Gary Lineker once observed that football was a simple game in which 22 men ran around the pitch, and then the Germans won. Much the same could be said of the car industry. It’s a simple enough business, in which everyone spends billions on big factories and flashy dealerships. And then the Germans make all the money.
Until now, that is. In the last year, through a spectacular mixture of family pride, in-fighting and historical resentment, two of the mightiest names in German industrial history, the car-makers Porsche and Volkswagen, have steered themselves to the edge of cata-strophe. It’s a story of hubris on an epic scale. It’s also a reminder that one reason the Germans are so sniffy about ‘Anglo-Saxon’ wheeler-dealer capitalism is because they are just not very good at it.
The Volkswagen group is Europe’s largest car manufacturer, including not just the ubiquitous VW marque, but also Skoda, Seat, Audi and our very own Bentley. From its Wolfsburg headquarters in Lower Saxony, Volkswagen has always been emblematic of postwar German industrial strengths: methodical, well organised, consistent in quality, if a little slow and conservative. The ad agency that came up with one of the most celebrated slogans of the 1980s — ‘If only everything in life was as reliable as a Volkswagen’ — was talking about the ubiquitous Golf, but could have just as easily been talking about the company itself. It stood aloof from the financial games played by other conglomerates. It even had its own special rules: the so-called ‘Volkswagen law’ that protected it from takeover through a blocking stake held by the state of Lower Saxony.
Likewise Porsche. In its upmarket niche, it outpaced its rivals with the style and thrust of a 911 pulling away from the kerb. Now based in Stuttgart, the company started out and remains best known as a specialist sports car maker, but from the 1980s onwards it also sneaked into the mainstream. If any marque captured the era of mass affluence, it was Porsche: City boys started out with a Boxster, then upgraded to a flashy Cayenne SUV when they were lumbered with a couple of kids and a dog. Porsche continued racking up profits even while they were vanishing for the rest of the industry; its shares soared from less than E20 in 2001 to E186 in 2007. And under an ambitious chief executive, Wendelin Wiedeking, Porsche not only provided wheels for investment bankers, it started to believe it could trade like them.
In this saga, history is everything; the shared heritage on which the two companies built their success may well end up destroying them. Both trace their origins to one of the most brilliant industrial designers of the 20th century, Ferdinand Porsche, who was an engineer in the 1920s for Daimler-Benz — which turned down his plans for a small city car, preferring to concentrate on upmarket Mercedes limousines. Hitler was more impressed, however, and asked Porsche to design the Beetle, the ‘people’s car’ that launched Volkswagen. Over the next few years, he came up with other nifty vehicles for the Führer, such as the Tiger tank which made its debut on the Eastern Front in 1942. But it was the Beetle that was his enduring triumph.
After the war, Volkswagen was re-launched, under new management, around the Beetle; cheap, practical motoring was always the company’s core ethos. But Ferdinand was arrested in France as a suspected war criminal and spent 20 months in a Dijon jail without trial. By the time he was released his son, also Ferdinand but known as ‘Ferry’, was at work at Gmünd in Austria on a sports car design that was to become the first model to carry the Porsche badge, the 356. Though the Porsche family firm received royalties for the Beetle design for many years, their effective severance from grandfather Ferdinand’s first great project remained a painful wound long after his death, aged 75, in 1951.
Both Volkswagen and Porsche are still dealing with that legacy. The network of relationships between the two companies would make the scriptwriters of Dallas (or perhaps more appropriate, Dynasty) feel they were over-complicating things. Ferdinand’s daughter Louisa married a Viennese lawyer called Anton Piech and the couple’s son Ferdinand (confusingly, almost everyone in the saga is called Ferdinand) Piech is now chairman of Volkswagen. Meanwhile, a third-generation Ferdinand Porsche designed the emblematic 911 before setting up his own design business, and remains linked to the company. Porsche listed in the 1970s, but the majority of its shares remain in the hands of the Porsche and Piech families. Like the rival BMW group, it remains at heart a family business.
And the family had unfinished business: reclaiming Volkswagen. Buoyed up by continuing success, Porsche started acquiring shares in its estranged cousin. On the surface, that looked a ridiculous ambition. Volkswagen is huge: in 2008, it had sales of more than E100 billion, compared to less than E8 billion for Porsche. Attempting to take control of Volkswagen made the kind of leveraged risks taken by Anglo-Saxon hedge funds look tame.
That didn’t deter the Porsche management team. Four years ago, Porsche bought 20 per cent of Volkswagen: Wiedeking described the move as defensive, on the grounds that Volkswagen supplies many of the parts for Porsches. In truth it was about as defensive as Ferdinand Porsche’s old mentor’s invasion of Poland. Over the next three years, the stake kept creeping upwards until, at the start of this year, Porsche finally acquired more than 50 per cent of Volkswagen, plus options to buy another 20 per cent later this year. Porsche’s buying of the thinly traded Volkswagen stock caused a massive spike in the share price, briefly turning Volkswagen into Europe’s most valuable public company. For a brief, heady period, Porsche was making more money from trading in Volkswagen share options than it was from making cars.
In the end, Volkswagen capitulated. Back in the spring, a merger between the two companies was announced that would see them integrated under a single holding company controlled by the Porsche and Piech families. The two marques the first Ferdinand created would finally be reunited.
The price was high, however, and possibly fatal. Porsche had taken in a big bundle of short-term loan money to pay for its Volkswagen shares, and the last 10 per cent of Volkswagen proved hugely expensive, at close to E10 billion. In the meantime, credit was getting tighter — though rather remarkably, at the end of March, Wiedeking admitted that he was ‘not aware of the worsening credit situation’. Everyone else was, however. Porsche was stuck with a pile of debt and no ready cash with which to pay the interest. Its share price collapsed, from close to E200 a share in 2007, to less than E40. In financial markets, there were rumours that the car-maker was about to run out of money.
Not many families could stand that kind of strain: certainly not the fractious Porsche clan. Back in Wolfsburg, the errant cousin Piech put the merger on hold, and the all-important Volkswagen works council argued that it was not viable. Piech went public with his worries about Porsche’s finances, causing another huge rift within the family. Instead of Porsche buying Volkswagen, he suggested turning the tables. Volkswagen would buy ailing Porsche instead, making it into a division that would sit above Audi but below Bentley on the group’s market segmentation chart. You don’t need to be German to see why the word schadenfreude might be appropriate here.
Since then, Porsche has been engaged in a desperate hunt for cash. It appealed to the government-backed industrial bank KfW, but Chancellor Angela Merkel cold-shoul dered the suggestion. She has enough problems without sorting out corporate feuds and, after all, these were not problems caused by the global recession. There have been rumours in the German press of Daimler bailing out Porsche. But those are denied, and the sight of the Mercedes maker taking control of Porsche would probably be more than the family could bear. Instead, it has turned to Qatar — the same princes of the desert who bailed out Barclays — and aims to sell the Gulf state a 25 per cent stake in Porsche for E2.5 billion. The hope is that just enough cash will be forthcoming to complete the takeover.
Over last weekend, the two sides were arguing it out in the pages of Der Spiegel, as German billionaires do. Piech threatened to push Porsche into bankruptcy if it didn’t agree to a Volkswagen takeover: under his plan, the families would own a chunk of the merged VW-Porsche, along with Qatar, and Lower Saxony. Wolfgang Porsche, leading his side of the family, described that as ‘blackmail’. Whatever happens, the dynasty seems to have lost control. So far, the Porsches and the Piechs have held on to all the voting stock in Porsche: indeed, when another of old Ferdinand’s grandsons, Ernest Piech, tried to sell his shares to an Arab investor in the 1980s, the rest of the family clubbed together to buy him out instead. This time round, there appears to be no choice. It is either humiliation or bankruptcy. And it may turn out to be both.
In the end, Porsche seems to have scored one of the most spectacular industrial own goals of all time. If the German football team ever did that, even Gary Lineker might revise his opinion of them.
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