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Macht schnell or go to hell

European Court Strikes Down ‘Volkswagen Law’

Published: October 23, 2007

FRANKFURT, Oct. 23 —The European Court of Justice in Luxembourg today struck down a 47-year-old German law that was the only roadblock standing between Porsche and its long-sought goal of taking over Volkswagen.

The ruling puts an end to the so-called Volkswagen Law, a statute devised by the German government to protect the auto giant from an unwanted takeover.

While such a decision is a significant milestone in Europe’s development of an open market, it is more momentous in the way it is expected to reshape the German auto industry.

Now that Porsche is free to increase its voting stake in Volkswagen, analysts have predicted, it will move to become VW’s majority owner — a small, but highly profitable maker of sports cars — swallowing a company 14 times its size.

It would be a classic David-and-Goliath tale, if this Goliath were not synonymous with the tiny Beetle.

Porsche has been buying shares in Volkswagen for two years, and it has made no secret of its goal. It has even arranged a $14 billion credit line for additional stock purchases, though Porsche executives insist they are under no pressure to raise their stake and in no hurry to do so.

Still, the court ruling promises to heat up an already simmering corporate drama, as Porsche’s hard-driving bosses begin to bear down on the management and employees at Volkswagen.

Porsche’s chairman, Wendelin Wiedeking, has declared he wants Volkswagen to rival Toyota — a grand ambition that would require VW, at a minimum, to recapture its lost presence in the American market. He has little patience for money-losing models, like the Phaeton, Volkswagen’s luxury sedan, which never held its own against BMW or Mercedes-Benz.

“Wiedeking has said, ‘We’ve got to change a lot of things at Volkswagen; there are no sacred cows,’” said Ferdinand Dudenhöffer, the director of the Center for Automotive Research in Gelsenkirchen. “Porsche is very successful in being lean and profitable. It’s not going to be harmonious.”

Already, Volkswagen workers have gone to court to stop Porsche from allocating board seats at the new holding company in a way that would reduce their representation from 10 seats to 3. The court, in Ludwigsburg, Germany, is due to hand down a ruling tomorrow.

The European court’s advocate general, Dámaso Ruiz-Jarabo Colomer, declared last February that the Volkswagen Law infringed on the free flow of capital within Europe.

The German government adopted the law in 1960 to protect the position of the state of Lower Saxony, which owns 20.1 percent of Volkswagen’s shares, and views itself as a protector of the workers’ rights. Porsche has spent more than 5 billion euros ($7 billion) to buy close to 31 percent of Volkswagen’s shares. But its voting share is capped at 20 percent, the same as Lower Saxony’s. Without the Volkswagen Law, Porsche is now able to behave like a principal shareholder.

To some extent, it has anyway. Mr. Wiedeking, who has a seat on Volkswagen’s board, has spoken about the company’s strategy in a way that suggests he is — or expects to be — deeply involved in formulating it.

Porsche does not worry about ruffling feathers. A spokesman, Frank Gaube, said the change in the allocation of board seats was necessary to protect the interests of Porsche’s 12,000 workers, which under German law could be overwhelmed by the interests of Volkswagen’s 340,000 workers.

To circumvent this, Porsche chose to incorporate its new holding company, Porsche Automobil Holding, under European, not German, law. Known as Societas Europaea, or S.E., the arrangement allows Porsche to negotiate reduced worker representation on the board. It also gives workers outside Germany a voice in choosing board representatives.

“Under German law, you’d have six employee representatives from Volkswagen on the supervisory board and zero from Porsche,” Mr. Gaube said. “Now we’ll have three from each company.”

That delicate balance is less evident in the other board seats, several of which are allocated to members of the Porsche family. The heirs of Ferdinand Porsche will effectively control Volkswagen, which some see as the closing of a circle, since Mr. Porsche led the company that, at the behest of Hitler, created the car that would become known as the Beetle.

In the unfolding power game, Mr. Wiedeking bears watching, according to analysts. He pushed Porsche to invest in Volkswagen and is likely to exert influence on decisions like what new models to build, or whether it should open a factory in the United States.

Volkswagen’s chief executive, Martin Winterkorn, said last month that an American plant might make sense, if the dollar continued to weaken against the euro. But Porsche executives said Volkswagen first needed to increase capacity at its existing plant in Puebla, Mexico.

In an interview at the Frankfurt auto show last month, Mr. Winterkorn seemed eager to breathe life into the faltering Phaeton line. But Mr. Wiedeking, analysts said, would have little tolerance for pouring resources into an unprofitable luxury car, especially since the Volkswagen-Porsche group already has several other premium brands: Porsche, Audi, and Bentley.

“The Phaeton will lead to conflict with Winterkorn, since he pursues products for image reasons,” Mr. Dudenhöffer, the analyst, said. (Mr. Wiedeking declined to comment before the court ruling.)

While Mr. Winterkorn may find himself under heightened pressure, he retains a powerful ally in Ferdinand Piëch, a former chief executive of Volkswagen and a member of the Porsche family.

On one point, Volkswagen and Porsche are agreed: VW needs to rebuild its once-mighty franchise in the American market. Mr. Winterkorn has made this his top priority, and is planning new models that will cater to American tastes by offering less complex and less costly engineering.

“Our problem, really, is that we build cars for Europe and think we can sell the same cars in America,” he said.
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