Volkswagen AG

The concept for a “people's car” originated in the mind of Ferdinand Porsche, a pioneering auto designer. Inspired by Henry Ford's success in making cars available to a much wider portion of the population, Porsche fought against the idea that automobiles were a luxury to be enjoyed only by the upper classes.

In 1931 Porsche went into business for himself, setting up a shop in Stuttgart to develop prototypes of small, inexpensive cars. Making such vehicles available to the German masses was one of the promises Adolf Hitler made soon after he got himself named chancellor of the country in 1933.

Porsche, who is said to have had little interest in politics, simply saw Hitler's rise as an opportunity to pursue his dream. He met with Hitler and came away with a subsidy equal to that being given to Daimler-Benz, a larger company formed by the 1926 merger of the operations of two German auto pioneers. Hitler, a car enthusiast, took a personal interest in the development of the Kleinauto (small car), to the extent of giving Porsche specifications on its gas mileage, cooling system, and other features.

Porsche struggled to design a car that would meet the designated price of 900 marks ($360), which was about 40 percent lower than he had initially considered a break-even figure. He also had to contend with the fact that the other German automakers privately thought that the führer's Kleinauto plan was mad, and had no intention of seeing it succeed. When Porsche finally delivered three prototypes of what was now being called the Volksauto in 1936, the other companies subjected them to brutal testing, apparently hoping to find them unfit.

By this time Hitler was fed up with the industry's resistance. In 1937 he ordered the creation of the Volkswagen Development Company, and put Porsche (along with some Nazi officials) in charge. Porsche quickly modified his prototypes—which had such later-to-be-famous features as the sloping hood and the beetle shape—so that what was now called the Volkswagen was ready for production.

The car was promoted by a Nazi-dominated worker recreational organization called Kraft durch Freude (Strength through Joy). The KdF encouraged all workers to participate in a plan that had everyone paying five marks a week toward the eventual purchase of a Volkswagen. Soon tens of thousands of workers were putting aside what in the aggregate was a substantial sum every week for a product that did not yet exist in significant numbers.

The plan was to build the Volkswagen factory in the rather remote region of Lower Saxony, where 10,000 acres were commandeered from the local aristocracy to accommodate the production facility and housing for a huge workforce. Hitler himself laid the cornerstone for the project on May 26, 1938—in between annexing Austria and invading Czechoslovakia—with a bombastic ceremony involving some 70,000 people. In his dedication speech Hitler decreed that the car would be called the KdF-Wagen. Yet as Walter Nelson noted in his book Small Wonder, a 1965 history of Volkswagen, “no one, except obdurate Nazis, ever called it that.”

The onset of the Second World War forced Porsche to modify the Volkswagen into a military vehicle called Kübelwagen (“bucket car”) with an amphibious version called the Schwimmwagen. Then, in 1944, the Volkswagen factory was extensively damaged by a series of Allied bombings. Not a single civilian vehicle had been produced.

After the Nazi regime collapsed, the heavily damaged Volkswagen plant was put under British supervision, and gradually repaired. By October 1946 it had turned out 10,000 cars.

Porsche himself was detained, then released and given an offer by France to help produce a people's car for sale there, and then re-arrested, reportedly at the instigation of the big French auto companies threatened by the plan. He was imprisoned for several years and died in 1951.

Meanwhile in Wolfsburg (the town created around the Volkswagen plant), new life was brought to the factory with the naming of Heinz Nordhoff, an experienced auto engineer, to head the operation in 1948. Although Henry Ford II had passed up a chance to take over the plant—advisors told him it was worthless—Nordhoff saw great potential in the company and worked hard to improve the quality of its products. (The issue of who owned the company, however, remained ambiguous until 1960, when it was designated a publicly traded corporation, with 40 percent owned by the federal and local governments.)

Volkswagen's growth paralleled the recovery of the German economy. In the mid-1950s Nordhoff branched into other vehicles such as the famous Microbus and, with the help of the coachbuilder Karmann and Italian designer Ghia, a sporty version of the VW “bug” called the Karmann-Ghia. Overall during that decade, VW's output leaped from 90,000 to 697,000 vehicles a year. By the early 1960s Volkswagen had become one of the world's largest auto producers: It ranked third when Chrysler had a bad year and otherwise, fourth.

Nordhoff was aggressive in developing new markets. Exports to Denmark, Sweden, Belgium, and other countries began in 1948, and deliveries of knocked-down cars to Ireland and Brazil started two years later. (Production facilities were opened in Brazil in 1959.)

Volkswagen first tried to export to the United States in the late 1940s, with little success. Through the early 1950s the company slowly built an American market by selling to non-conformists, and by the latter part of that decade increased demand for small cars such as the VW Beetle prompted Detroit to introduce its own compact models. Many imports lost ground, but VWs developed a kind of cult following, created in part by a series of unorthodox advertising campaigns with slogans such as “Ugly is only skin deep” and “Think small.” During the 1960s the now rapidly selling Beetle became a counter-culture symbol.

Production of the Beetle peaked in the late 1960s, and soon it was clear to the company, which had recently purchased the Audi operation from Daimler-Benz, that it was time for a change. VW introduced a new generation of cars—Passat in 1973 and Scirocco and Golf in 1974—but with intensified international competition, especially from Japan, the company lost ground. VW attempted to win a bigger market share in the United States through an assembly plant in Pennsylvania that was opened in 1978. The results were disappointing, and the plant was finally abandoned in 1988.

It was not until the mid 1980s, with the introduction of the new Golf, which underpriced the Japanese, that VW recovered and jumped to first place among European auto producers. The Golf, however, like its predecessor, the American-made Rabbit, did not go over big in the United States. VW's strong European position was enhanced in 1986, when it purchased a majority interest in Spain's Sociedad Española de Automóviles de Turismo (SEAT). That same year VW and Ford Motor agreed to merge their money-losing operations in Brazil and Argentina into a new company called Autolatina Ltd. (later disbanded).

In 1987 VW faced a scandal regarding its handling of foreign currency, as well as a controversy in the United States over the safety of its luxury Audi 5000S, which was said to have a tendency to accelerate on its own. At the same time, union opposition prevented the company from transferring production of its Polo compact to lower-wage SEAT plants in Spain.

VW nevertheless continued its international expansion. It was an early entrant into Eastern Europe: In 1984 it struck a deal to use engines made in East Germany in its Polos. By 1990 VW was beginning construction of a $1.9 billion assembly plant in the former German Democratic Republic. That same year, the Czech government chose Volkswagen -- over rival bidder Renault -- to partner with Škoda, the leading Czech auto maker, which was being converted from a state-owned to a publicly traded company. The decision was a victory for VW, which committed more than $6 billion over a number of years in exchange for a 70 percent stake.

VW's 1991 introduction of the third generation of its Golf (the best-selling car in Europe), was used to launch a new effort by the company to improve its market share around the world, including in the United States.

Also in 1991 VW formed a second Czech joint venture with Bratislavske Automobilove Zavody (BAZ) to make transmissions and assemble a limited number of complete cars. VW, along with Ford Motor, signed a $2.8 billion agreement with the Portuguese government to produce a new multiple-purpose vehicle in that country for the European market. All this was is in addition to VW's $1 billion commitment for an auto plant in China.

The following few years saw a drop in sales and a plunge in profits. VW Chairman Ferdinand Piëch (grandson of the company’s founder) pressed its unions to accept layoffs and other cost-cutting measures. The company also faced allegations that José Ignacio López de Arriortúa, recruited from General Motors to head manufacturing and purchasing at VW, had brought GM trade secrets with him. In January 1997 VW agreed to pay GM $100 million to settle the dispute. It also agreed to purchase $1 billion in parts from GM over seven years.

After several years of cutting back, VW went on a buying binge in 1998 aimed at shedding the company’s plebeian image. It acquired luxury carmaker Rolls Royce (including its Bentley marque) and Italian sports car producers Bugatti and Lamborghini. (After a dispute with BMW, VW kept Bentley but let BMW have Rolls). VW also developed an upscale car of its own, the Phaeton. At the same time, the company’s less expensive models such as the Jetta enjoyed a resurgence in the United States with a hip advertising campaign aimed at the young adult market.

In the late 1990s Piëch was being praised for carrying out a remarkable turnaround for the company, but the move into the luxury portion of the market did not turn out well for Piëch’s successor Bernd Pischetsrieder. By the early 2000s, quality problems began to emerge, and sales did not live up to expectations. There was also tension between the upscale ambitions of VW and its Audi unit, which focused on that portion of the market.

In 2005 the company also had to contend with a scandal involving bribes paid by VW labor relations managers to labor union officials. Amid rumors of a planned hostile takeover, Porsche AG, a luxury carmaker that purchased key components from VW, increased its small holding in the company to 19 percent, purportedly to help keep VW independent. The move set off a firestorm of controversy in Germany, in part because Porsche was controlled by a family group led by former VW chief executive Ferdinand Piëch, who was also serving as chair of VW’s supervisory board.

It soon became clear that Porsche had other than altruistic motives in mind. In January 2006 it obtained two seats on VW’s board, though Piëch had to agree to resign from that body the following year. Nine months later, Pischetsrieder was forced out, reportedly at the instigation of Piëch.

In March 2007 Porsche announced it would increase its stake in VW to 31 percent, triggering a legal requirement that it make an offer for the entire company. Yet such a takeover was technically barred by a VW-specific 1960 law that had been adopted to protect the interests of the state of Lower Saxony, which held a 20 percent stake in the company. After that law was overturned in October 2007, Porsche continued to boost its stake in VW, but a complete takeover was thwarted by feuding among the different family groups controlling Porsche.

When Porsche began to face financial difficulties in 2009, and turned to VW for a cash infusion, the tables began to turn. The situation got more complicated when the Qatar Investment Authority came into the picture as a potential investor in Porsche and perhaps VW as well. When the dust settled in July 2009, Porsche agreed to merge into VW, which will be controlled by the Porsche family. Qatar will end up with a minority stake.

But all was not well. In August 2009 German prosecutors raided the offices of Porsche as part of an investigation of insider trading in connection to the takeover battle with VW.

In December 2009 Volkswagen announced it it would buy a 20 percent stake in Suzuki Motor of Japan.