Müllering VAG (Part 2): Too Big To Fail?

The words may be different, but the tune is the same: despite a great many statements to the contrary, the message sent out by VAG management is still one steeped in technocratic arrogance.

Germany Volkswagen
Matthias Müller (CEO) and Bernd Osterloh (VAG shop chairman) having a laugh at anonymous man’s choice of tie, Photo (c) manufacturing.net

With the press already on the Volkswagen big guns’ heels, Matthias Müller et al will now have to face their second most powerful opponent: the mighty work council. VAG is a special company, not just because it accommodates such a vast number of car brands (12) or because of the number of people it employs (almost 600.000). The most peculiar element of VAG is its ownership structure. For it is neither semi-state owned nor a family run business – or both at the same time, depending on one’s point of view. There are also ‘normal’ shareholders – what with the AG in VAG standing for Aktiengesellschaft (public limited company) – but it is obvious that one needs to have either the state of Lower Saxony or the mighty Porsche/Piëch clan standing behind oneself (or, ideally, both) if one intends to get things moving in Wolfsburg.

But it’s not just these two parties which are heavily, shall we say, influencing VAG’s management. The state of Lower Saxony’s main aim, at least on par with ensuring VAG’s financial wellbeing, is to ensure high employment at the company’s motherland factories. This unites whoever may be elected the state’s prime minister with VAG’s shop chairman, whose intentions are broadly similar, as well as with the incumbent head of Germany’s IG Metall union, who is traditionally awarded membership of the board of directors.

So what’s good for employment is basically good for the unions and Lower Saxony. In contrast, rich earnings should supposedly be the Porsche/Piëch family’s main agenda, one would believe. And yet, there has been a unique collaboration between these three parties that has been ongoing for the past two decades – including the odd disruption (such as Wendelin Wiedeking’s plan to take over VAG, which was foiled by an alliance of convenience forged by the machiavellian Ferdinand Piëch).

But in general, all was well, as long as VAG didn’t become too efficient (so no painful redundancies at the German factories) and Piëch was allowed to indulge in his own vision of the future of the automobile (which meant luxury brands and, yes, diesel engines). Even a sleazy affair revolving around a former VAG shop chairman, union officials’ regular visits to brothels all over the globe and a Brazilian mistress that was getting paid by VAG for obscure services couldn’t bring an end to this agreement.

Now, what with diesel at the crossroads and Piëch alumnus Martin Winterkorn presumably hiding in some Swabian mediaeval castle, the VAG accord is being jeopardised like never before. Some of this disruption could be interpreted as being in keeping with new CEO, Matthias Müller’s promises to establish a new corporate culture at VAG, an environment in which both open-mindedness and critical thinking are allowed to thrive. But the truth looks very different indeed.

The Wolfsburgian battle lines are many and often intertwined. The work council is obviously most interested in keeping both domestic employment and wages high. Management, on the other hand, is hoping to find a way to maintain a healthy r&d budget, despite the heavy anticipated and acute financial losses. Moreover – and most damningly in the current climate – a great many members of the board are unwilling to do without this year’s boni, to the great disdain of the press, workers and shareholders.

The seemingly absurd fact that VAG is intending to pay any kind of bonus at all is actually due to German legislation, which had been changed in the wake of 2008’s financial crisis. Since then, boni paid by German businesses are to be evaluated based not on the past year’s performance, but the previous two to four years’ figures. Some managers therefore believe that the current crisis does not relate to those past achievements that are now supposed to be honoured. New chairman of the supervisory board, former VAG CEO, Hans Dieter Pötsch, is even entitled to an incentive to the tune of ten million Euros, as some of his pension rights are being forfeited as a consequence of his move to the supervisory board.

A compromise has just appeared on the horizon: Matthias Müller et al have allegedly proposed cutting their boni by 30%. The trouble is that this only relates to the part of the bonus that’s based on last year’s performance. The significant rest remains untouched.

Ironically, the situation isn’t all that different when looking at the workers’ demands. VAG is a notoriously overstaffed enterprise (Toyota, for example, employs about half as many people as Volkswagen) and workers are among the best-paid in the industry.

VW Passat Estate: VW UK

Which leads to Herbert Diess, a new face at VAG, who had incidentally been hired before the diesel fumes started to stink. Diess, a former BMW CEO hopeful, is leading the Volkswagen brand, and is supposed to act in almost exactly the same capacity as one of his successors, Wolfgang Bernhard (who had arrived from what was still DaimlerChrysler back in the day). Yet again, an outsider is tasked with blowing away the cobwebs and building up an even remotely modern corporate structure and cost basis at Volkswagen. And just like Bernhard, Diess has already made some powerful enemies within the VAG empire, which led to him offering his resignation to the workers council recently, on the basis of a perceived lack of trust in his person. His offer was declined, but the situation serves to highlight the difficulty of trying and not doing things ‘the Volkswagen way’ in Wolfsburg.

In the upper echelons, the Porsche/Piëch family also has an agenda of its own. Which is mostly about consolidation of power. The canny purchase of VAG shares once their prices had plummeted was one such move, but right now, the powers that be are very concerned about the prospect of dividends being held off as a consequence of the current crisis. This is not directly a financial concern on the Salzburg clan’s part, which doesn’t rely on this kind of payment. The worries are revolving around a clause in stock corporation laws that endows non-voting shares with additional rights if no dividends are being paid for a certain period of time. This would effect the Porsches/Piëchs to significantly lose influence over Volkswagen, which would be, one can presume, even more painful than negative fiscal consequences.

2015 Audi A6 - as unstylish as a car can be: nextcarreviews.com
2015 Audi A6 – as unstylish as a car can be: nextcarreviews.com

For the first time in years, the different camps’ aims are, sometimes severely so, at odds with one another. Ferdinand Piëch, ever the great puppeteer, will certainly make his move sooner or later to gain another party’s commitment to his cause, the price for which can only be guessed at present. But even he will find the current situation particularly taxing, especially as it is unthinkable that Piëch will once again be able to forge an alliance with the work council (as he had been the case when fighting against Wiedeking and, to a lesser degree, Pischetsrieder & Bernhard) in order to achieve his goal.

And all this is just the infighting. There’s still an ongoing crisis revolving around the corporate behemoth that needs all the attention it can get. Trust needs to be regained, the product range needs to be realigned, costs need to be saved and, above all else, a new corporate culture needs to be established. Yes, really.

2015 Skoda SuperbAll of these factors appear to be overwhelming the man who is charged with making the big decisions. Matthias Müller’s performance has thus far been lacking, to say the least. In his public statements, he has far too often contradicted himself to be considered a true reformer. There is still a sense that VAG believes it can get away with its misdeeds, possibly because there’s a feeling that the corporation is too big to fail. But so was GM, once upon a time. And even if there’s a feeling that the average car driver cares more about decent consumption figures and soft touch plastics than NOx emissions, the legal dangers, especially in the US, are simply immense.

Despite grand claims to the contrary, “weiter so“- a very German term that, at its worst, can stand for narrow-mindedness, arrogance and ignorance at the same time – seems to be the order of the day at VAG. “Weiter so” will not do. That is for certain.

Sources: Manager Magazin/Süddeutsche Zeitung/Die Zeit

17 thoughts on “Müllering VAG (Part 2): Too Big To Fail?”

  1. Great article, of the type that one used to enjoy in the industry section of TWBCM of yore. I had not realised that VW employed so many people, but with that kind of shareholder construct, it is not surprising. From a desk in the UK, it often seems that such a structure is a strength – longer term thinking based on less aggressive demands for shareholder return, lower costs of finance, in-built local political support, etc. But at a time like this, singularity of interest is vital and it seems like Muller is in a near impossible position, even if he were the most capable of general managers.

  2. Automotive News report cuts to bonuses. Frankly, the salaries of these people are large. Boni/bonuses are not entitlements – as the name suggests they are extra to the standard.
    Anyone and I mean anyone familiar with the Holy Roman Empire (800-1806) will see parallels in the way VAG is ruled.

    1. Yes, apparently both management and Mr Putsch have agreed to a cut (supposedly more than 30%), but the details have yet to be announced.

      The boni (I may have forgotten about most of my six years of Latin studies, but certain details stick) are actually part of VAG management’s contracts, hence the feel that they ‘earned’ them, regardless of the current situation. Of Martin Winterkorn’s record €16 million salary, only about €2 million constituted the fixed salary. The rest was part of the bonus scheme. Not that an annual €2 million would mean that he’d have to eat untoasted white bread with cold baked beans day in, day out, but in these echelons, the difference between ‘a lot of money’ and ‘a shyteload of money’ apparently counts for a lot.

    2. Kris. The usually harmonious editorial staff of DTW sometimes disagree over grammar. Only yesterday Richard and I (or me and Richard) were (or was) round the bike sheds trading blows, coming away none the wiser. My own take on ‘foreign’ words that are brought into a language, is that their use should follow the rules of the language into which they are imported, not the one they came from. Hence, I’d say that more than one bonus would be bonuses.

      That said, first, I’m sure that Richard would disagree and, second, I actually like the look of ‘boni’. So thank you anyway.

    3. Well, I also refer to more than one Airbus as Airbuses, rather than Airbi, as that’s a modern brand name that’s not related to Latin. However, as for bonuses or dilemmas… no, I’m sorry. I just can’t.

    4. And I do, indeed, talk of formulae, but I wouldn’t call my travails in questioning this issue travaux. So I think we can be pragmatic on this

    5. Absolutely, Sean. But not about the fact that Mr Auto Correct, Esq has chosen to turn Herr Pötsch into Herr Putsch. Which is almost as annoying as Wendell Wiedeking.

  3. A very illuminating piece, Kris. VAG’s ups and downs over the past years, particularly since the attempted takeover by Porsche, are very confusing to outside observers.

    In the UK, we do things so straightforwardly. Bike repairer makes car, starts company, gets big, merges with another one, gets into trouble, is taken over by the government then gets flogged off to a series of people who don’t really want it. and ends up being auctioned on Ebay for ten quid to four mates in a pub.

    The machiavellian world of Piech is so different from this and, until recently, it amazingly seemed to work. That the people involved can’t understand how they are now seen by outside observers suggests a certain hubris that could well end up badly.

    1. The paradox is that the Porsche/Piech clan only really established itself as THE big player among VAG owners in the wake of the Porsche takeover. Before that event, ownership had been far more widely spread, with the state of Lower Saxony being biggest single stockholder.
      What appeared like VAG taking over Porsche was, in fact, VAG buying the Porsche brand, as well as Porsche’s VAG dealership in Austria, from Porsche SE, the holding established for the intended VAG takeover, who in turn remained biggest VAG shareholder, but could now service its debts.

      Hence VAG in a sense paid for the Porsche/Piech’s purchase of VAG shares. A classic modus operandi of hedge funds, if you like.

  4. Kris and Sean: Simon Kearne refers always to Hackett & Cholmondely (1913 edition) for matters of style. I hope this resolves the problem of usage. Like Kris I prefer the classical plurals: addenda, referenda, (one) agendum and never “medias” or “the media is”.

    We do uphold certain standards here (but not related to spelling or matters of structure and syntax).

    1. ‘Boni’ would be correct if and only if bonus was the latin word for a form of financial reward as we understand it, which doesn’t seem to be the case. In other words it’s kitchen latin, which is probably why you won’t find any serious dictionary suggesting that the plural should follow the latin declensions.

    2. ‘Kitchen Latin’ – nice one, Laurent! And guess what: my French is even worse. Should you ever make it out of Smartalecistan, you’re invited to a lukewarm can of 1995 vintage Dr Pepper (shaken, not stirred) in Hamburg, Deutschland. Bisous!

  5. VW is paying their board members and their members of the supervisory board more than any other german car company. Even with a cap of 30 percent they will earn miore than the BMW people for example.

    Why? Ferdinand Piëch is convinced that a good income is part of the deal for being a loyal board member. Loyal in the sense of Ferdinand Piëch. And that is nothing else but very logical.
    That is his way to avoid another Bernhard Pischetsrieder – a man that was coming from another planet to the Volkswagen world and not willing to follow the Piëch-rules blindly.
    He did a good job and – nevertheless – he was fired soon, in 2006. But he was still on the VW payroll until 2012 – while making wine in Austria. Not too bad for Pischetsrieder, but a lesson for Piëch. So the board members after this fault was a group of obedient men, never ever tinking of trying to oppose to Mr. Volkswagen (and risking their very well paid jobs).

    So it must be very painful for them to accept a salary reduction. For them that is just not part of the deal.

    1. Very well put, Markus. Piech is notorious within the industry for not forgiving those who refuse his job offers. The Ferdl giveth and the Ferdl taketh away. It’s quite a cosa nostra-like system of favours and privileges, really.

      I don’t rate Pischetsrieder and Bernhard very highly, but they certainly were the last managers to try and establish something akin to a modern corporate structure at VAG. I wonder what happens when Pischetsrieder accidentally meets Carl H Hahn at the golf course. They’d certainly have some stories to share (albeit not with WiKo, mind, should he ever pursue any kind of hobby).

  6. Very interesting article. With our European perspective, it is easy to think that until Dieselgate all at VW has been Liebfraumilch and roses, weird Porsche reverse takeover excepted. The view is very different from the other side of the pond, however. In the US, VW has been on the slide for some time now, with dire reliability and poor customer satisfaction being constant bugbears. The US market Passat has been a disaster, and dealers were grumbling even before there was a whiff of Nox. Now thanks to Dieselgate VW USA is under a constant barrage of litigation by franchisees and customers, who are staying away in droves. Throw in the wobbly Chinese economy and two huge markets are now looking dicey for VW. God help them digging themselves out of the plop in the bear pit European market.

    1. Unlike Europe, the US simply won’t be won over by what VW considers its virtues. And rather to adapt the product accordingly, VW decided that what Americans really wanted was just a cheap VW, in any sense of the word. Rather than look at how Toyota, or even the Koreans are doing it, the typical Wolfsburgian arrogance resulted in ‘that’ll do’ cars. And the Americans, although they may not share our definition of quality, have an unerring instinct for detecting when they’re being short-changed.
      All things considered, VW simply considered themselves too smart for their own good.

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