VW Falls Into a Big Publicity Pothole

Think 1960s. Bell bottoms, love beads, the Grateful Dead, scented candles and wisps of marijuana smoke lacing the air. Antiwar doings.

At the center of this period pageant are thousands of young Americans rattling around in their Volkswagen Beetles--cheap, reliable, funky, easy to fix.

The people at Volkswagen headquarters here have been thinking a good bit about the 1960s lately. For them, it was the magical mystery decade when the Beetle was the cult car par excellence in the United States--the fuel-efficient auto that for many Americans defined the term “foreign car.”

That’s a far cry from today, when Volkswagen’s brand name has lost its ring to American ears and its Pennsylvania assembly line, its only U.S. plant, is long since closed.

And so it is that these days the Volkswagen brass wants to tap the 1960s lode of cultural associations, rejoining those happy images with the Volkswagen name and using the connection to sell an all-new Beetle in America. The new vehicle may be launched in 1998.

But two events--the publication of a damning new corporate history and growing signs of VW culpability in a case of alleged industrial espionage that culminated in the resignation Friday of a top executive--are suddenly making the makers of that friendly little car from the 1960s look more like central-casting villains from the 1930s.

It is an extraordinary wave of bad news at the world’s fourth-largest auto maker, news that has seemingly little to do with new product lines, factory operations, labor relations or any of the other nuts and bolts of a large manufacturing concern.

On the contrary, when it comes to making and selling cars, Volkswagen is on the rebound: Worldwide sales have risen 14% so far this year, profits have more than doubled, and its share of the world car market will hit an enviable 10% by the end of the year. Since 1993, when Chairman Ferdinand Piech, an Austrian, arrived promising a turnaround, Volkswagen has done better on the stock market than any other European auto maker except Porsche.

In heavily social-democratic Germany, meanwhile, Volkswagen is not only gaining market share but also winning social brownie points for its bold experiments in cutting costs without firing workers and ruining morale.

But just when Volkswagen might otherwise be trumpeting a successful turnaround-in-the-works, just when it should be congratulating itself on its labor-force innovations, just when it is contemplating the end of its long slide in America, a bizarre image problem is spoiling the fun.

“Here I am, sitting in Germany, a Kraut!” exclaims Klaus Kocks, Volkswagen’s chief spokesman and a member of the company’s supervisory board, “facing a civil suit in the United States . . . with an Austrian CEO who happens to look like Hitler when he smiles. We have all the luck.”

Legal Storm

Little wonder that Volkswagen parted ways with its celebrated purchasing chief, Jose Ignacio Lopez. He was at the center of the legal storm between Volkswagen and its American archrival, General Motors, and GM had been acting as if it would spend whatever it took to shame and punish Volkswagen in the American court system unless Volkswagen dumped the executive, renowned for his ability to cut costs.

Lopez had been GM’s superstar vice president for world purchasing until he abruptly defected to Volkswagen in March 1993. GM, arguing that Lopez took trade secrets with him when he left Detroit, has claimed triple damages against Volkswagen, relying on U.S. racketeering laws. GM’s complaint against Volkswagen names Piech and other Volkswagen executives.

Now, with Lopez out of the picture, Volkswagen stands a chance of settling with GM out of court, an outcome that would go a long way toward reducing its legal bills--and protecting its image in the U.S. market at a decisive time.

But the price is high. Lopez, described as a brilliant visionary by even his most hard-line detractors, had been a driving force behind Volkswagen’s business improvements of the last three years. Although the German auto maker now seems to be headed in the right direction, its performance problems are by no means over.

“We’ve come only about a quarter of the way,” Piech told the German newsmagazine Der Spiegel. “We want to become the most attractive auto maker in Europe, for our workers, for customers, for shareholders and in the public view in general.” Lopez was brought in to help achieve those goals, Piech told the magazine, “but everybody’s replaceable--even me, of course.”

The new corporate history that has so compounded Volkswagen’s image problems this fall is “Volkswagen and Its Workers During the Third Reich,” a 1,055-page, richly detailed account of Volkswagen’s Nazi-led founding and its use of slave labor during World War II. The author, Hans Mommsen, is one of Germany’s most prominent historians of the period.

Although “Volkswagen and Its Workers” started out as a corporate-sponsored project, and Mommsen received more than $2 million from Volkswagen to conduct his research, the white-haired professor certainly did not shy from biting the hand that fed him.

Nazi History

In chapter after shameful chapter, Mommsen details the way Volkswagen used interned Jews, Russian prisoners of war and Poles to turn out military vehicles and other war materiel--including some of the long-range rockets Germany fired at London during the war--after the auto maker’s original work force was drafted into the military. Some of the slave workers were beaten, and others were worked to death.

The book, so far available only in German, also features archival photos of Hitler inspecting Beetle prototypes with a kid-in-a-candy-store grin, Beetles parading before ranks of helmeted infantrymen and Beetles being touted on posters as the “Strength Through Joy Car.”

It portrays Volkswagen founder Ferdinand Porsche as a Nazi opportunist who, in his zest for building cars, overlooked the agony of his slaves. “Porsche walked through these crimes like a sleepwalker,” Mommsen writes.

Porsche, who went on to create the eponymous sports car after the war, was the grandfather of Ferdinand Piech, the current Volkswagen chairman--the stern Austrian who Kocks worries looks too much like Hitler for American consumer tastes.

“What we fear is that the launch of the new Beetle in the United States will be afflicted by this,” Kocks complains. “Now we have the Nazi badge pinned on it.”

Alas for Volkswagen, Mommsen’s book appeared just as the tide was beginning to turn against it in its long-running, high-stakes legal battle with General Motors.

By this fall, the dispute had given rise to no less than 11 lawsuits, motions for injunctions, appeals and criminal investigations on both sides of the Atlantic.

In recent weeks, courts in both Germany and the U.S. handed down rulings that seemed to promote GM’s side of the dispute, particularly an order in U.S. District Court in Detroit allowing GM to pursue triple damages from Volkswagen under the Racketeer Influenced and Corrupt Organizations Act.

GM has never stated exactly how much damage, in dollar terms, it believes Volkswagen has caused it, but some observers have been saying that a tripling of this hypothetical figure could go into the billions. Volkswagen had sought to have the racketeering complaint dismissed.

Suddenly, Volkswagen not only risked an enormous hit to its bottom line, it was also worried that, in the relatively theatrical setting of an American courtroom, GM would even find a way to exploit Mommsen’s Nazi revelations, undermining Volkswagen’s unfolding efforts to rebuild brand loyalty in the U.S.

Whether Lopez’s resignation will lead to an out-of-court settlement remains to be seen. GM continues to demand a public apology for what it calls Volkswagen’s unethical behavior in poaching Lopez and insists on “compensation for the damages that occurred.”

Volkswagen still retorts that it will not go to the negotiating table as long as GM is setting the conditions in advance. It has always denied any wrongdoing, and Chief Financial Officer Rutbert Reisch says the company sees “no need for forming any provisions against damages.”

German news reports Saturday indicated that GM may be ready to soften some of its conditions for a settlement in the wake of Lopez’s resignation.

Reisch, like most others at Volkswagen, wishes that the world would forget about the Lopez soap opera and concentrate on the impressive new fundamentals of his company. Indeed, stock market analysts say there is much to be pleased about in Volkswagen’s recent performance.

Piech, who arrived from Volkswagen’s Audi division in 1993, rewrote Volkswagen’s corporate objectives, which had focused solely on market share. He demanded that his management emphasize product improvements instead.

With the advent of such well-reviewed cars as the Passat--billed as an “economy luxury car”--and the forthcoming reborn Beetle designed in VW’s Simi Valley studio to suit American tastes, Volkswagen has offered evidence that, with a good product, market share takes care of itself. Officials say they anticipate U.S. sales growth of 15%-20% a year for the next few years, making the German auto maker a player in America again, perhaps matching the market share of Ford’s Lincoln-Mercury division.

Elsewhere, Volkswagen is doing even better. Its share in the still-risky Chinese market is said to be 50%, and in profitable Brazil it commands 37%. Sales in Mexico collapsed with the peso’s fortunes in late 1994, but Volkswagen is hoping that under the North American Free Trade Agreement it will be able to use its Mexican plant to make cars profitably for export to the U.S.

Cost-Cutting Successes

In Germany, Piech is celebrated for the cost-cutting measures he has pushed through at Volkswagen, a company that has often behaved more like a political animal than a business.

He has overseen the streamlining of production processes, substantially reducing the time it takes to build various models and making parts interchangeable from model to model. The European-market Polo, which once took 20 hours to make, now takes just 14. The industry standard for a passenger car is 10 to 12 hours, but Piech says he intends to hit a revolutionary seven hours for the Polo.

Piech’s Volkswagen has also been a pioneer in labor relations, getting its rank and file to accept sizable wage and benefits cuts in exchange for guaranteed jobs and a four-day workweek. The workers grumbled about having thinner pay packets at first, but now they seem pleased with the extra time they have won in exchange.

Labor Innovations

Next, Volkswagen hopes to implement a new labor-saving instrument it calls time shares: If the concept survives bargaining, workers would be able to take some of their pay or benefits in the form of paper shares worth blocks of time off in the future at 85% pay.

The workers would be able to trade their time shares among themselves, even accumulating big enough blocks of time to construct personalized early retirement plans if they wish.

In Germany, where a major debate is underway about how to reduce unemployment--and about whether it is even possible to create jobs without U.S.-style mass dislocations and wage cuts--Volkswagen’s inventiveness offers encouraging evidence that a middle path can work.

Labor costs worldwide are already down by 14%. And even though Volkswagen’s return on sales is still one of the lowest in the industry, and even with GM baying outside the door, international stock analysts are busily changing their “Hold” recommendations to “Buy.”

In October, Merrill Lynch picked Volkswagen as the stock with the most appreciation potential for U.S. investors.