Audi CEO's Dieselgate arrest threatens fragile truce among VW stakeholders

FRANKFURT — The arrest and detention of Audi's chief executive forces Volkswagen Group's competing stakeholders to renegotiate the delicate balance of power that has helped keep Audi CEO Rupert Stadler in office.

Volkswagen's directors are discussing how to run Audi, its most profitable division, following the arrest of the brand's long-time boss on Monday as part of Germany's investigations into the carmaker's emissions cheating scandal.

The supervisory board of Audi, meanwhile, has suspended Stadler and appointed Dutchman Bram Schot as an interim replacement, a source familiar with the matter said on Tuesday. Schot joined the Volkswagen Group in 2011 after having worked as president and CEO of Mercedes-Benz Italia. He has been Audi's board member for sales and marketing since last September.

The discussions risk reigniting tensions among VW's controlling Piech and Porsche families, its powerful labor representatives and its home region of Lower Saxony.

VW has insisted the development of illegal software, also known as "defeat devices," installed in millions of cars was the work of low-level employees, and that no management board members were involved.

U.S. prosecutors have challenged this by indicting VW's former chief executive Martin Winterkorn. Stadler's arrest raises further questions.

Audi and VW said on Monday that Stadler was presumed innocent unless proved otherwise.

Munich prosecutors detained Stadler to prevent him from obstructing a probe into Audi's emissions cheating, they said on Monday. Stadler is being investigated for suspected fraud and false advertising.

Here are the main factors deciding the fate of Audi.

Background: Audi's role in Dieselgate

Volkswagen Group was plunged into crisis in 2015 after U.S. regulators found Europe's biggest carmaker had equipped cars with software to cheat emissions tests on diesel engines.

The technique of using software to detect a pollution test procedure, and to increase the effectiveness of emissions filters to mask pollution levels only during tests, was first developed at Audi.

"In designing the defeat device, VW engineers borrowed the original concept of the dual-mode, emissions cycle-beating software from Audi," VW said in its plea agreement with U.S. authorities in January 2017, in which the company agreed to pay a $4.3 billion fine to reach a settlement with U.S. regulators.

Audi engineers developed a 3.0 liter diesel engine that was later also used in VW and Porsche models sold in the United States between 2009 and 2016.

Stadler has denied any involvement in cheating, and Audi even denied the existence of illegal engine management software after the U.S. Environmental Protection Agency (EPA) issued a notice of violation against Audi on Nov. 2, 2015.

Audi eventually admitted to violations on Nov. 19, 2015, according to VW's plea agreement with the U.S. Department of Justice from January 2017.

The deal revealed that Audi employees were also involved in a cover-up once U.S. regulators began asking questions.

"Within VW AG and Audi AG, thousands of documents were deleted by approximately 40 VW and Audi AG employees," VW's plea agreement revealed.

Stadler's backers

In May 2017, Stadler was awarded a five-year contract extension until the end of 2022, but only because of a closed-door pact among supervisory board members in which it was agreed that he would not serve out his full term, two sources close to the company's supervisory board told Reuters at the time.

Stadler has enjoyed backing from the Porsche and Piech families who control Porsche SE, the family's holding company, which has a 52 percent stake in VW Group.

Stadler is close to the families because of his prior role at VW, where he was chief of staff to Ferdinand Piech, the former chairman and chief executive of VW.

Piech and his cousin Wolfgang Porsche, who currently heads the family clan that controls VW, are grandchildren of Ferdinand Porsche, who developed the iconic VW Beetle.

Stadler's detractors

Stadler's continued presence at the helm of Audi has been criticized by VW's labor representatives, who have half the seats on the carmaker's supervisory board.

Under pressure to cut costs within the VW empire in the wake of more than $25 billion in fines and penalties for emissions cheating, labor leaders have called on Stadler to cut costs at Audi and take responsibility for his division's failings.

Audi is the most profitable division within the VW Group, which also owns the Skoda, Bentley, Bugatti and Porsche brands.

The 20-seat VW supervisory board, or board of directors, grants equal representation to workforce and shareholder representatives.

But VW differs from other German companies in one respect — Lower Saxony, where VW is headquartered, gets two of the 10 shareholder seats, tipping the balance of power.

Analysts say the representatives from Lower Saxony and the workforce share the common goal of protecting jobs at the region's biggest company, which employs over 100,000 people in the northwestern German state.

Porsche-Piech power

The Porsche and Piech families, controlling 52 percent of the votes in VW through Porsche SE, have the power to force change at VW, but have largely kept silent over "Dieselgate."

The ruling clan encompasses about 80 people with diverse interests and careers ranging from design to real estate, with patriarchs Ferdinand Piech and Wolfgang Porsche being slow to hand the wheel over to their children.

The clan lost its dominant figure at VW in April 2015 when Ferdinand Piech, who spearheaded its global expansion, quit as chairman after more than two decades at VW's helm following a power struggle with then CEO Martin Winterkorn.

With Piech gone, his cousin Wolfgang Porsche leads the family, which now occupies four seats on the supervisory board.

Qatar's role

In 2009, Qatar emerged as a VW stakeholder after it helped stabilize Porsche Automobil Holding SE's rocky finances in the wake of the Stuttgart-based company's failed takeover attempt of VW. A portfolio of derivatives on VW shares that Porschek Automobil Holding had accumulated was hastily sold to Qatar, which now owns a 17 percent VW stake.

Frustrated with the pace of reform at VW, Qatar had asked the carmaker for a seat on the company's executive committee in 2016, a request that failed amid substantial opposition. Qatar has two seats on the supervisory board of VW.

Reporting by Edward Taylor

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By Reuters