Bernd Pischetsrieder inherits record earnings as Volkswagen's new CEO, but he also faces some complex problems. To begin with he has to fix a small-car strategy that isn't working.
Ferdinand Piëch delivered E2.9 billion in profits on all-time high revenues of E88.5 billion in 2001, his final year as management board chairman.
But Piëch's 54-year-old successor, the former head of BMW, is now facing a sales slump. And Pischetsrieder must move quickly to coordinate the two new car divisions that he and Piëch formed last year.
At the company's shareholder meeting last week, Piëch was widely praised for his 30 years with the group, including the last nine as CEO. But shareholders also welcomed Pischetsrieder.
'In light of desired future profitability, Pischetsrieder brings a Bavarian sense of shareholder value to Wolfsburg,' said one shareholder who spoke.
VW's share price has languished under Piëch, even though sales and earnings have been strong.
'We expect measures to be taken to keep our investments interesting,' said Bernd Wilken, a Deutsche Bank executive who represented owners of 6.7 million ordinary VW shares.
Volkswagen's group sales in Europe declined by 9.5 percent to 676,259 units in the first quarter, compared with a 4 percent drop for the western European market as a whole. The VW brand was down 13.5 percent, to 379,269 units.
Meanwhile, sales at rivals PSA/Peugeot-Citroen and Renault increased by 4.3 and 2.8 percent respectively in the first quarter.
The VW group lost a full percentage point of market share in the quarter, dropping to 17.4 percent.
'Automotive markets ... are anything but satisfactory, and this applies in particular to western Europe, where the German market remains weak,' said Pischetsrieder.
German sales fell 4.3 percent in the first quarter to 798,521 units.
Pischetsrieder has other problems, too. VW is weak in small cars, which makes it vulnerable as sales of its core Golf and Passat models come under pressure near the end of their life cycles.
The Lupo, introduced in 1998, has been a disappointment. Last year, sales of VW's smallest car were just over 82,000 units, down from 97,000 in 2000. Sales of the Seat Arosa equivalent were 23,000 last year, down from a peak of 49,000 in 1999.
In the same 3500mm mini category, Renault sold 163,000 Twingos last year, even as the model is nearing the end of its cycle. Sales of the Fiat Seicento, one of the oldest designs on the market, were 147,000 in western Europe in 2001.
'People don't like the Lupo, partly because it is too expensive,' said one German VW dealer. 'It is a difficult car to sell.'
Volkswagen is under added pressure now that PSA and Toyota plan a joint venture in the small-car segment. The joint-venture plant in Kolin, Czech Republic, will have annual capacity for 300,000 units starting in 2005.
VW executives are even considering whether to replace the Lupo and Arosa. 'The cars do not have a great future with such low sales figures,' a VW source said.
The larger Polo has long been an important volume model for VW, but has lost sales in the last five years. In 1997, 536,000 Polos were sold. Last year the total was 328,000, including some of the all-new Polo.
The Polo's decline is partly blamed on the success of the lower-priced Skoda Fabia, which is based on the same platform. But Fabia sales have also dropped recently in western Europe.
Combined sales of the Fabia, Polo and Seat Ibiza are below PSA's offerings in the same supermini segment. The Peugeot 206 is the class leader and much is expected from Citroen's new C3.
The Golf, Europe's longstanding bestseller, is also under pressure. The Golf was outsold in Europe by the 206 in the first quarter.
But a new Golf arrives next year and the model range will be extended with a compact minivan version late this year and a car-derived van, the Stadtlieferwagen, in late 2003 or early 2004. The Stadtlieferwagen will compete with the successful Citroen Berlingo and Renault Kangoo.
Analysts expect VW group sales to drop below 5 million this year, and remain stable in 2003.
'That is typical for VW when the Golf is at the end of its life cycle,' said Phillip Rosengarten, senior analyst at DRI-Wefa in Frankfurt. 'But when the new Golf is in place with all its new versions, VW group sales may reach 5.5 million in 2004.'
VW's worldwide group sales were 5,107,142 in 2001, down from 5,165,046 in 2000.
Meanwhile, despite good reviews for technical innovation, sales of Audi's smallest car, the A2, are still slow. Audi sold 52,000 A2s in 2001 compared with installed capacity for 60,000 in Neckarsulm, Germany.
Will next A2 be a Seat?
The recent addition of a sportier version with a fuel-efficient, 1.6-liter, direct-gasoline injection engine is expected to help A2 sales. But insiders say the A2 won't have a successor - at least not under the Audi brand. The replacement may be a Seat. And the advanced, but expensive, aluminum body structure is not expected to survive.
VW is still struggling to develop brand strategies for its two new divisions - VW/Skoda/Bentley, and Seat/Audi/Lamborghini.
'We should have settled it by now, but many aspects are still under consideration,' a VW source said. 'It could be four to six weeks before we have it finalized. The process of defining things is still flowing.'
The key issue is how to synchronize model and image strategies.
In particular, analysts say the company needs to better define the roles of Volkswagen and Skoda, since almost all their models overlap.
'VW cannot differentiate the models, but they should create different images for VW and Skoda,' said Rosengarten. 'The challenge for VW lies in developing a premium image for VW and a more volume-focused image for Skoda.'
The strategy for Seat, Audi and Lamborghini is further developed. Seat's range ends with the Golf-based Toledo sedan, while Audi's begins with the A2. But Audi has no Toledo equivalent and the A2 has no Seat counterpart.
The TT coupe and roadster are also concepts exclusive to Audi. The only overlap is the Seat Leon and Audi A3, but the two models have clear image and price differences.
Still, Pischetsrieder said recently 'it may take 18 months' for the full scale of the Seat/Audi/Lamborghini strategy to take shape.
As the brand directions are worked out, insiders expect further changes in senior executive jobs.
'Top management wants to continue to work with team members they know,' a VW spokesman said.
For instance, former VW product development boss Martin Winterkorn, who replaced Franz-Josef Paefgen as CEO at Audi, worked closely with Werner Wilhelm and other top VW engineers. Most recently, Wilhelm was project leader on the new high-end VW Phaeton.
'I would love to work with Wilhelm again,' Winterkorn said recently.
And Pischetsrieder is trying to find a replacement for VW's high-profile communications boss Klaus Kocks, who resigned last autumn.
Volkswagen even canceled its annual global public relations conference in May because no successor has been found.
'Pischetsrieder needs a good right ear,' said a spokesman. 'But he still has not found the right person as his group communications manager.'