We've all read about the Volkswagen (NQB: VLKAY) sex scandal (or at least I'm hoping you did). If not, you missed out on the hottest thing to come out of Germany since supermodel Heidi Klum. Encompassing everything from expensing sexual favors to a secret network of dummy companies, this scandal has the media's mouths watering and the executives at Volkswagen worrying about much bigger things than the company's faltering market share.
The bad press couldn't have come at a worse time. Last year, the VW brand lost 44 million euro, and its operating profits dropped by more than 12%, with profits after tax plummeting by 28%. The firm also lost market share in the Asian sector to General Motors (NYSE:GM), ending its 20-year run as the top overseas automaker in China. To top it off, in a recent quality poll by J.D. Power, Volkswagen ranked a dismal 34th out of 37 brands.
Still, Volkswagen isn't about to let a little internal corruption and some lousy numbers get it down. Wolfgang Bernhard, a recent addition to the Volkswagen management team, is taking the scandal in stride and has been able to use the bad press to his advantage. Delaying the construction of both a new factory and an assembly plant until things cool down, instead of building more potential problems, Bernhard plans to take on the real issue -- the company's decaying profit margins.
Currently, the factories located in Lower Saxony are operating at less than 70% of capacity -- well below the level required for a profit. Although this is a big money-eater, cutting jobs in Germany is out of the question. Not only is the company's biggest shareholder the state of Lower Saxony, but last year's labor contract guaranteed the Volkswagen workforce's job security until 2011.
With his hands tied, Bernhard is focused on aggressively reducing costs in raw materials and production with goals of raising Volkswagen's operating profits to more than 7 billion euro by 2008. Not a bad alternative, considering the cost of materials rose in 2004 by nearly 10%, while production only increased by a little more than 1%.
With the focus on increasing current efficiency, the press attacking Germany's restrictive co-determination and union laws, and Bernhard's plan of fixing what's there rather than building more mess, Volkswagen just may be able to pull off a few miracles and come out this situation with a tastier balance sheet. Perhaps a little juicy scandal was just what the company needed.
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A downtown subway girl, Fool contributor Michelle Ponto doesn't own a car, nor does she have stocks in any of the above mentioned companies.
