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... itron Chief Executive Jean-Martin For. No matter: Brussels is adamant. The new EU rules could knock prices down a further 1 % to 2 %, analysts say, by reducing wide price differentials within Europe.
All these pressures are bearing down on middle-market players, such as Fiat, VW, and Renault. These and other volume manufacturers accounted for 70 % of last year's sales of 14. 8 million vehicles. Overall, investment firm Schroder Salomon Smith Barney estimates the operating margins of these manufacturers will shrink below 2 % of sales this year. Even Peugeot, which reported a 25 % rise in 2001 operating income, will be lucky to show a profit gain. Carmakers with aging model lineups are finding it especially tough. Renault has a big handicap in 2002 because its main contender in the popular compact segment, the Megane series, which starts at $ 12, 760 and includes the curvaceous Scenic compact minivan, is six years old. "That has reduced the line-up's attractiveness and had to be offset by marketing efforts, " says Renault CEO Louis Schweitzer.
VW's Golf IV, meanwhile, is showing its age. For years the most popular car in Europe, the Golf is seeing its sales slip as it enters the last year of its model life. Bringing up the rear are Fiat (FIA) and Opel. The companies teamed up in 2000 to cut costs by combining parts purchasing and developing common platforms. But the big benefits of their joint efforts will not materialize until 2006. Meanwhile, they are attempting to slim down further.
Fiat said in December it would close 18 factories, shed 6, 000 jobs, and sell some assets. Opel announced plans in June to pare back output by 16 % and cut thousands of jobs. Its powerful unions, however, have put up fierce resistance. After fits and starts, negotiations between Opel's management and the unions resumed on Feb. 8. Analysts say the two marques' difficulties may spur the next big deal: the sale of Fiat Auto to GM. The U.
S. auto maker acquired a 20 % stake in the Italian caretaker in 2000, and the Fiat group has an option to unload the rest. There is a silver lining to the cloud hanging over the industry. Analysts and car executives believe the profit squeeze will give them the excuse they need to slash away at production capacity, which exceeds demand by at least 15 %. "There's still a lot of room for cost-cutting and rationalization, " says Klaus Martini, head of European equities at Frankfurt fund manager DWS. And room for more pain, more discounting, and more red ink. Who's behind the Wheel at Audi?
The industry expects a bloodletting before VW Chief Pich exits Audi CEO Franz-Josef Paefgen doesn't seem like a candidate for the ax. In the first nine months of this year, Audi, Volkswagen's (VLKAY) premium auto brand, was the group's most profitable unit by far, contributing more than a fourth of earnings. It boosted European sales by 10 % in the same period, capturing a record 3. 6 % of the sluggish market to overtake rival BMW in Europe. And with the successful launch a year ago of the elegant, $ 29, 000, A 4 sedan, Audi looks set to clinch a sixth consecutive annual sales rise. That apparently isn't enough to satisfy Volkswagen CEO Ferdinand Pich, who ran Audi before being promoted to the top spot at VW.
Paefgen is likely to be swept away in a final bloodletting at the Volkswagen group before Pich turns over the reins to his successor, Bernd Pischetsrieder, on Apr. 17, industry insiders say. The talk is that Paefgen's job will go to research and development chief Martin Winterkorn, one of Pich's loyal lieutenants, as part of a reorganization of the group's nine brands. It's unclear whether there will be room for Paefgen, 55, anywhere in the group. Neither Paefgen nor VW is commenting on the rumors, but officials say a reorganization might be approved as early as the supervisory board's next meeting on Nov. 23. This little piece of corporate intrigue gives VW watchers some interesting clues about the caretaker's future. First is the question of Pich's role after he steps down as CEO and takes up the nonoperating role of supervisory board chairman.
The speculation in German car circles has always been that Pich would put his trusted aides in key positions before his departure, to make doubly sure VW's progress adhered to his own precise vision. Winterkorn's promotion would confirm this thesis. OVERDUE. The second conclusion to be drawn from this likely changing of the guard is that Pich finally is coming to grips with problems he helped to create. A new brand strategy for all of VW -- not just Audi -- is long overdue. Unfettered competition among the auto company's 60 -plus models has hindered VW's potential.
In particular, the Czech-based, bargain-priced Skoda (DCX) cars have lured customers from VW and other marques. Pich plans to divide VW's car brands into two main groups, conservative and sporty. VW, Skoda, and the aristocratic Bentley brand will be in the conservative camp. Audi, Lamborghini (VLKAY), and the struggling Spanish brand Seat will make up the sporty set, expected to turn out sexy, head-turning models. Audi stands to gain from the reorganization.
Its A 4 faces stiff competition from VW's slightly less expensive Passat. Paefgen's defenders say he has been hamstrung by Pich's own maneuvers in favor of the VW brand. Case in point: Volkswagen will launch a luxurious, high-performance VW-badged car, code-named D 1, next spring in Europe, before replacing the seven-year-old, $ 64, 000 Audi A 8 sedan. Industry sources say a new A 8 had been scheduled for launch in spring, 2002, but has been delayed by a year -- perhaps to give the $ 65, 000 D 1 a clear shot at capturing customers. Volkswagen officials riposte that the D 1 is chasing the thousands of buyers each year who leave the VW brand to move upmarket but opt instead for BMWs and Mercedes (DCX). "The clientele for the D 1 and A 8 are different, " says Thomas Bible, sales chief at the Audi Zentrum Stuttgart dealership. VW tends to attract customers who are looking for traditional, family cars, while Audi evokes sporty, technologically innovative cars. "They won't get in each other's way. " But car analysts say the D 1 will cannibalize the next-generation A 8. "I can't think of another product that attacks it more directly, " says Christopher Will at Lehman Brothers in London.
Pich's maneuvering doesn't mean the VW chief isn't plenty ambitious for Audi, which he ran from 1988 to 1993. Earlier this year, he lambasted Paefgen for the marque's bland product offering. Paefgen's advocates in the industry point out that recent Audi concept cars, such as the Steppenwolf coupe and the spacious Avantissimo station wagon, show that Audi designers have the kind of flair customers crave. True or not, Pich still gets the final say. Volkswagen's Pich: The Road Not Taken Volkswagen (VLKAY) Chief Executive Ferdinand Pich has turned out some of the most technologically advanced mass market cars in the world, but the man himself is of an earlier vintage. Once almost all German manufacturers were led by Pich-like figures, passionate and brilliant engineers who believed that, if the product was superb, all else would follow.
Thus Pich, 64, can sketch a new Audi drive system on an envelope, yet seem indifferent to marketing needs or shareholders preferences. Thanks to VW's partial government ownership, Pich has so far been a CEO who could afford to pay more attention to stakeholders than shareholders. But Pich is last of the breed. German corporate peers such as Siemens have since learned the painful downside of his kind of engineers' culture. In the mid- 1990 s, Siemens fell behind in businesses like mobile communications because it insisted on building state-of-the-art products that nobody was willing to pay for. Siemens and other German behemoths have since learned to let marketing people contribute to the design process.
And they learned that shareholder trust comes in handy when you want to raise capital for growth and acquisitions. Granted, the car business is different. As VW's gains in market share demonstrate, buyers appreciate the quality improvements forced through by Pich and are willing to pay more for them. Yet he's wrong to put marketing in the back seat and shareholders in the trunk. In the end, there's no conflict between them. They " re all part of one team.
Just look at rivals BMW and DaimlerChrysler (DCX), which manage to combine engineering excellence with sublime marketing and at least a degree of common courtesy toward investors. Pich deserves tremendous credit for one of the great automotive turnarounds in history. He took over the top job in 1993 and resurrected VW quality while turning the Golf, Passat, and Audi brands into all-time best sellers. Certainly in the big U. S. market, Pich gave new life to VW and made it into one of the top players in recent years.
The relaunch of the new Beetle was a particularly brilliant move and captured the imagination of young American buyers. If the company proceeds with a relaunch of the VW Microbus, it will probably extend its great success in tapping into the nostalgia for the 1960 s in America. The headstrong Pich may never change his ways. But as he prepares to give up the CEO's job within a year for semi retirement as supervisory board chairman, this much is possible: Pich could confound expectations and allow his successor (most likely ex-BMW CEO Bernd Pischetsrieder) to lead Volkswagen into a new era.
It will be tough for a hands-on guy like Pich to let go. And he should continue to contribute his engineering talent. But if he really wants to preserve his legacy, Pich shouldn't impose his legacy on his successor. Challenges Facing VW's Next Boss A slowdown in the U. S. and European car markets -- Nimble archrival's in Europe -- PSA Peugeot Citron, Ford of Europe, and Renault -- are closing the quality gap -- Fierce competition for the Chinese market -- Luxury auto makers such as BMW and Mercedes are moving downmarket into VW's core segments -- Icy relations with investors -- Possible interference from retiring CEO Ferdinand Pich, who will probably chair the supervisory board Volkswagen Ferdinand Pich has powered Volkswagen to the top slot in Europe.
Now he is stepping down, and troubles are building. What's next? Volkswagen CEO Ferdinand Pich has every reason to feel satisfied. The Austrian engineer and scion of one of Europe's most noted automotive dynasties is less than a year from retirement as chief of the German caretaker. As he looks back, Pich can boast of one of the great turnarounds in automotive history. Since taking the top job at the Wolfsburg headquarters in 1993, his engineering brilliance has helped resurrect Volkswagen quality and turn models such as the Golf and Passat into all-time best-sellers.
Pich's relaunch of the Beetle has cemented VW's hold in the U. S. market. Only VW has successfully revived a communist-era caretaker, Skoda of the Czech Republic.
Even now, as the global car industry lurches through a stressful year, VW expects profits to grow: In 2000, they more than doubled, to $ 1. 8 billion, on sales of $ 76 billion. And before Pich steps down, VW will launch his pet project, ...
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