Volkswagen Sticks to Restructuring Despite Leadership Struggle

The German auto giant is in full-blown crisis. Its flagship VW brand is barely breaking even; earnings and market share are evaporating in the all-important Chinese market; and union anger over Pischetsrieder's drastic belt-tightening plans could well cost the 58-year-old Bavarian chairman his job.

But Pischetsrieder told VW's annual earnings news conference that he was sticking to his guns regardless and he saw no reason to step down.

"Why should I step down?" he asked. "The debate about the extension of my contract does not belong in the public arena. It's a matter for the supervisory board," Pischetsrieder said.

Nevertheless, it was comments by the head of supervisory board Ferdinand Piech that sparked speculation about Pischetsrieder's future last week.

Piech said it was an "open issue" whether Pischetsrieder's contract would be renewed since he did not have the backing of the labor representatives on the supervisory board.

"No alternative" to restructuring

Pischetsrieder himself has acknowledged he is in a difficult position. "My position has always been that you can only manage a company with the employees not against them," he said.

But he insisted he saw "no alternative" to the restructuring plans, under which up to 20,000 jobs were potentially on the line over the next three years.

The car maker's biggest problem remains the core VW brand. The VW brand division as a whole was able to steer back to operating profit of 638 million in 2005 from a year-earlier loss of 25 million euros.

But that was largely thanks to Skoda and Bentley, while

Volkswagen passenger cars were "just above operating break-even," chief financial officer Hans Dieter Poetsch complained. "Further restructuring of this business is inevitable."

China a major headache

Another major headache is the key Chinese market, where VW skidded into the red last year.

The development is of particular concern because China is the biggest market for the VW brand, even ahead of the home market of Germany. Once the number one car maker in China, VW has since lost that title to General Motors.

VW also faces difficulties in the US as a result of ferocious price competition from domestic rivals, as well as the weak dollar.

It was such factors that caused Pischetsrieder to describe VW's 2005 results as "unsatisfactory", despite a sharp rise in underlying profits last year.

The car maker booked operating profit of 3.1 billion euros ($3.7 billion) in 2005, up 54.0 percent from the figure a year earlier.

VW's bottom-line net profit jumped by 61.5 percent to 1.12 billion euros in 2005 on a 7.1-percent rise in sales to 95.268 billion euros. And total vehicle sales amounted to 5.243 million worldwide, 3.2 percent more than in 2004.

Pischetsrieder predicted that underlying profits would improve this year, even if he steered clear of making a more concrete forecast.

United we stand

Looking further ahead, Pischetsrieder reiterated VW's

medium-term forecast for pre-tax profit of 5.1 billion euros for 2008, up from 1.7 billion euros in 2005.

The chairman declined to quantify the financial fallout from the current leadership battle.

But experts suggested it could be enormous. "The power struggle between Piech and Pischetsrieder puts VW in a catastrophic position," said Ferdinand Dudenhoefer, director of the Center of Automotive Research in Gelsenkirchen.

"The public image is damaged, employees are frustrated and the restructuring is being blocked at key points," Dudenhoeffer told Deutsche Welle television.

Asked about speculation that the head of VW's profitable luxury car arm Audi, Martin Winterkorn, was vying to take over the driving seat at the parent company, Pischetsrieder responded: "We won't let ourselves be divided up."

The car maker would only be able to attain its targets "if we're united on the steps that need to be taken and if we take them together," he said.