, says commission spokesman Thomas Kaufmann.
Some global fund managers, meanwhile, are diverting investments to companies with a one-share, one-vote philosophy, says Arndt Ellinghorst, an analyst at WestLB Panmure in Dusseldorf.
"The shares would have an upside potential of 20-30 percent if Volkswagen improved how it treats capital markets," says Ellinghorst.
Even Gary Motyl, chief investment officer at Templeton Institutional Group, whose funds hold US$800 million in Volkswagen shares because he expects double-digit returns in the next few years, recognizes the company's flaws.
"Volkswagen has not had as strong an investor relations group as some other companies. There is probably some discount in the valuation because of this," says Motyl.
Another investor complaint: Piech's Volkswagen is one of only two companies in Germany's DAX Index that won't adhere to voluntary Deutsche Borse AG guidelines to treat all shareholders, majority and minority, the same in corporate takeovers.
This year, Volkswagen started using international accounting standards (IAS), which, among other things, allow companies to write off factory equipment over several years instead of mostly in the first year, as in German standards.
DaimlerChrysler AG, then Daimler-Benz AG, began using US generally accepted accounting principles with its New York Stock Exchange listing in 1993.
In 2000, Volkswagen's sales rose 13.8 percent to US$73.4 billion under German accounting standards, and profit rose 150 percent to a record US$1.76 billion. Under IAS, Volkswagen earned US$2.6 billion in 2000.
When Volkswagen restated its 2000 results under IAS standards in March, it failed to provide year-ago comparisons. It did the same yesterday when it released second-quarter results.
That leaves analysts unable to judge the long-term impact of the standards on Volkswagen's finances until next spring, when 2001 figures are released.
In a statement to the Frankfurt stock exchange, Volkswagen reiterated its forecast that it will raise full-year profit as rising foreign sales offset falling domestic demand.
Piech was trained to worry more about shock absorbers than stock prices. One of the few engineers still running a major automaker, Piech comes from a long line of innovators.
His grandfather Ferdinand Porsche designed the original Beetle as the ``People's Car'' during Adolf Hitler's Third Reich. His father, Anton Piech, ran Volkswagen during World War II.
Piech started as an engine designer at Porsche, where he built the 917 sports car that revived the company by winning the 1970 endurance race in Le Mans, France.
When he jumped to Volkswagen's Audi division in 1972, he revived it with such improvements as permanent all-wheel-drive sports cars. At Volkswagen, he introduced a system of interchangeable chassis to cut costs and speed product development.
"He's a genius. He's probably the best or one of the best engineers in the history of the automobile," says Pierre-Alain de Smedt, executive vice president of Renault SA and until 1999 chairman of Sociedad Espanola de Automoviles Turismo SA, or Seat, Volkswagen's Spanish carmaker.
Productivity lacking
Piech's engineering skills have not translated into superior productivity. Volkswagen's Passat factory in Emden, Germany, was Europe's least productive factory last year, building an estimated 27 cars per employee, according to World Markets Research Centre, an automotive forecaster in London. The European leader, Nissan Motor Co's factory in Sunderland, England, built 101.
Volkswagen's productivity lags in part because unions limit the workweek in most cases to 28.8 hours.
Volkswagen has been able to offset its low productivity with prices that are 11 percent higher in Germany than the European average, but that disparity will likely shrink in coming years, says Gregory Melich, a Morgan Stanley Dean Witter & Co analyst.
Volkswagen generates a return of 3.2 percent on capital employed compared with 7.4 percent for Renault and 9.3 percent for BMW, according to Keith Hayes, a Goldman, Sachs & Co analyst.
Piech acknowledged the problem at the shareholders meeting in June. "We need to grow profits and achieve a higher return on the capital employed to increase the value of the company," he said.
Piech presides over Volkswagen from a 13-story redbrick administration building in Wolfsburg, a town of 123,578 people about 140 miles west of Berlin. His factory in the town employs 50,000 people.
When Piech took over in 1993, the automaker was on track to lose US$1.2 billion. That year, Volkswagen would sell only 49,533 vehicles in the US -- one tenth as many as in 1970.
Seven years later, in 2000, Volkswagen sold 355,479 vehicles in the US and was preparing to launch a minivan and a sport utility.
Volkswagen grew in large part because of Piech's knack for listening to customers. By sending engineers from its Mexico factory to US showrooms, Volkswagen heard about and fixed flimsy cup holders on the Jetta compact and streaky wiper blades on the New Beetle.
Those measures have helped cut customer complaints by 25 percent since 1999 -- faster than any automaker, according to market researcher J. D. Power & Associates.
Piech also attracts more young buyers in the US than anyone else. This year, 46.2 percent of Volkswagen's US buyers are younger than 35 years old, according to J. D. Power. At Honda Motor Co, 35.3 percent are younger than 35 and at General Motor Corp's Chevrolet unit, only 27.8 percent are in that age group.
Company research turns up the features that customers most cherish. Volkswagen's New Beetle, costing as little as US$17,325, comes with enough cruising power for the German autobahn, standard side air bags and dashboard vents that close completely.
Such luxuries are usually found on cars like the BMW7 series, which costs four times more, says Jim Hall, an automotive analyst at AutoPacific Group. "Volkswagen has the only European cars that average people in the US can afford," Hall says.
In the US, Volkswagen found a way to freshen the company's image by aiming its marketing at people who had owned a Beetle or a Microbus van during the 1960s.
Many of these former hippies, and the urban bohemians who followed, still wanted cars that were affordable, reliable and different.
"The people who buy our cars feel most advertising is full of baloney," says Alan Pafenbach, creative director at Arnold Worldwide Partners, Volkswagen's US advertising agency. "To approach them with anything that is less than honest, that does not make the world seem like it is, would be a bad tactic."
The ad agency also developed commercials with a wry tone that has appealed to under-30 buyers. A recent Volkswagen ad for the New Beetle dryly notes, for example, that the dashboard is wide enough to hold 13 statuettes of gyrating hula dancers.
Popular in us
Marketing efforts on US college campuses have helped boost the brand with younger buyers as well. In April, for example, Jacqueline Reasor, a freshman at Kent State University in northeastern Ohio, and 28 other students stuffed themselves into a New Beetle in a Volkswagen promotional stunt near the hilltop where four student war protesters were killed in 1970.
Reasor, 19, then joined hundreds of students at the Volkswagen display playing video games and singing karaoke.
"They're not trying to impress us by saying they won `Car of the Year,'" Reasor says. "They just want us to have fun." Contrast that sensitivity to the consumer with Volkswagen's indifference to shareholders. Up until last year, Volkswagen refused to say in advance when it would release earnings, and it released them as late as 11pm
It still won't specify financial results for each quarter, but it issues cumulative results for up to four quarters at a time. Its reports aren't specific enough for a region-by-region analysis of how each sales and manufacturing unit is performing, says WestLB's Ellinghorst.
In a sense, Piech takes good care of his most important shareholder, the state of Lower Saxony, which holds an 18.6 percent stake. With its suppliers, Volkswagen employs 28 percent of all workers in the state.
In 1960, when Volkswagen went public, Germany passed the so-called Volkswagen Law, which prohibits any shareholder from wielding more than 20 percent of voting rights regardless of the size of the shareholder's stake.
The law also made it impractical for German banks to bundle individual votes to exert influence -- an exception to Germany's proxy voting law.
"The true value of Volkswagen would be reflected in its share price if the VW law were abolished," says Hans-Peter Schupp, who manages about 500,000 Volkswagen shares at Julius Baer Kapitalanlage AG in Frankfurt. "Because of the VW law, management doesn't have the pressure on it that it otherwise would have." Lower Saxony opposes abolishing the Volkswagen law, says Heinrich Aller, the finance minister. He says Lower Saxony doesn't get involved in Volkswagen business policy and didn't block the opening of factories abroad.
"When it comes to Volkswagen, our top priorities are employment and tax revenue in Lower Saxony," Aller says. He lists Volkswagen's financial health as a third-place priority.
Volkswagen also wields influence in Berlin. When Gerhard Schroeder, who was Lower Saxony's minister president from June 1990 through September 1998, became chancellor, he changed the chancellor's official car from a Mercedes to an Audi.
Every year, Volkswagen workers pay an estimated US$67 million in dues to IG Metall, Germany's metal- and autoworkers union and one of Schroeder's Social Democrat Party's biggest supporters.
In May, Schroeder reversed Germany's stance and opposed a European Commission proposal that by 2006 would have made it easier for companies to have been acquired through hostile bids. The European Parliament rejected the commission's takeover proposal on July 4.
"Volkswagen is good at working within this complicated system of relations," says Juan Llorens, who was president of Seat from November 1993 to December 1996.
"That, of course, might cause problems with efficiency and return on investment, but it gives safety in continuity.''
Peter Guntermann, who manages the US$14.5 million Oppenheim Select fund at Oppenheim Kapitalanlagegesellschaft mbH in Cologne, says Volkswagen's defensive posture weighs on its market value and makes it even more vulnerable.
"The best defense against a takeover is a high stock price. Because of the VW law, VW's stock price is lower than it should be," says Guntermann, whose fund includes about 14,350 Volkswagen preferred shares.
Ulrich Hocker, director of the German SdK Small Shareholders Association, says the EU and investors will eventually pressure Volkswagen to become friendlier to shareholders. Hocker noted that when Volkswagen forecast record earnings this year on June 7, its share price barely budged, rising less than 1 percent.
``Even good news doesn't give the shares any traction,'' says Hocker, whose association's membership doubled in five years.
Profits, not investor politics, are foremost on Piech's agenda at the moment. Through May from a year earlier, European auto sales were down 3.3 percent, and in the US -- Volkswagen's largest foreign market -- they were down 5.9 percent. Production cuts caused by power shortages in Brazil aren't helping.
Piech is trying to offset such problems with cost cuts worth DM1 billion to DM2 billion (US$448 million to US$897 million) this year.
He's negotiating with unions for longer working hours and may reorganize production under three groups: luxury cars, mass-market cars and sport-utility vehicles.
He plans to push the company upscale in the next five years with 67 new models, including some of the most expensive cars in Volkswagen's history. For 2002, he plans a 500-horsepower sedan aimed at the S-Class sedan from DaimlerChrysler's Mercedes unit. For 2003, he plans a US$1 million, 1,001-horsepower supercar from Bugatti.
He's also seeking acquisitions or alliances with heavy-truck makers. Last year, he spent US$1.28 billion for an 18.7 percent share in Scania AB, Europe's third-largest truck maker. He was also named Scania's chairman.
Volkswagen opened an investor relations office in London last year. Since then, its executives have met with analysts and investors more regularly.
"We have changed our attitude in terms of investor relations," Jens Neumann, a member of the management board, said in January at the Detroit Auto Show.
Not all investors are impressed. "Volkswagen's shareholder policies are impossible," says Heino Drieling, a Volkswagen shareholder who's now retired after working in the company's finance department from 1965 to 1971.
"The company doesn't care about shareholders because it doesn't have to. The only ones who count are the state of Lower Saxony, the unions and the Social Democratic Party." Change may come more quickly if Bernd Pischetsrieder, chief executive of BMW from 1993 to 1999, succeeds Piech as Volkswagen chief executive next spring when Piech retires.
Piech hired Pischetsrieder, 53, to run Seat last year.
"At BMW, Pischetsrieder was more open with investors than Piech has been at Volkswagen. He tried harder to explain his strategy," says Arndt Ellinghorst, the WestLB analyst.
Still, Piech will retain considerable clout after retiring. He'll likely serve as chairman of Volkswagen's supervisory board, which hires and fires senior executives, and will remain chairman of Scania.
That may mean that Volkswagen will still be a leader in finding out what customers want and giving it to them. It could also mean that the company will continue to be far less sensitive to investors' needs.
ROLLER-COASTER RIDE: More than five earthquakes ranging from magnitude 4.4 to 5.5 on the Richter scale shook eastern Taiwan in rapid succession yesterday afternoon Back-to-back weather fronts are forecast to hit Taiwan this week, resulting in rain across the nation in the coming days, the Central Weather Administration said yesterday, as it also warned residents in mountainous regions to be wary of landslides and rockfalls. As the first front approached, sporadic rainfall began in central and northern parts of Taiwan yesterday, the agency said, adding that rain is forecast to intensify in those regions today, while brief showers would also affect other parts of the nation. A second weather system is forecast to arrive on Thursday, bringing additional rain to the whole nation until Sunday, it
CONDITIONAL: The PRC imposes secret requirements that the funding it provides cannot be spent in states with diplomatic relations with Taiwan, Emma Reilly said China has been bribing UN officials to obtain “special benefits” and to block funding from countries that have diplomatic ties with Taiwan, a former UN employee told the British House of Commons on Tuesday. At a House of Commons Foreign Affairs Committee hearing into “international relations within the multilateral system,” former Office of the UN High Commissioner for Human Rights (OHCHR) employee Emma Reilly said in a written statement that “Beijing paid bribes to the two successive Presidents of the [UN] General Assembly” during the two-year negotiation of the Sustainable Development Goals. Another way China exercises influence within the UN Secretariat is
LANDSLIDES POSSIBLE: The agency advised the public to avoid visiting mountainous regions due to more expected aftershocks and rainfall from a series of weather fronts A series of earthquakes over the past few days were likely aftershocks of the April 3 earthquake in Hualien County, with further aftershocks to be expected for up to a year, the Central Weather Administration (CWA) said yesterday. Based on the nation’s experience after the quake on Sept. 21, 1999, more aftershocks are possible over the next six months to a year, the agency said. A total of 103 earthquakes of magnitude 4 on the local magnitude scale or higher hit Hualien County from 5:08pm on Monday to 10:27am yesterday, with 27 of them exceeding magnitude 5. They included two, of magnitude
Taiwan’s first drag queen to compete on the internationally acclaimed RuPaul’s Drag Race, Nymphia Wind (妮妃雅), was on Friday crowned the “Next Drag Superstar.” Dressed in a sparkling banana dress, Nymphia Wind swept onto the stage for the final, and stole the show. “Taiwan this is for you,” she said right after show host RuPaul announced her as the winner. “To those who feel like they don’t belong, just remember to live fearlessly and to live their truth,” she said on stage. One of the frontrunners for the past 15 episodes, the 28-year-old breezed through to the final after weeks of showcasing her unique