Volkswagen Aktiengesellschaft

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Volkswagen Aktiengesellschaft

Berliner Ring 1
D-38436 Wolfsburg
Germany
Telephone: (5361) 9-0
Fax: (5361) 9-2 82 82
Web site: http://www.volkswagen.de

Public Company
Incorporated: 1938 as Volkswagenwerk GmbH
Employees: 297,916
Sales: DM 134.24 billion (US$80.55 billion) (1998)
Stock Exchanges: Berlin Bremen Düusseldorf Frankfurt Hamburg Hanover München Stuttgart Basle Geneva Zürich Antwerp Brussels Luxembourg Amsterdam London Paris Tokyo Madrid Barcelona Bilbao Valencia Milan
NAIC: 336111 Automobile Manufacturing; 336112 Light Truck and Utility Vehicle Manufacturing; 421110 Automobile and Other Motor Vehicle Wholesalers; 522291 Consumer Lending; 532111 Passenger Cars Rental; 532112 Passenger Cars Leasing; 331419 Primary Smelting and Refining of Nonferrous Metal (Except Copper and Aluminum)

Volkswagen Aktiengesellschaft, a company born in the shadow of Nazism, rose to become the world’s third largest automobile company. It produced 4.6 million vehicles annually in the late 1990s to control 11.5 percent of the global market. Volkswagen has long been the industry leader in Germany, and it claimed the top position in European sales with a 17 percent market share. But the company also led the trend among automakers to locate production facilities in emerging international markets such as China, Eastern Europe, and Latin America; it also held substantial shares of the passenger car market in these regions: 13.3 percent in Eastern Europe, 30.2 percent in Brazil, 17.2 percent in Argentina, and 56 percent in China. In addition to its flagship make, Volkswagen also produces vehicles under several other names, including Audi, Bentley, Bugatti, Lamborghini, Rolls-Royce, Seat, and Skoda. Volkswagen, which is 18 percent owned by the German state of Lower Saxony, is involved in consumer lending and leasing and car rental through its Financial Services Division; it also holds a 35 percent interest in Israel-based Dead Sea Magnesium Ltd., which produces and distributes magnesium, the lightest metallic mineral and a potential 21st century vehicle design material.

Nazi Era Origins

Volkswagen was founded in 1937 as Gezuvor—Gesell-schaft zur Vorbereitung des deutschen Volkswagen GmbH (the Company for the Development of the German Volkswagen); its name was changed the following year, when it was incorporated as Volkswagenwerk GmbH. It embodied the dreams of two men: Ferdinand Porsche and Adolf Hitler. Porsche, an engineer, had designed powerful luxury automobiles for Austro-Daimler, but had been dreaming of a small, low-priced car for the ordinary consumer since the early 1920s. Porsche had tried in vain to find financiers for his venture. Always interested in technical innovation, Porsche had designed a rear-engine, air-cooled vehicle with independent suspension. The radical design had to be perfected, however, and Porsche’s first sponsor had little patience for torsion bars that exploded under pressure and engines that malfunctioned after a few miles.

Porsche’s meeting with Hitler in 1934 changed everything. By 1938 his roundish, odd-looking car had become the center of a plan to build an ideal worker’s city, and a factory was started at Wolfsburg. During the war, however, the Volkswagen plant produced vehicles for the German military, largely with the slave labor of prisoners. By the end of the war the factory had been virtually destroyed by bombing. Hitler’s “people’s car” never materialized.

The Volkswagen factory was operated by the British occupation forces from 1945 to 1949. The company became the focus of an effort to rebuild the German auto industry, and within a decade Volkswagen was producing half of Germany’s automobiles. Ironically, it was the British administrators of Volkswagen who started the production of passenger rather than military vehicles, and thus made the dream of the people’s car a reality.

Postwar Era and the Beetle

The company came under the control of the German federal government and the state of Lower Saxony in 1949. The man the British selected to head the company, Heinz Nordhoff, was largely responsible for Volkswagen’s impressive recovery and the conversion of a reminder of Nazi aspirations into the most popular car ever built. His success was the more surprising given that he was no fan of Volkswagen prior to his arrival there. Nordhoff, an engineer, had been employed by the Adam Opel Company, owned by General Motors, before and during the war. Opel management resented Hitler’s Volkswagen because they were hoping to develop a similar automobile of their own.

Unlike Porsche, it was not Nordhoff’s skill as an engineer (though he was responsible for innovations) but his managerial ability that made such a contribution to the success of Volkswagen. (Porsche was unable to take part in the realization of his dream; his health was ruined by nearly two years spent in a French prison on charges of war crimes for which he was later acquitted. Porsche died in 1951.) Nordhoff was able to assemble around him a talented team of executives, and he inspired his sometimes despairing and hungry workers. He actually slept in the factory for six months, and instituted the quite novel practice of addressing the workforce on a regular basis. Nordhoff, however, also gained a reputation for being autocratic and even arrogant, perhaps due to his unrelenting managerial approach.

Success came slowly, particularly in the United States. Nordhoff sorely needed U.S. dollars, but his first trip to the United States in 1949 was a failure, and only 330 Volkswagens were sold there in 1950. The car’s Nazi associations continued to haunt it. Though American interest in foreign cars grew during the mid-1950s, it was really not until 1959, when the firm of Doyle Dane Bernbach took over the advertising for the car, that it began to appeal to large numbers of Americans. Doyle Dane Bernbach coined the name “Beetle” for the Volkswagen. In a series of award-winning advertisements, the ad agency took what had been the car’s drawbacks and turned them into selling points with such slogans as “Think Small” and “Ugly Is Only Skin-Deep.” Even the car’s apparently invariable design from year to year was exploited, with an advertisement that had no photography at all and claimed there was nothing new to display about the more recent models. Changes were made internally, however, and the Volkswagen became renowned for its durability. The Beetle eventually had a record production run of over 40 years, during which over 20 million cars were produced, making it the best-selling car in the world. During the 1960s, the Volkswagen Beetle became a counterculture symbol in the United States and helped imports to gain an important foothold in the American market for the first time. Another 1960s icon, the Volkswagen microbus, had made its debut in the mid-1950s.

In 1960 Volkswagen was partly privatized, with the sale of 60 percent of its stock to the public. The remaining 40 percent of the stock was divided evenly between the German government and the government of Lower Saxony. A foundation was also established to promote research in science and technology, and it received all dividends paid to the two governments. These measures settled the disagreement between the federal government and Lower Saxony over the ownership of the company. Nordhoff was glad to have an end to the question, but he did not benefit directly since he and other Volkswagen executives in high income brackets were not eligible to purchase stock under the terms of the sale. At the same time of privatization, the company’s name was changed to Volkswagenwerk AG.

In 1965 the company acquired Auto Union GmbH from Daimler-Benz, thereby gaining the Audi make. Nordhoff died in 1968 following a brief illness; Kurt Lotz took over as Volkswagen chairman. Annual production of the Beetle peaked that year at 400,000 units, and by the early 1970s the Beetle was finally regarded as outdated. In 1974 Volkswagen was brought to the brink of bankruptcy. Diminishing sales, rising labor costs, increasing competition from Japanese automakers, and the end of fixed exchange rates had all contributed to the dramatic decline. New models were introduced, but they suffered from a poor reputation.

Ups and Downs in the 1980s and Early 1990s

A development program was instituted to create a successor to the Rabbit, the company’s major automobile after the Beetle. Meanwhile in 1981 Volkswagen’s U.S. workforce was cut from 10,000 to 6,000, and a plant in Michigan was sold to Chrysler. In 1983 the company lost $144 million in the United States alone. Meantime, in April 1982 Carl H. Hahn, who had worked under Heinz Nordhoff, took over as company chairman.

Company Perspectives:

The Volkswagen Group offers an unparalleled range of vehicles. Over 50 different automobile models from a range of nine international marques provide a diversity, the likes of which can be found nowhere else in the world and one which serves to accommodate the increasing individuality of customer demand in ever more fragmented markets. A truly comprehensive selection of vehicles, individualised through body design and elegance, but also through technology, safety features and quality. Today’s range spans everything from subcompact cars with an accent on economical three-cylinder engines to luxury limousines that meet the highest of demands on performance and prestige; from family convertibles to exclusive sports cars; from small vans to mid-weight lorries. The one thing all vehicle marques and models have in common is the pursuit of perfection—an objective expressed not only in features such as driving pleasure, safety, fuel economy, effective ecology and competitive prices, but likewise in the achievement of the best of quality. This claim to perfection is also translated to external, visible-body design, such as exceptionally thin body gaps on doors and hoods or a guarantee against corrosion covering twelve years.

When the new Golf was finally unveiled, it looked very much like the Rabbit but had a larger engine, more interior space, and better overall performance. The changes paid off: sales rose 25 percent in 1985, profits doubled, and Volkswagen became the leading European auto manufacturer. The Golf GTI was named “Car of the Year” by Motor Trend in 1985. In the luxury car market, sales of the Audi were up 50 percent for a second straight record year. Even more remarkable was that sales of the Jetta, a model costing about $1,000 more than the Golf, jumped 120 percent. Also in 1985, the company changed its name to Volkswagen Aktiengesellschaft.

From the company’s point of view, it was significant that the gap between Volkswagen and the competition had been narrowed. It used to be that German cars cost 20 percent more than their Japanese rivals, but the base price of the Golf eventually went below those of competing vehicles from Honda and Toyota. These gains were due in part to Volkswagen’s policy of automating its factories. The company spent $194 million on its Halle 54 at the Wolfsburg factory (the largest single automobile factory in the world), where 25 percent of final assembly was performed by robots. The automation provided a time savings of 20 percent.

Not everything looked promising for Volkswagen, however. The company recalled 77,000 Golf and GTI models because the innovative high-density polycarbonate fuel tank which fit under the rear seat and over the axle failed to meet crash test requirements. The cost of the recall ran as high as $18 million. Additionally, 18,000 Vanagons and Campers were recalled for a potential problem with the latches on their sliding doors. Finally, the New York attorney general and two consumer groups asked the Transportation Department to recall 200,000 Audi 5000s, claiming that the cars could suddenly accelerate when shifted out of the park position. Volkswagen maintained that the accidents reported were the result of driver error, but it also replaced some damaged cars or paid repair costs.

In 1986 the company sold Royal Business Machines, one of its office equipment subsidiaries, and purchased a 75 percent interest in Spain’s Sociedad Española de Automobiles del Turismo S.A. (SEAT), which had been a money-losing venture. The Spanish government agreed to absorb the company’s $1 billion debt and to provide a cash infusion of $114 million. With SEAT, Volkswagen held about 25 percent of the Spanish car market. Volkswagen gained full control of SEAT in 1990.

Volkswagen made agreements with East Germany and China for the production of 300,000 and 100,000 automobile engines, respectively, with options for Volkswagen to buy back some of the engines to help alleviate its capacity problems. The company also negotiated with the Soviet Union to build an engine plant and entered into a licensing agreement with Nissan for the production of kits to build Nissan Santanas. Meanwhile, the company continued its Golf design, but its Scirocco sports model, introduced in the early 1980s, was slated for phase-out and ceased production in 1992.

Volkswagen chairman Hahn’s strategy for Volkswagen’s resurgence, though it included cost-cutting measures, essentially involved the expenditure of vast sums to build or acquire production facilities and thereby broaden the company’s geographic scope. Capital spending, which had been increasing gradually during the latter half of the 1980s, picked up pace, reaching prodigious proportions by the beginning of the 1990s. Hahn spent US$3.3 billion to increase production capacity at a plant in Zwikau in eastern Germany, plowed an additional US$3.3 billion into SEAT, and invested a massive US$6 billion to acquire a 31 percent interest in the Czechoslovakian Skoda automobile company in 1991—all part of an enormous US$34 billion capital spending program set to take place in the first half of the 1990s. A cost-reduction plan initiated in 1987 had saved, by this point, US$2.6 billion, but the expenditures far outweighed the savings. Hahn, whose retirement was scheduled to begin in 1991, was given a two-year extension to oversee the denouement of his bold and costly plan.

Key Dates:

1937:: Company is founded as the Company for the Development of the German Volkswagen.
1938:: Company is incorporated under the new name, Volkswagenwerk GmbH.
1945:: British occupation forces begin operation of the Volkswagen factory.
1949:: Company comes under the control of the German federal government and the state of Lower Saxony; British select Heinz Nordhoff to head the company.
1959:: The name “Beetle” is coined for the Volkswagen.
1960:: Company is partly privatized, with the sale of 60 percent of its stock to the public; remaining 40 percent of the stock is divided evenly between the German government and the government of Lower Saxony; company name is changed to Volkswagenwerk AG.
1965:: Company acquires Auto Union GmbH, thereby gaining the Audi make.
1968:: Nordhoff dies and is replaced as chairman by Kurt Lotz; annual production of the Beetle peaks at 400,000 units.
1982:: Carl C. Hahn takes over as company chairman.
1985:: Company changes its name to Volkswagen Aktiengesellschaft.
1986:: Majority interest in Spain’s Sociedad Española de Automobiles del Turismo S.A. (SEAT) is acquired.
1990:: Company gains full control of SEAT.
1991:: Company spends US$6 billion to acquire a 31 percent interest in Czech automaker Skoda.
1993:: Ferdinand Piéch, grandson of founder Ferdinand Porsche, is named chairman.
1996:: The VW Passat is launched.
1998:: The New Beetle is launched in the United States; company acquires the Bentley, Bugatti, Lamborghini, and Rolls-Royce brands.
1999:: The 100 millionth Volkswagen vehicle is produced.

Mid-to-Late 1990s: Piéch-Engineered Turnaround

Hahn, however, was gone by the following year, forced to resign at year-end 1992 after presiding over Volkswagen’s rise from fourth to first place in European market share during his decade-long tenure. Despite this laudable success, Hahn’s strategy had proven too ambitious. Volkswagen’s U.S. operations continued to cede market share to Japanese and U.S. car manufacturers and the profit margins realized from sales elsewhere were alarmingly low. The person partly responsible for Hahn’s ouster and also selected to replace him was Ferdinand Piéch, grandson of Volkswagen’s founder Ferdinand Porsche. Piéch had served as the top development manager at Audi during the 1980s, then became its chairman in 1988. He rose through the ranks to gain overall control of Volkswagen in January 1993, a company he described to Automotive News as “a duck grown too fat to fly.”

To trim the excess fat from Volkswagen, Piéch announced he would cut 12,500 of Volkswagen’s 127,000 German jobs by 1998 and initiate substantial restructuring of all company operations in an effort to save Volkswagen more than US$5 billion, the figure he calculated would enable the company to avoid a loss for the year. Although substantial changes were effected, financial loss was not avoided, and Volkswagen recorded a DM 1.94 billion (US$1.15 billion) loss for 1993, abetted by poor performances of the company’s North American operations, Audi AG, and SEAT.

Volkswagen returned to modest profitability in 1994, then profits rose steadily through 1998, when they reached DM 2.24 billion (US$1.35 billion). Revenues grew prodigiously as well, increasing from DM 76.59 billion (US$44.05 billion) to DM 134.24 billion (US$80.55 billion) during this period. Piéch engineered this tremendous turnaround with a strong focus on cost cutting and a reenergized lineup of models. On the cost-cutting front, Piéch managed to pry away from General Motors that company’s relentless cost-cutter, José Ignacio López de Arriortúa, in March 1993. López, as he had at GM, moved to change Volkswagen’s relationships with its suppliers to the company’s advantage. He also took the lead on the construction of a new assembly plant in Resende, Brazil, where production began in 1996. At Resende, Volkswagen began building trucks and buses through a radical scheme in which suppliers did much of the assembly work, creating an even closer relationship between automaker and supplier and in theory a more efficient factory.

Lopez’s stay at Volkswagen proved to be a short one, however, after GM accused him of stealing confidential company documents, including plans for future Opel models, and taking them with him to VW. GM subsequently sued Volkswagen over the allegations, and criminal probes were begun in both the United States and Germany. The GM-VW feud culminated with Lopez’s November 1996 resignation from VW, his indictment on charges of industrial espionage by German prosecutors one month later, and the announcement in January 1997 of a settlement between the two auto giants whereby Volkswagen agreed to pay the U.S. carmaker $100 million.

Meanwhile, Piéch was implementing a key strategy intended to keep down production costs—producing all of the company’s cars, from low- to high-end, from one of a handful of platforms. A platform included the chassis, transmission, and other components; the parts of a car that differentiate it in the eye of a customer—the body shape, steering wheel, seats, engine, etc.—could all be tailored for the specific brand and make. Whereas Volkswagen used 16 platforms in the early 1990s, Piéch had managed by the late 1990s to whittle that down to four for the main company brands: VW, Audi, Seat, and Skoda. This strategy was credited with saving Volkswagen billions of dollars during this period.

Under Piéch’s leadership, Volkswagen also revitalized its product development. The VW Polo made its debut in 1994, the VW Passat was launched in mid-1996, and the fourth generation of the Golf was introduced to the public in August 1997. Perhaps the most important debut came in January 1998, when the New Beetle was launched in the United States to great fanfare. The nostalgic model helped jumpstart sales in the United States, where Volkswagen’s share of the passenger car market increased from 5.2 percent in 1997 to 7.7 percent in 1998. The company delivered nearly 268,000 units to the United States in 1998, compared to just 50,000 in 1993. Also debuting in 1998 was the VW Lupo, a car featuring an economical three-cylinder engine and marking the company’s entry into the subcompact segment.

Another goal of Piéch’s was to take Volkswagen upmarket. Rather than taking the more time-consuming route of building a new high-end make, Piéch went the acquisition route. In July 1998 the company acquired the Rolls-Royce and Bentley Motor Cars Group from Vickers P.L.C. for US$640 million. Volkswagen thereby gained the rights to the luxury Bentley brand but the use of the Rolls-Royce was to be only a temporary one, through the end of 2002, when that brand was slated to be taken over by BMW. By September 1998 Volkswagen made several other high-end purchases: Lamborghini, the Italian sports car maker, for about US$110 million; Bugatti, another Italian producer of sports cars; and Cos worth, British maker of specialty engines, which was bought for US$178 million from Vickers Engineering plc.

There were several other important or potentially important developments in the late 1990s. In anticipation of magnesium, the lightest metallic mineral, becoming an important automotive design material, Volkswagen in 1996 acquired a 35 percent interest in Israel-based Dead Sea Magnesium Ltd., a producer, processor, and distributor of the mineral. Also in 1996 came the publication in Germany of a book titled Volkswagen and Its Workers in the Third Reich. Commissioned by the company ten years earlier, the 1,005-page book brought back into the light Volkswagen’s close association with top Nazis and its use of Jewish concentration camp inmates and Russian prisoners of war at its Wolfsburg plant, where they worked under horrible conditions. Authors Hans Mommsen and Manfred Grieger also contended that workers were sometimes beaten, occasionally to death. In September 1998 Volkswagen announced that it was establishing a DM 20 million (US$12 million) “humanitarian aid” fund to compensate people—the survivors, at least—who were forced to work at the plant. In January 1998, the European Commission fined Volkswagen US$106.2 million for blocking Italian dealers in the early 1990s from selling to citizens of Germany and Austria who were seeking to gain from the cheap lira. Then in 1999 Volkswagen faced another European Commission probe into an alleged price-fixing cartel centering on the Passat model within VW’s network of dealers in Germany. Also in 1999, Volkswagen offered to buy the 30 percent of Skoda it did not already own for US$229 million.

In September 1999 Volkswagen produced the 100 millionth vehicle in its 50-plus-year history, becoming the first European automaker to reach this lofty mark. The company had strengthened its position as Europe’s number one auto company in the 1990s, and stood at the dawn of the 21st century as number three in the industry worldwide, trailing only General Motors and Ford. But a new number four company, DaimlerChrysler AG—formed in 1998 from the merger of Daimler-Benz and Chrysler Corporation—was sure to be a more formidable competitor in Europe and elsewhere. With increased competition predicted in the global auto industry during the early 21st century, Volkswagen appeared to have less options in regard to workforce reductions or shifting production overseas because of the 18 percent stake in the company still held by the German state of Lower Saxony. Analysts also questioned the company’s decision to invest US$745 million to develop a new luxury car under the Volkswagen brand; the car was slated for production in 2001 and would compete directly against Mercedes-Benz and BMW. Even the move to platform sharing—which had saved billions of dollars—had its critics, who contended that it could lead to brand cannibalization; a November 22, 1999, Business Week article summarized this potential problem: “Buyers are starting to wonder why they should pay $25,000 for an Audi A6 when it looks susplciously like a $16,000 Volkswagen Passat.” There was finally the question of a successor to Piéch, who was expected to retire in 2002 and whose dictatorial management style may have purged Volkswagen of independent-thinking senior managers.

Principal Subsidiaries

Audi AG (98.99%); Volkswagen Sachsen GmbH; Volkswagen Bruxelles S.A. (Belgium); Volkswagen-Sarajevo d.o.o. (Bosnia-Herzegovina; 58%); Rolls-Royce & Bentley Motor Cars Ltd. (U.K.); Cosworth Technology Ltd. (U.K.); Automo-bili Lamborghini S.p.A. (Italy); Volkswagen-Poznan Sp. zo. o. (Poland); AutoEuropa - Automóveis Lda. (Portugal); Seat, S.A. (Spain); Volkswagen Navarra, S.A. (Spain); Gearbox del Prat, S.A. (Spain); Volkswagen Slovakia, a.s.; Skoda Auto a.s. (Czech Republic; 70%); Audi Hungária Motor Kft. (Hungary); Volkswagen Argentina S.A.; Volkswagen do Brasil Ltda. (Brazil); Volkswagen de México S.A. de C.V.; Volkswagen of South Africa (Pty.) Ltd.; Cosworth Technology Inc. (U.S.A.); Shanghai-Volkswagen Automotive Company Ltd. (China; 50%); FAW-Volkswagen Automotive Company Ltd. (China; 40%).

Principal Competitors

Bayerische Motoren Werke AG; Daewoo Group; DaimlerChrysler AG; Fiat S.p.A.; Ford Motor Company; General Motors Corporation; Honda Motor Co., Ltd.; Hyundai Motor Company; Isuzu Motors Limited; Kia Motors Corporation; Mazda Motor Corporation; Mitsubishi Motors Corporation; Nissan Motor Co., Ltd.; PSA Peugeot Citroen S.A.; Renault S.A.; Saab Automobile AB; Suzuki Motor Corporation; Toyota Motor Corporation.