Empires of yesterday and today.
A few days ago, I was watching a documentary on King Remses II, who is regarded as Egypt's greatest and most powerful pharaoh. He lived well into his 90s, more than 3 times the average life expectancy of his people. During his reign, he expanded his empire, built himself a series of fancy monuments, temples and his royal tomb to stamp his mark as Egypt's greatest leader. This is the man who built the magnificient Abu Simbel and Ramesseum temple. To learn that his people accomplished such gargantuan feats of engineering even by today's modern standards despite having only basic tools and minimal understanding of science and mathematics further adds to his mystic glamour.
Dictators and empire builders of old, from Ramses to Caesar to Genghis Khan to Emperor Qin Shih Huang and even Adolf Hitler, they all have one thing in common - their massive egos and the need to stamp their name on the history books.
At the same, I have been noticing that a different sort of empire builders live in our current time and age. No longer are empire builders leaders of nation states as military expansion have all been outlawed and any form unjustified military excursions will only raise the ire of the global society. But rather, empire builders of our world reign from corporate board rooms. Empire expansion is done by means of controlling the markets and finances of the world.
Lurking beneath the attention line of the general public, a different sort of empire building effort is underway, escaping attention of all but those who are within the industry. Its means of empire building might be different but its motivation is still the same as that of those leaders who reigned 5000 years ago. I guess men don't change don't they?
In the 2007 Internationalen Automobil-Ausstellung (IAA) or more commonly known as International Frankfurt Motor Show, the CEO of Volkswagen AG Dr. Martin Winterkorn has publically announced that Volkswagen, the world's 4th largest manufacturer will be challenging Toyota Motor Corp, the world's second largest car company after General Motors. But given the sorry state that GM is currently in, the industry frequently considers Toyota to be world's largest as it is no longer a question of whether can Toyota beat GM but a question of when. Toyota's market capitalization - it's financial war chest is more than all of that of Daimler AG (Mercedes Benz), Ford, Chrysler and General Motors combined. If it wants to, Toyota can easily buy out the top 3 of the main car manufacturers in the world. Think of it as the Goliath of the auto industry. Very bold, and arrogant statements but humility is not a trait that many German bosses are known to have. But then again, believe me that when I say that Japanese bosses from VW's rival Toyota are no less arrogant. When it comes to the real corporate culture, away from the pretentious act for the media and the overly rated write-ups on the virtues of one company's management style, you may forget about all your assumptions that Japanese are courteous and very humble. That maybe be true if you are a visitor or a tourist, but not a co-worker or staff. It's just that Germans are a lot more direct and the Japanese tend to beat around the proverbial bush too much.

Flags of nation states and empires of old have been replaced by today's corporate emblems. VW Group's brands include Lamborghini, Bentley, Audi, Seat and Skoda.
Anyway, to hear such bold public statements of intent from a "smaller" company is akin to the biblical story of David challenging Goliath, or should I say the Godzilla from Nagoya? But this is where things start to get more interesting. You see, the REAL challenger to Toyota is actually Porsche, a tiny but highly profitable sports car company that compared to Toyota, is nothing more than a mosquito. But do not be fooled by its size as Porsche is one of the world's most profitable companies and it holds the industry benchmark to make the most profit per car. If Toyota is a Godzilla, Porsche is the virus! Both can kill you very fast. Porsche has recently bought majority share holding rights in VW, and thus is using VW as a mass-market brand vehicle / proxy to challenge another mass market company like Toyota. Thus, protecting the exclusivity of the Porsche brand while allowing it to move downmarket where the volume is.


Wendelin Wiedeking of Porsche and Katsuaki Watanabe of Toyota.
The story of this whole empire building effort is worthy of any Korean or should I say German soap opera.
Character 1 : The story begins all the way back to 1930s, in a Austria where a young boy named Ferdinand Piech was born to Louise Porsche and Anton Piech. Louise was the daughter of Ferdinand Porsche and sister of Ferry Porsche. Thus, he was the grandson of Ferdinand Porsche and nephew of Ferry Porsche. Ferdinand Porsche was probably one of the most brilliant automotive engineers ever. His greatest success was creating the famed Volkswagen Beetle, a people's car project commissioned by Adolf Hitler. The Volkswagen brand is loosely translated into the "people's car."

An early model Volkswagen Beetle prototype.
The most amazing thing was that Ferdinad Porsche never received any formal engineering education. But he was said to sneak into a local university whenever he could. After World War 2, Ferdinand Porsche's role in assisting Hitler landed him in prison for 20 months. His son, Ferry Porsche continued his work and laid the actual work of creating the first car to bear the Porsche name - the Porsche 356. Ferdinand Porsche died shortly before seeing the actual car that bore his name could be built. Ferry would later continue his father's legacy, culminating with the 901 Carrera, and the rest is history...
Thus, Ferdinand Piech came from a family line of highly brilliant technical minds. In 1972, the supervisory board of Porsche AG decided that to avoid conflict of interest, a new policy was drafted to bar any member of the Porsche family to be involved in the management of Porsche AG. Thus, Ferdinand could no longer be actively involved in Porsche and left for Audi, where again his technical brilliance was shown when he created the quattro all-wheel-drive system that would later be instrumental in the legendary Audi Quattro's dominance in 1980s world rallying. He would later serve as CEO and later chairman of Volkswagen AG, where he orchestrated some controversial projects like the way over-budget and overdue Bugatti Veyron, the financial sink-hole Volkswagen Phaeton and also the fight with BMW AG to purchase Rolls-Royce and Bentley.
In Piech's eyes, Volkswagen and Porsche should be united due to their common family heritage. It is also said that Ferdinand Piech never liked the fact that he was always compared to the legacy of his grandfather and thus had to work very hard to get out of the shadow of his illustrious grandfather Ferdinand Porsche, the creator one of the most successful car in history (Bettle) and built many famous Auto Union racers, and also his uncle Ferry Porsche who founded the world's most admired car company.
End of character one.
Character 2 : Back in 1993, Porsche AG was in a very bad state. Sales were in a negative spiral and the quality of its products were below par of many Japanese competitors and certainly does not justify its high price. In comes Wendelin Wiedeking. Wiedeking recognised the strength of the Toyota Production System, dubbed by a study by MIT as "The Machine That Changed The World". Wiedeking sought assistance from Toyota and Porsche engineers were frequently sent to Japan to be trained by Toyota. Back in Porsche's nerve center in Stuttgart, Porsche factories were gradually been reconfigured to apt that of Toyota's factories. The results appeared fast. Porsche is not only the most profitable car company, it is also the only independent sports car manufacturer in the world, bucking its doomsday prediction by many "analysts" in the light Ferrari's sale to Fiat, Lotus to Proton, Lamborghini to Audi etc.
Today, Porsche's quality levels is on par to that of Lexus, and certainly far ahead of its German competitors including Mercedes and BMW. However, Porsche is currently facing a different sort of challenge. The car industry in many developed markets where Porsche sells has matured and growth potential is limited. Cost competiveness in the car industry is not for the faint hearted as development cost for new models can run into hundreds of millions. Porsche desperately needs to enter into new market segments - which explains the existance of SUV Cayenne and Panamera sedan project. They would also need to achieve far higher volumes that their current output in order to achieve sufficient economics of scale to offset the high cost. Thus the Cayenne was developed with VW's Tuareg. Moreover, new EU environmental regulations are forcing car manufacturers to cap CO2 emission of their vehicles and punitive taxes are levied onto car manufacturers based on the average CO2 emission of all their cars. This puts high performance car companies like Porsche at a disadvantage while companies like Volkswagen can spread out its CO2 emission over its smaller economical cars like Polo and Golf.
Which explains why Porsche has set its eye on VW. Porsche's ambition was finally realised when the EU court finally allows Porsche to increase its voting rights in VW. The fact that a tiny company like Porsche is buying into Volkswagen is already a David-Goliath story on its own. However, this is nothing simple about this takeover. It has been widely speculated that the takeover has been engineered by VW supervisory board chairman Ferdinand Piech. In a riveting board room drama, VW's former CEO Dr. Bernhard Pischetsrieder was forced to resign after a no-vote of confidence by the supervisory board. His ally and VW group brand chief Wolfgang Bernhard was also forced to resign. In their place, Ferdinand elected his portege and then CEO of Audi AG Dr. Martin Winterkorn. Bernhard and Wolfgang's departure was done despite the fact that the two had achieved considerable success in trimming VW's inefficient and bloated workforce. But being the hard headed man that Ferdinand Piech is, this is hardly surprising. Ferdinand is known to be a technical genius but a his reputation as a manager is far from exemplary. Nonetheless, it will be interesting to see how will this "drama" develop.


The victims of the coup : Wolfgang Bernhard and Dr. Bernhard Pischetsrieder.

The victors of the coup: Martin Winterkorn and Ferdinand Piech.
Being the brilliant man that he is, I am sure Ferdinand Piech recognises the shortcomings of VW against Toyota, which has set the various benchmark for profitability, model life cycle, profitability for the industry to follow. Afterall, Piech was awarded Car Industry Executive of the Century. Piech's plan is to bank on Wiedenking's deep understanding of the Toyota Production System and to capitalise on his experience to replicate the same turnaround he did for Porsche on VW.

"We believe that if anybody can stand up to Toyota, it is Volkswagen," Wendelin Wiedeking

As expected, Toyota simply ignored the recent events from Stuttgart. What do you expect them to react anyway? That they are scared? You could almost hear them silently mummering "We could bury you if we wanted to."
VW has since announced they will be launching a series of new models and strengthen their position in developing markets with the objective of toppling Toyota by 2015. Bold words, but I have my own reservations. Though a financial blackhole, the Bugatti Veyron is a pet project is Piech. So was the commercial flop Phaeton. But Wiedeking has stated that there will be no sacred cows and all models within the VAG must churn profits or they will be discontinued. Piech is a brilliant engineer but he lacks the tight cost control of Wiedenking, who is also an engineer by training. Development cost could be an area of conflict for the two. Piech is an engineer who thrives on accomplishing great technical challenges, whatever the cost maybe. He is a firm believer of the mantra that if a superior product is in built, everything else will fall into place and he expects customers to pay a premium for it.

The Phaeton project was an example, and certainly not the only example of this. Piech wanted to make a point to VW's other German rivals that it too could built a highly sophisticated car if it wanted to. But as expected, the car was a commercial flop. Common logic will tell us that not many will pay Mercedes S-class price for a car with a VW badge on it. Piech argued that the purpose of the Phaeton is not to make a profit to prove a point of VW's engineering superiority.


To push things further, the Phaeton was not built in a conventional factory. It redefined the term "manufacturing" as the car was built in VW's Dresden famed Glass Factory. The Dresden factory resembles an art gallery more than a car manufacturing plant. It is also a famous tourist destination in Dresden. VW never recouped the investment on the Phaeton its future is uncertain.

Not satisfied with building the world's most accomplished limousine, Piech wanted to built the fastest car in the world. So he bought the Bugatti brand and initiated the 1001 bhp Veyron project, which quickly balloned way over-budget and its development was way behind schedule due to the scale of the technical challenges facing the engineers. Again, it was a financial blackhole. The car kept sucking money in and never churned profit though VW claims that it is a making "good progress" on the financial side.
"The most pointless exercise on the planet has got to be this four-wheel-drive 1000 horsepower Bugatti. I think it’s incredibly childish this thing people have about just one element—top speed, standing kilometer or 0-60. It’s about as narrow minded as you can get as a car designer to pick on one element. It’s like saying we’re going to beat the original Mini because we’re going to make a car 10 mph faster on its top speed—but it's two feet longer and 200 kilos heavier. That’s not car designing—that just reeks of a company who are paranoid," Gordon Murray, former F1 engineer and creator of the McLaren F1 roadcar. Porsche's chairman Wiedenking has made it clear that there will no more expensive "toys" in the new VW group and that every single model must generate profit. How does this go down with Ferdinand Piech and Martin Winterkorn is still left to be seen.
The Audi R8 is challenging Porsche 911 and Lamborghini Gallardo, it is threading on dangerous grounds as all German car manufacturers abide to an unwritten law that no German car company will launch a model that will challenge the superiority of the Porsche 911 due to reasons of national pride. And how different should you position the Golf GTi from the Audi S3? Same thing goes to Seat and Skoda models. The Volkswagen Group's existing product line-up is in a complete mess, cannibalizing sales from each other without making any significant threats to high volume models like Toyota's Camry and Corolla. Then there is the issue of managing in-fightings between bosses from all the VAG group companies; Volkswagen, Audi, Seat, Skoda, Bentley, Lamborghini and now Porsche. Do remember that every single one of these bosses are highly ambitious individuals with an equally large egos to match. Any efforts to limit their autonomy currently enjoyed will not go down well with them.
Toyota's strength in the market has largely been supported by its success in developing markets. In almost every Third World country, it would seem that the national car is a Toyota. Hiluxes and Hiace vans mobilize the entire Third World communities while VW is virtually non-existant in developing countries outside South America, China and Eastern Europe. But the signs of widending focus is clear. VW's interest in Proton alone is telling enough. In both the Frankfurt and Tokyo Motor Show, VW has unveiled the Space Up! concept car, the first of the many cars that VW will use to challenge Toyota in developing markets.

Volkswagen's Up! concept car hints at the future models VW plans to wield against Toyota.

Artist rendition of a VW truck, a type of vehicle VW desperately needs should it desires to challenge Toyota.
As powerful as Toyota is, it is not infallible. After more than a decade of rapid global expansion under the guidance of Hiroshi Okuda, Fujio Cho and now Katsuaki Watanabe, Toyota is begining to reveal some kinks in its armour. Rapid expansion has placed tremendous amount of strain on its manpower and facilities. 2007 saw the highest number of safety and quality related recalls on Toyota group cars ever. The launch of its highly anticipated Tundra full-size truck in the USA has been plagued by reports of camsharts failures leading to serious engine damage, that coupled with automatic transmission problems on US market version Camry has caused some very embarrassing moments for Toyota's most important market outside Japan. From its high profile success of the Prius, Toyota suddenly found itself the target of various environmental groups for not supporting their cause.
Within the span of 3 months, Toyota USA has lost 3 of its top executives. Jim Press, former president of Toyota Motor Sales USA and Deborah Wahl Meyer, VP of marketing for Lexus has defected over to Chrysler while James Farley, VP of Marketing has defected to Ford.
When placed in the context of this eventual showdown between these two giants of the auto industry, you see how pointless it is for our government to keep dragging its feet in the negotiations for the sale of Proton to VW. There is no place for a national car industry. With all due respect to the excellent job of the new CEO Syed Zainal Abidin in turning around Proton with the Persona, the hard cold truth is that Proton is nothing but a pawn in the grand scheme of things Porsche, VW and Toyota has in plan. The consolation fact is that VW have a much better success story than any other car manufacturer in turning around ailing car brands. They lifted the dowdy Czech brand Skoda into a name synonymous with value for money and Audi level quality, ironed out Lamborghini from being a quirky Italian supercar that could fall into pieces anytime and only starts if you beg enough into a reliable everyday supercar. They have moved Bentley from being a brand known for making cars in time warp stuck in the 60s bought only by old Englishmen into a avant-garde modern GT cruiser bought the celebrities and footballers. And the best thing is that VW has done all these whilst maintaining the key charaters that make a Lamborghini a Lambo and not a Ferrari, a Bentley and not a Roller. Their track record is certainly better than GM, which massively screwed up brands like Saab.
Many times I have wanted to blog about the negotiations between VW and Proton, but now it just seems so stupid and pointless to even spend time collecting my thoughts on it.
In closing, I guess empires of old are built with one strong headed dictator at the top, commanding an army of slaves and foot soldiers to do his bidding. Empires of today are actually not that much different after all. Just that slaves and armies go about their duties in suits and ties, and instead of carrying medieval weapons, they now carry a combination of calculators, notebooks, cellphones and PDAs. Question now is, are you wasting your life away building someone else's vision of grandeur or are you living a life you are happy with?
Posted by whylikethat at 05:18 AM | Add a Comment

