VW to Cut Costs as Hartz Departs

Members of the company's inner council, a four-member supervisory board, said they had accepted the resignation of Peter Hartz, tendered last Friday, and that company chief executive Bernd Pischetsrieder would take over his responsibilities on a temporary basis.

Head of the IG Metall trade union Jürgen Peters said they hoped "to reach an agreement peacefully, but quickly" on Hartz's permanent replacement.

Separately, management announced it would continue with an ambitious cost-cutting program aimed at improving the operating efficiency of the group, Europe's biggest car maker.

Last year, Volkswagen's net profits fell 30 percent.

The group, which is split into two car divisions -- Volkswagen and Audi -- plans to reduce costs in its VW operations by seven billion euros. The cost-savings plan, which aims to increase group net profit by four billion euros ($4.83 billion) by 2008, would come partly from a two-billion-euro improvement in sales and distribution as well as a three-billion-euro cut in material costs.

Another one billion euros would come from a reduction in production costs, 500 million from lower overheads as well as another 500 million in warrant costs, it said.

Wolfgang Bernhard, the head of the Volkswagen division who has a reputation as a cost-cutting specialist, warned there were "no sacred cows" in his division, which groups the Volkswagen, Skoda, Bentley and Bugatti brand names.

But he sought to downplay rumours the group planned massive job cuts and factory closures following a report in the Financial Times Deutschland on Monday that the company was preparing to shut a factory in Brussels with 5,700 employees.

Opportunity for reform

The departure of Hartz (photo) was seen by some analysts as an opportunity for Volkswagen to push through more draconian restructuring plans.

They estimate the company needs to cut about 30,000 jobs. But due to VW's unique corporate governance policy which gives unions and workers' representatives unusual amounts of power -- even for labor-friendly Germany -- such cuts are very difficult to push through.

"That's a tragedy for VW, because it means they cannot set objectives like the Toyotas, like the BMWs to have a strategy which optimizes stakeholder value," said Ferdinand Dudenhöffer, the director of the Center of Automotive Research at the University of Applied Sciences Gelsenkirchen.

Despite the plans to reduce costs, the group vowed to continue investing and unveiled an initiative to spend 2.5 billion euros per year to improve its core passenger car business in 2006-2008.

Millions paid in India

Hartz is the latest VW executive to bear the brunt of the growing bribery scandal, whose first tremors of the scandal came last month when the former head of personnel at VW's Skoda unit, Helmuth Schuster, resigned amid allegations of bribery and fraud.

On Wednesday, a top minister in India's southern state of Andhra Pradesh admitted to paying money to try secure a deal with the German auto giant but denied it was a bribe.

"The money was paid to Vasishta Wahan which we were told is an Indian arm of Volkswagen," state Chief Minister Y.S. Rajasekhara Reddy told reporters in this southern Indian city.

Reddy was reacting to charges that the state government had paid 2 million euros ($2.5 million) to Vasishta Wahan, a shadowy company, which shares the same initials as the automaker and projected itself as the Indian arm of Volkswagen.

Vasishta Wahan = VW?

The government's dealings with Volkswagen have been under a cloud after Schuster quit last month amid bribery allegations and claims in German press reports that he used dummy companies to secure lucrative VW contracts abroad, notably in India and Angola.

The Andhra Pradesh government claims Schuster (photo) "pressured" them to pay five million euros to Vasitha Wahan, which he claimed was Volkswagen's Indian arm. The sum was to be paid as equity for a proposed Volkswagen manufacturing plant to be set up in Andhra Pradesh's major port city of Visakhapatnam.

"He sent us a letter asking for five million euros as nominal equity in the project to affirm our commitment to it," Reddy said.

However, opposition parties in the state are demanding an explanation as to why the government released a tranche of two million euros merely on the advice of Schuster without verifying the background of Vasishta Wahan.

The German media has reported that the bribery scandal at Volkswagen has led Chairman Bernd Pischetsrieder to postpone making a decision on the planned construction of the factory in India.