VW and luxury? Pischetsrieder wants to remake the "people's car" company. Can it be done?

Chief Executive, The, March, 2004 by Herbert Shuldiner

Rolling into Volkswagen showrooms these days is a 17 1/2-foot-long, low-slung sedan that embodies all the engineering and technical know-how the German automaker can muster. Even though VW's motto was once "think small," there's nothing small about the new Phaeton, especially its price tag: up to $95,000. The Phaeton is designed to move the VW brand upscale and compete with luxury powerhouses BMW and Mercedes. But the lux car has not exactly sprinted out of the starting blocks, and that has unleashed a stream of criticism about VW's premium car strategy in the press and in investment circles.

VW Chairman Bernd Pischetsrieder is the target of most of this criticism even though he's carrying out a strategy that was authored by his predecessor. Pischetsrieder is feeling the heat for sinking profits, a declining share price, slow product sales and quality problems.

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This will clearly be a watershed year for Pischetsrieder and VW, Germany's biggest and the world's fourth largest car company. Yet the Volkswagen chief doesn't act besieged. In fact, he exudes confidence. He is intent on transforming the auto industry icon into a new kind of company, one that is less Eurocentric and directed from the top to one that is more inclusive of key managers in Germany and abroad.

Pischetsrieder's task is especially delicate because his predecessor, Ferdinand Piech, who handpicked Pischetsrieder for the job, is still very much in the picture as chairman of VW's supervisory board. In U.S. terms, that job is equivalent to a chairman of the board whereas Pischetsrieder's role is equivalent to CEO.

But Pischetsrieder, a tall, 55-year-old who sports a pepper and salt goatee, bristles at any suggestion that he is handcuffed by Piech's strategies that he inherited when he became VW's CEO in 2002. Pischetsrieder implies that he would have declined the job if he did not agree with Piech's foray into the luxury segment. "I would have chosen a different route to get to the objective," he acknowledges. "But there's no point in second-guessing."

As development costs go nowadays, the Phaeton did not consume a huge amount of capital to develop. During a tour of the company's factory in Dresden, Germany, where the Phaeton is assembled, a VW executive told reporters the project cost about $212 million. The company won't say how many Phaetons it must sell to break even, but initial sales targets are modest. The Dresden plant produces just 30 to 40 Phaetons every day. But there are plans to increase that to meet higher sales targets. In 2003, VW sold 6,000 Phaetons, mostly in Germany. Pischetsrieder forecasts about 15,000 Phaeton sales in 2004 worldwide.

Pischetsrieder argues that the Phaeton's significance transcends mere sales numbers. The car was conceived of as a challenge to VW's engineers to set a standard of engineering excellence for the entire brand. The many innovations in the Phaeton are expected to trickle down to the company's mass market models, pulling them up to premium status in their niches.

While the Phaeton may reinvigorate VW's image, Pischetsrieder is also attempting to make the company immune to the cyclical boom-and-bust pressures that prevail in the auto industry. Sitting in a private room overlooking VW's sprawling exhibit at the North American International Auto Show in Detroit early this year. Pischetsrieder said his main goal is to make VW "solidly weatherproof." That's his term for recession-proof. "Everything else is a tool for achieving that," he says.

The way to become ever more resilient, in his view, is to keep finding new markets. "What drives our company is a need to disperse sources of revenue," he says. "We need more products."

Pischetsrieder won't predict how long it will take him to achieve his targets. "You can't say when you've made it," he says, "You close one gap and you uncover another one," he says. "One of our chickens is always ill."

He says Volkswagen needs to overcome its existing mentality. "We only do proven things rather than take the risk of doing something new," he says. Another obstacle to overcome is VW's overly Teutonic approach to the marketplace. "You can make mistakes by aiming products only for Germans," he stresses. That's why he has put so much effort into seeking advice from executives in other markets.

For instance, sales in the U.S. fell last year after several years of surging volume. China has actually surpassed the U.S. as VW's second biggest market after Germany. "He not only lets us manage our markets, but he also asks us what we need," an insider says. He cites this as proof that VW has become less "Eurocentric." As Pischetsrieder circles the world, he's constantly seeking input on local vehicle opportunities for VW. "What do you guys in America need?" is a typical query from Pischetsrieder, the insider says.

Piech's neglect of U.S. trends tied the hands of executives who clamored for an SUV for more than a decade. After much pressure, VW finally produced the Touareg, which went on sale in the U.S. last year, SUVs account for more than 50 percent of the U.S. market. Without one, VW was competing in less than half the U.S. market.