Volkswagen A.G.

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Volkswagen A.G.

Postfach 3180
Wolfsburg
Federal Republic of Germany
(O 53 61) 90

Public Company
Incorporated: 1938
Employees: 259,047
Sales: DM 47.2 billion (US$24.3 billion)
Market Value: DM 12.5 billion (US$6.446 billion)
Stock Index: Berlin Düsseldorf Frankfurt Hamburg
Munich Stuttgart Zurich Basle Geneva Vienna
Brussels Antwerp Luxembourg Amsterdam

Volkswagen AG, a company born in the shadow of Nazism, has risen to become one of the world’s premier automobile companies. Volkswagen has long been the industry leader in West Germany where it holds 28 percent of the automotive market, but the company’s interests are truly international: it maintains plants in the United States, Brazil, Mexico, South Africa, Nigeria, Yugoslavia, Argentina, and Belgium. In addition to its automotive subsidiaries, Volkswagen owns computer and office equipment concerns. Yet, however large and diverse the company becomes, it will perhaps always be most strongly associated with the idea from which it derives its name, “the people’s car.”

Volkswagen was founded in 1937 as the “Company for the Development of the German Volkswagen.” 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 1920’s. Porsche had tried in vain to find financiers for his venture. Always interested in technical innovation, Porsche had designed a rear-engined, 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 the 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.

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 is 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 could not 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 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, and though American interest in foreign cars grew during the mid-1950’s, it was really not until 1959, when the firm of Doyle Dane Bern-bach took over the advertising for the car, that it began to appeal to large numbers of Americans. It was Doyle Dane that 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. During the 1960’s, the Volkswagen became what might be called a “cult classic” in the U.S.

In 1960 Volkswagen was, in essence, denationalized, with the sale of 60% of its stock to the public. The remaining 40% of the stock was divided evenly between the federal government and the government of Lower Saxony. A foundation was also established to promote research in science and technology, and 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 did not benefit directly since he and other Volkswagen executives in high income brackets were not eligible to purchase stock by the terms of the sale.

Annual production of the Beetle peaked in 1968 at 400,000 units, but by the early 1970’s 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 the 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.

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.

When the new Golf was finally unveiled, it looked very much like the Rabbit, but it had a larger engine, more interior space, and better overall performance. The changes paid off; sales rose 25% 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%, a second straight record year (Volkswagen had acquired the Audi automobile manufacturer in 1965). Even more remarkable was that sales of the Jetta, a model costing about $1,000 more than the Golf, jumped 120%.

From the company’s point of view, it is significant that the gap between Volkswagen and the competition has been narrowed. It used to be that the German cars cost 20% more than their Japanese rivals, but the base price of the Golf is now lower than those of competing vehicles from Honda and Toyota. These gains may be due to Volkswagen’s policy of automating its factories. The company spent $194 million on its Halle 54 at the Wolfs-burg factory (the largest single automobile factory in the world) where 25% of final assembly is performed by robots. The automation provides a time savings of 20%.

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

Volkswagen sales fell in the first quarter of 1986, partially, at least, because of a drop in the value of the U.S. dollar. And while the Westmoreland, Pennsylvania plant is operating at half capacity, there is an order backlog for Golfs in Europe. A plan has been considered to produce 21,000 to 30,000 Jettas at the Westmoreland plant which would allow the European operation to increase its capacity, but it would take a year to retool the factory. Without such an adjustment the Westmoreland factory, where 18,000 workers are already on layoff, could face further cuts. There has been talk of building Surbarus at Westmoreland with Fuji Heavy Industries, but discussions are presently suspended. Plans have also been made to close a West Virginia parts plant and substitute parts from Mexico and Brazil. (UAW autoworkers in the U.S. make $20 per hour, whereas their Brazilian counterparts collect an hourly wage of $2.)

In 1986 the company sold Royal Business Machines, one of its office equipment subsidiaries, and it has purchased a majority 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 could acquire 25% of the Spanish car market.

Agreements have been made 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, which would help alleviate its capacity problems. The company has also negotiated with the Soviet Union for the building of an engine plant, and it has entered into a licensing agreement with Nissan for the production of kits to build Nissan Santanas. A possible production merger has been discussed by Ford Argentina and Volkswagen of Brazil, in order to increase capacity by 30% and meet consumer demand. And, with Renault, Volkswagen is planning development of a four-wheel-drive/automatic transmission system. Almost every Volkswagen model brought out between now and the end of the decade is slated to be available with a four-wheel-drive option. The company also has ambitious plans to compete with the Yugoslavian Yugo and South Korea’s Hyundai Excel by introducing a Brazilian-built, low-priced car, currently leferred to simply as Project 99. Volkswagen hopes sales of this will reach 100,000 cars per year. Meanwhile, the company will continue its current Golf design, but its Scirroco sports model, introduced several years ago, will shortly be replaced with a car along the lines of the Porsche 944.

Volkswagen chairman Carl C. Hahn, who worked under Heinz Nordhoff, is stressing German engineering and advanced technology as the key to the company’s competitiveness. He has set his sights on rebuilding the public’s confidence in Volkswagen in the United States, and hopes to boost the company’s return on sales from 1% to 3% to match the U.S. automakers. Hahn also aims to cut costs and raise profit margins by making use of newly acquired SEAT and other Volkswagen operations in developing countries. Capital spending will be boosted 25% in the next five years, with $13 billion aimed at operations outside Germany. It is uncertain what labor’s reaction will be to the increasing use of foreign resources; the German auto industry was plagued by strikes in 1984.

Hahn has gained valuable experience in the American market; he headed the Volkswagen operation in the U.S. during the Beetle’s heyday. Later Hahn became chief of continental Gummi Werke, where he turned a money-losing business into an industry leader. Like his predecessor, Hahn seems capable of taking forceful steps where necessary to control the direction of the company, and he appears more than willing to circumvent inflexible bureaucratic corporate culture that frequently afflicts large German firms. If he proves to be as forthright and determined as Nordhoff, then Volkswagen should remain a major force in the worldwide automotive industry.

Principal Subsidiaries

AUDI AG (99%); V.A.G. Kredit Bank GmbH; V.A.G. Leasing GmbH; VOTEX GmbH; VW KRAFTWERK GmbH; VW Siedlungsgersellschaft mbH; InterRent Autovermietung GmbH; V.A.G. Marketing Management Institut GmbH. Volkswagen also has subsidiaries in the following countries: Belgium, Brazil, Argentina, Canada, France, Italy, Japan, Mexico, The Netherlands, Netherlands Antilles, South Africa, Sweden, Switzerland and the United States.