August 27, 2019 / 11:42 AM / 3 months ago

Breakingviews - VW still grapples with Piech’s mixed legacy

Ferdinand Piech, chief executive of Volkswagen AG, sits in a Bentley model Azure with 8 cylinders and a 385 horsepower (PS) engine before the German carmaker's annual news conference in Wolfsburg.

LONDON (Reuters Breakingviews) - Few legacies are either wholly good or bad. Volkswagen’s current management could be forgiven for feeling particularly ambivalent about the heritage of Ferdinand Piech, the company’s former chief executive and chairman who died aged 82 on Sunday.

When Piech took the wheel in 1993, 250,000 employees produced about 3 million cars, and the company reported a loss of 2 billion Deutsche marks ($1 billion). By the time Piech was elevated to chairman in 2002, a post he held until 2015, about 30% more workers produced about 70% more cars, and generated a 2.6 billion euro ($1.5 billion) net profit. In other words, a failing German carmaker had become a profitable global behemoth.

Piech inherited the spirit of his grandfather Ferdinand Porsche, who developed the cheap-to-produce Volkswagen Beetle. The grandson pioneered “modular” production, in which numerous different models use the same or similar parts. Also in the spirit of Porsche, who founded the eponymous sportscar maker, Piech had VW buy luxury brands Bentley, Lamborghini and Bugatti, besides turning Audi into a sought-after premium product.

Piech’s many acquisitions mostly worked in an industry that tends to reward scale. But size has not always been VW’s friend.

On the potentially positive side, Herbert Diess, the current chief executive, thinks VW’s heft will give it an edge in electric cars. More negatively, the company’s 2019 gross profit margin will be lower than smaller and perhaps nimbler European mass-market peers Peugeot and Renault, according to Refinitiv data.

Shareholders are sceptical about VW’s future. Its 5.5 forward price-earnings multiple is 23% below the average for global carmakers, according to Refinitiv. Evercore analysts reckon that the wholly-owned Porsche business on its own could garner a market capitalisation greater than VW’s 72 billion euro, assuming it was spun off debt-free.

Less tangible but perhaps more damaging is the legacy of Piech’s autocratic governance. The fear he inspired not only silenced dissent but, combined with the high expectations he set, arguably contributed to VW’s costly diesel-emissions crisis.

The Porsche-Piech family, which still controls the company with a more than 50% voting stake, has long seemed to care most about glory and empire. As Piech’s reign showed, that comes with a cost.

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