RESTRUCTURING BATTLE

Qatar Doubles Down on Volkswagen

ARCHIV - The silhouette of visitor pictured next to the corporate logo of German car manufacturer Volkswagen at the International Motor Show IAA in Frankfurt/Main, 23 September 2015. Photo: BORIS ROESSLER/dpa (zu dpa "«Dieselgate»: USA setzen VW mit Milliarden-Klage unter Druck" vom 05.01.2016) +++(c) dpa - Bildfunk+++
Ushering in new rules?
  • Why it matters

    Why it matters

    After the Dieselgate scandal, employee and regional government representatives strengthened their position within the company. Now Qatari investors may be pushing back.

  • Facts

    Facts

    • Since the Dieselgate scandal broke six months ago, Volkswagen shares have dropped more than 50 percent.
    • Qatari Holdings is the third-largest Volkswagen shareholder, controlling about 15.4 percent of the company.
    • Volkswagen is Europe’s largest industrial company, with a brand portfolio including Audi, Porsche, Saab, Skoda, Lamborghini and MAN trucks.
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    Audio

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Qatar Holdings, a branch of Qatar’s sovereign wealth fund and a major investor in Volkswagen, plans to intervene more heavily in the carmaker’s strategy in the wake of the Dieselgate emissions-rigging scandal, Handelsblatt has learned.

According to sources, Qatar, which is VW’s third-largest investor, fears that the works council and the state of Lower Saxony, the latter of which has a 20 percent vote on the company’s board, will prevent real restructuring in the aftermath of the scandal. Chief executive Matthias Müller plans to present a comprehensive new strategy by the summer: it is expected to propose substantial cuts, including job losses and plant closures.

One well-placed insider told Handelsblatt that Qatar Holdings would push hard for this strategy, and was prepared to take on the powerful works council if necessary. This is a new tactic for the Middle East investor, which holds 15.4 percent of VW, but so far has largely favored a soft approach.

The Qataris fear that unless things change, Volkswagen may be a big loser in the global reconfiguration of the car industry.

The new strategy bears the hallmarks of Akbar Al Baker, the hard-driving and outspoken chief executive of Qatar Airways. When Mr. Al Baker joined the Volkswagen supervisory board last year, he was all smiles and handshakes. “Volkswagen is already one of the world’s top carmakers, and enjoys a wonderful reputation all over the world,” he said at the company’s annual general meeting in May 2015.

Volkswagen has since been hit by the worst scandal in its history. In September, it emerged that VW engineers falsified emissions test returns on as many as 11 million diesel-engine cars. Volkswagen now faces regulatory crackdowns in numerous countries, as well as massive fines and class-action consumer lawsuits. Potential losses are currently estimated in tens of billions of euros, and may go higher still.

In the last six months, VW’s share price has collapsed, shedding more than 50 percent of its value. The company’s “excellent stock performance,” praised by Mr. Al Baker, is now a thing of the past. The losses have directly hit the Qataris: they originally invested €5 billion, or $5.64 billion, and benefited on paper when the share price shot up. The crash has wiped away a potential €6.4 billion profit, although they are not thought to have lost any money – yet.

Now Qatari Holdings seems about to end its traditional reticence and join the fight for VW’s future. The key question now is not the Dieselgate scandal, but rather how Volkswagen will restructure to face future upheavals in the car industry.

 

Qatar Holding Engagement-01 (2)

 

The Qataris fear that unless things change, Volkswagen may be the big loser in the global reconfiguration of the automobile industry. Qatari representatives have made this clear in recent conversations with other board members. They think digitization and electrification will mean a rapid revolution in the car business. New players like Google, Apple and Uber are disrupting the industry. Old carmakers must react. The coming upheavals may even put heavyweights like Volkswagen at risk.

It’s no secret that Volkswagen is not well placed for the changes. Its electric models are far from competitive. Experts think BMW and Daimler are further ahead with new mobility concepts. They suggest that, to avoid being left behind, the Volkswagen Group – whose brands include Audi, Porsche, Seat, Bentley and truckmaker MAN – has to become a quicker and more efficient company. And crucially, it has to get costs under control at its core Volkswagen brand.

Electrification will mean large job losses in the car industry as petrol and diesel-driven engines become obsolete. That much is clear to everyone. In the current round of German car industry pay negotiations, phased retirement for older workers is on the agenda: this is seen as a way of reducing jobs gradually, without too much social disruption. But arguments rage on about what older workers who go part-time should be paid.

By summer, Volkswagen’s future vision should be clearer. That’s when Mr. Müller, chief executive of what is Europe’s largest industrial company, will present his detailed new plan. His strategy team is led by Thomas Sedran, who was hired as head of Group Strategy specifically with this task in mind.

As a temporary fix to the troubles of the core Volkswagen brand, Herbert Diess, chief executive of Volkswagen cars, has delayed the launch of the problematic Phaeton model and has issued a 12-point cost-cutting plan. But his proposals have already run into opposition from the powerful works council, which represents employees. In accordance with German corporate governance law, the works council controls almost half the seats on the VW board. But sources close to Qatari Holding say Mr. Diess has the full support of the Qataris, who strongly approved of the Phaeton decision.

 

a helicopter and a car in the desert DPA picture alliance
Things are heating up between VW and its Qatari shareholders. Source: DPA, picture alliance

 

Now Mr. Al Baker, along with Hussain Ali Al Abdulla, the second Qatari representative on the board, intends to back Mr. Diess more energetically to help him push through his reform package. There have been too many compromises already, now they will push the board to “really get down to business,” say sources close to Mr. Al Baker. “The time for compromise deals is over.” However, neither Qatari Holdings nor Volkswagen would officially comment on this suggestion.

By taking this attitude, the Qatari board members are in effect allying with the Porsche-Piëch family, the majority owners of the Volkswagen Group, who also want to see more radical restructuring. However, this will not be enough to win a majority on the Volkswagen Group board. “Between them, the works council and the state government of Lower Saxony control 12 votes. The family, the Qataris and the independents have only 8,” one board member told Handelsblatt.

Sources close to the Qatari investors say they find it incomprehensible that the state government and the works council should have such a big say in the company. This criticism has found echoes, in private, among several members of the Porsche and Piëch families.

The works council is open to a fundamental restructuring of the company. But works council chief Bernd Osterloh, another supervisory board director, has said this should not be at the expense of the employees. The government of Lower Saxony, the company’s second-largest shareholder, has also said it sees no reason to cut jobs or close factories.

“But to achieve anything, we absolutely have to talk to each other, above all on the board.”

Wolfgang Porsche, Director, Volkswagen Group

But these are exactly the scenarios Volkswagen is weighing up, say insiders. The board of Volkswagen cars, led by Mr. Diess, wants to cut at least 3,000 administrative jobs. Entire management hierarchies may be scrapped, said one senior manager. The company is also said to be considering ending production in two locations, including one in Lower Saxony, the VW heartland.

That will not make the path to restructuring any easier. As well as the works council, the Lower Saxony government will fight hard against new arrangements with massive job losses. So before Mr. Müller’s new strategy is even on the table, a majority of the board is against it. “To achieve anything, we certainly have to talk to each other, above all on the board,” Wolfgang Porsche, a leading family figure and a supervisory board member, told Handelsblatt. That approach had brought good results within the Porsche company, he added.

Mr. Al Baker has already had some experience with German corporate governance, which gives stakeholders a strong say in the boardroom. The Qataris were deeply unhappy last year, it is reported, when Berthold Huber, a former head of IG Metall, Germany’s metalworkers union, joined the board after the resignation of Ferdinand Piëch, the charismatic former VW chairman. Back then, Mr. Huber surprised the Qataris by seriously tackling reforms.

However, this time, dialogue seems less likely. The works council says it is open to talks with the Middle Eastern minority shareholders. “But we haven’t seen much interest from the Qataris,” said a spokesman for the council. “We are interested to see if that will change,” he added.

 

Martin Murphy is an editor with Handelsblatt and specializes in the automotive, defence and steel industries. Mathias Brüggmann is head of Handelblatt’s foreign affairs desk and focuses on Eastern Europe, the Arabic world and Iran. Robert Landgraf is Handelsblatt’s chief correspondent for the financial markets. To contact the authors: murphy@handelsblatt.com,  brueggmann@handelsblatt.com  and landgraf@handelsblatt.com.

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