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Volkswagen Needs New Control Structure, But Won’t Get It

Volkswagen Needs New Control Structure, But Won’t Get It.

“VW should be able to act as a world-wide global car manufacturer, but is more like a small-town operation based on the village of Wolfsburg”

Volkswagen is doomed to remain a mediocre company by global standards because of its weak management ultimately controlled by unions.

VW needs a structure geared to profitability which can take tough decisions, but unless the current diesel emissions scandal becomes an existential one, there appears to be little chance of that, thanks to the politics in its home state of Lower Saxony.

A key number which illustrates just how inefficient VW is compared with its rivals – Toyota, roughly the same size in terms of global sales, use 300,000 workers to produce about 10 million vehicles a year. VW needs 600,000.

Because of lax governance, VW is regularly embarrassed by scandals. In 2005 it was union perks and prostitution, in 2006 a corruption scandal involved bribes from suppliers, and there was a market manipulation investigation in 2009 after smaller Porsche tried to take over the much bigger VW.

VW is governed by a complicated structure which includes the Piech (the recently deposed chairman of the board was Ferdinand Piech) and Porsche families, union, and politicians from the state of Lower Saxony. Lower Saxony owns one-fifth of VW’s voting shares and labour leaders have half the seats on the 20-member supervisory board, the powerful body that appoints and dismisses members of management. Any important decisions, like building or shuttering of plants, needs a two-thirds majority on the board.

Fitch Ratings, in a statement which reflected the damage it felt might be done by the emissions scandal, put VW on its Rating Watch Negative.

“This crisis is also another illustration of our assessment of the company’s fairly weak corporate governance compared with its peers,”

Fitch said.

“Fitch considers VW’s corporate governance as weaker than that of its main peers. Key areas of weakness include the 20 per cent blocking minority in voting resolutions (held by Lower Saxony), conflicts of interest on the part of some board members including between Porsche and Volkswagen, and lack of independence and diversity at the supervisory board level. The latest emission test crisis is another illustration of inconsistent management control in some areas,” Fitch said.

Professor Ferdinand Dudenhoeffer, director of the Center for Automotive Research (CAR) at the University of Duisburg-Essen, has been banging this particular drum for some time. He wants a strong and independent chairman of the board to replace Piech who was forced out in April. VW stalwart Hans Dieter Poetsch already has the inside track on this job. Poetsch, currently VW’s finance chief, was nominated earlier this month and faces a shareholder vote in November to confirm his appointment.

German newspaper Handelsblatt was reporting that the idea Poetsch should stand aside is gaining currency with investors. Reuters reported about the close links of Matthias Mueller, VW’s new CEO, and Poetsch to what it called the “Piech-Porsche clan that controls Volkswagen”.

Dudenhoeffer believes VW needs a strong independent outsider like Wolfgang Rietzle, currently with Germany’s Continental, to do a job similar to Alan Mulally, who took over at Ford in 2006 from Boeing.

“VW needs a strong separation between unions and management. That means a strong personality as board chairman. VW should be able to act as a world-wide global car manufacturer, but is more like a small-town operation based on the village of Wolfsburg. Currently, there’s no chance of changing anything in Wolfsburg,” Dudenhoeffer said.

“The union doesn’t want to change and because of that VW has very weak profitability,” Dudenhoeffer said.

“Poetsch is an expression of the old system and it is precisely what VW needs to separate. With Poetsch we stay with the secret rulers of the VW Group – led by the all-powerful works council (union) head Bernd Osterloh. Osterloh dominates the Supervisory Board. Without his consent, Mueller can’t implement anything,” Dudenhoeffer said.

He points out that unlike most global car manufacturers, VW makes many of its components, rather than using outside suppliers which compete against each other to lower costs. That’s a cosy recipe for a bloated costs.

BMW and Mercedes aren’t hampered by VW-type constraints and are ultimately ruled by investors.

Dudenhoeffer doesn’t hold out much hope for change at VW.

“The labour unions and the government of Lower Saxony make it impossible to make VW into a normal company. A strong outsider like Reitzle would find that a strong coalition on the supervisory board would block him. There’s no hope if the political situation doesn’t change,” Dudenhoeffer said.

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