VW Gets a Chance to Woo Investors

WOLFSBURG, Germany ,Madeline Chambers, European Auto Correspondent for

Reuters reports that It may look from the outside as if 60 years have passed Volkswagen AG by, but a new driver is poised to take the wheel of Europe's biggest car maker and investors are hoping to be offered more than just a backseat ride

In April BMW AG's affable former boss Bernd Pischetsrieder takes over as chief executive from Austrian engineer Ferdinand Piech, the so-called Pit Bull of the German auto industry.

VW's huge Wolfsburg plant is to many people a reminder of the group's origins in Nazi times but behind the dated facade, sophisticated technology helps it produce a car every 25 seconds.

And now it looks as if the firm that delivered the first Beetle, or ``People's Car,'' in 1946, will complement its expertise in engineering with a focus on returns.

``All the management now has realized that we must sell shares as well as cars,'' Chief Financial Officer Bruno Adelt told Reuters.

Pischetsrieder, appointed in mid September, has already made his mark by announcing a board shake-up and a new brand strategy, broadly welcomed by investors.

STUNTED

Despite posting healthy profits, VW shares trade at a discount to peers due to a bad reputation among investors, high capital expenditure and its close links to the state of Lower Saxony, which effectively has a blocking minority.

A disastrous capital hike, an expensive foray into the trucks business and uncertainty about the reason for a share buyback have in recent years left investors bewildered.

``The main problem with VW is the past. Many investors have been very disappointed and frightened away,'' said one Paris-based fund manager.

VW shares trade at about nine times 2002 estimated earnings, compared to BMW's 19 and are the second cheapest in the sector.

VW's share performance is a measure of Pischetsrieder's success so far. The stock under-performed the DJ European Auto Stoxx Index by 5.5 percent in 2001, but has out-performed it by 3.6 percent since his appointment in early September.

A big plus is Pischetsrieder's willingness to communicate.

``A little bit more information would make a big difference,'' said Mark Vincent, a fund manager at Standard Life Investments.

He says more information on cost cutting would end doubts about whether VW really has made inroads into its cost base.

NEW CREED

Pischetsrieder and Adelt have cheered investors by adopting return on investment as a yardstick for profitability, replacing return on sales, and by trimming capital expenditure.

``The concept of return on investment is witness to the fact that we want to make our investments profitable -- that is the clear message to investors,'' says Adelt.

A major area of concern regarding investment has been the luxury segment, which investors believe has consumed a huge amount of VW's cash in recent years.

``I think there has been a tendency to invest in projects for the engineering merit rather than their returns,'' said Vincent.

Few analysts expect the investment in a raft of luxury VW brand models including the new powerful Passat and the super-luxury Phaeton, to pay off any time soon, if at all.

Pischetsrieder has been cagey about his commitment to VW's luxury segment but his new brand strategy, aimed at more clearly defining the group's brands, shows an intention to boost Audi which has suffered while the VW brand has moved upmarket.

PIECH IN BACKGROUND

The new CEO will have to take some tough decisions to ensure investors stick with him after a honeymoon period.

Piech's beady eye will be watching keenly from the Supervisory Board and he could block decisions not to his taste.

Despite worries about hiss continued influence, most company insiders expect him to take a back seat, noting that he already hands over to Pischetsrieder in meetings.

``There was speculation Piech would get involved at an operational level but he has made it clear he will restrict himself to the role of a supervisory board member and that he will move ``home'' which I understand as Salzburg or Austria,'' said one insider.

Investors would like to see U-turns in some areas, for example, a complete withdrawal from the trucks business -- which would mean selling its stake in Sweden's Scania -- a conversion of preference shares to common stock and a cancellation of repurchased shares.

Politics will also continue to play an important role and could define the future shape of the company.

Social Democrat Chancellor Gerhard Schroeder, a former Lower Saxony premier, has a close relationship with both VW and Piech but this might change if a new government takes power after September's elections.

Schroeder has made it clear he will fight to keep VW's independence, not least to ensure jobs remain in the state -- the Wolfsburg plant alone employs 50,000 people.

VW can be reasonably sure that Schroeder would block a new European takeover code if it jeopardized the so-called ``VW Law'' which gives Lower Saxony a blocking minority even though it holds only some 19 percent of VW's common stock.

The European Commission has expressed concern about the law and Lower Saxony officials acknowledge there is pressure to change it. If the hard-right Edmund Stoiber were to become chancellor he may decline to play to VW's tune.

``It is a worry -- I don't think we would have the same support from Stoiber,'' said one company insider.

If that happened, the stock could soar with the possibility, at least in theory, of a takeover bid and expectations of lower labor costs.