Will Corporate Drama Hurt Volkswagen?

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It may be spring, but love hasn’t exactly been in the air in the automotive world. Last month, a punch-up that the BBC famously described as “a fracas” led to the swift and shocking downfall of Top Gear, arguably the most popular TV show in the world.

Then the chief designer at Bentley went for Ford’s jugular when he accused the brand of stealing its design language for the upcoming Lincoln Continental. Just last week, the dominant Mercedes-Benz Formula 1 team seemed to crack under stress as driver Nico Rosberg publicly blasted teammate Lewis Hamilton for his aggressive driving despite a one-two victory at the Bahrain Grand Prix.

But these high-profile conflicts pale in comparison to what’s going on at Volkswagen, where a soap opera-worthy drama has unfolded that could have major repercussions for the company as it tries to overtake Toyota to become the world’s largest automaker.

Source: Volkswagen

In an interview with German newspaper Der Spiegel in early April, Ferdinand K. Piëch, the 78-year-old chairman of the Volkswagen Auto Group, stunned the automotive world by questioning the direction of the company and declaring that he’s “keeping his distance” from his hand-picked successor, Martin Winterkorn.

While this isn’t the first time Piëch has used the media as the launching point for a corporate shakeup, it is the first time that the famously conniving and autocratic industry titan has so badly miscalculated his position. Now, just two weeks after his opening salvo, Volkswagen’s board of directors have surprisingly stood up to the automotive legend, and after 51 years at Volkswagen AG, Piëch is out of a job.

Martin Winterkorn and Ferdinand Piëch. (Sean Gallup/Getty Images News)

Piëch is as close to automotive royalty as anyone alive today. A grandson of Ferdinand Porsche, his father ran the first Volkswagen factory, and he began his own career in the 1964 at his grandfather’s company. Trained as an engineer, he worked on both the original 911 and the Le Mans-winning Porsche 917.

He moved to Audi, where he spearheaded the development of the Quattro all-wheel-drive system, and he was instrumental in transforming it from a middling company into the luxury juggernaut it is today. He became chairman of  Volkswagen AG in 1993 and guided it as it acquired brands like Bentley, Lamborghini, and Bugatti, and grew into a corporate powerhouse. He was named Car Executive of the Century in 1999, and further secured his place in history by personally green-lighting both the Bugatti Veyron and the 313 mile-per-gallon Volkswagen XL1.

Now, just two years from the end of his final term as chairman, the mercurial Piëch had a change of heart about the direction of his company, and the man who famously said that he fires anybody who “makes the same mistake twice” had his sights set on Winterkorn — the man he controversially picked to succeed him.

Source: Bugatti

In 2006, Piëch mused to The Wall Street Journal about the “open issue” of extending then-Volkswagen brand CEO Bernd Pischetsrieder’s contract, implying that he had a poor relationship with union leaders and workers’ groups. The comments came at a time when Piëch and other members of the Porsche family were busy acquiring a larger stake in the company, and saw Pischetsrieder as an obstacle to their agenda.

The family favored the development of the group’s premium brands over mass-market cars and commercial vehicles, something that the embattled CEO disagreed with. After a public and protracted battle, Pischetsrieder resigned in November 2006, and Piëch promoted Winterkorn from Audi, his old company, to run the Volkswagen brand, eventually naming him as the next chairman of Volkswagen AG once his term was set to expire in 2017.

Source: Volkswagen

In the nearly nine years since Pischetsrieder’s ouster, Volkswagen under Winterkorn has seen growth every year, and his relationship with workers’ groups, union officials, and the other board members is sterling. Still, insiders believe that Piëch holds Winterkorn responsible for Volkswagen’s failure to grow in the American market, an issue that continues to hamstring the company even while it grows its global market share.

Within a few days of Piëch’s original comments, rumors began to emerge that he was positioning for Matthias Mueller, the CEO of Porsche, to replace Winterkorn, and had begun pressuring his relatives on the board to support him. But instead of the embattled Volkswagen chief being left out in the cold, for the first time, Piëch was the one on the outs.

To oust Winterkorn, Piëch would have needed a two-thirds majority of Volkswagen AG’s board to agree with him, and in a rare break from tradition, it didn’t happen. In a statement issued shortly after the article was published in Der Spiegel, Bernd Osterloh, the chairman of Volkswagen’s group works council, called Winterkorn “the most successful automobile manager on board,” adding: “Together with him we have written an unprecedented success story. … As far as we are concerned, his contract will be extended beyond 2016.”

Late last week, Volkswagen AG’s supervisory board further declared that Winterkorn is “the best possible CEO of Volkswagen” and recommended a contract extension when his current term is up in 2016.

Sean Gallup/Getty Images News

Despite being a global powerhouse, Volkswagen AG is still in many ways a family run company, with Piëch wielding the most power, owning 13.2% of it. Its board also has five members of the Porsche family, which is what he counted on for support in his latest power grab. But with 10 employee representatives, representatives from the State of Lower Saxony (where Volkswagen has its headquarters), and Qatar Holding, which invested in the corporation during the financial crisis in 2009, he was outmaneuvered and outvoted.

The end came for Piëch (and his wife, Ursula, also a board member) at a secret meeting in an airport just outside Volkswagen headquarters, where he was presented with an ultimatum: resign or be publicly fired by the company he helped build. Unsurprisingly, Piëch walked.

Source: Volkswagen

Despite the high profile of this shakeup, a fresh start like this could be just what Volkswagen needs to remain successful. Under Piëch’s autocratic leadership, halo projects from brands like Audi, Bentley, Bugatti, or Lamborghini often took resources and precedent over developing mass-market models for profitable markets like Asia and the United States.

While the Volkswagen group could overtake Toyota as global sales leader as early as this year, its razor-thin profitability margins remain a dangerous issue for the company. In 2014, the Toyota brand saw a return of 7.9% in profits, compared to the Volkswagen brand’s meager 2.9%.

Unlike the committee-based General Motors or Toyota, Piëch’s dictatorial rule over Volkswagen affected nearly every aspect of the company’s operations. Suddenly faced with the post-Piëch era, Volkswagen’s management has taken a united front in keeping the company stable. In a statement issued by the supervisory committee, it said, “The members of the Executive Committee have unanimously determined that in view of the background of the last weeks the mutual trust necessary for successful cooperation no longer exists.”

The committee placed Deputy Chairman Berthold Huber in charge for the interim, with plans to appoint Piëch’s successor (most likely Winterkorn) at a meeting on May 5.

For decades, Piëch’s single-handed determination helped make Volkswagen AG into the corporate powerhouse it is today. But Piëch has always been a liability. As several high-profile executives have found out over the years, standing up to Piëch usually leads to being fired, sapping the company of fresh ideas.

As a result, Volkswagen’s direction has usually been Piëch’s direction, for better or for worse. Free from Piëch’s top-down management style, the company could finally be ready to become the world’s largest automaker. With this fresh start, it might even be able to stay there for a while.

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