Germany's Volkswagen is up to its neck in a sleaze and bribery scandal with enough lurid details to make Herbie blush. Leading managers have resigned one a week for the past month in a scandal that could shatter the unique co-determination system of Europe's largest car-maker.
The first allegations surfaced last month that executives at VW and its Skoda subsidiary had created a secret network of front companies that made bids for VW contracts. Six firms have been uncovered so far, from France to Angola, all operated by the same Swiss holding company with links to Helmut Schuster, head of Skoda who resigned last month, and Klaus Volkert, VW works council boss who resigned two weeks ago.
Volkert's resignation opened the floodgates, and state prosecutors are now probing claims that managers bribed the members of the VW works council with luxury holidays and prostitutes.
German newspapers have had a field day reporting stories of works council executives flying out on all-expenses-paid holidays to Brazil with "high-class hookers," as one newspaper said.
A tabloid newspaper alleged that VW petty cash was used to fly a Brazilian woman across the Atlantic to meet regularly with Volkert. The woman said she was an "advertising consultant", but had little to show for her efforts except regular private meetings with Volkert in the Georges V hotel in Paris, and other luxury hotels across Europe.
The most prominent head will be claimed today, when the VW board is expected to accept the resignation of personnel chief Peter Hartz. He "emphatically denies" waving through any irregular spending, but offered to take "political responsibility" for the affair and stand down. "This is about more than just me," he said. "It's about the reputation of Volkswagen, for which I feel especially responsible."
Hartz rose to prominence three years ago when he was asked by his close friend, Chancellor Gerhard Schröder, to develop proposals to shake up the labour market and reduce mass unemployment. The Hartz reforms were implemented at the start of this year and the VW man was hailed as Germany's greatest reformer since Martin Luther. Now opposition politicians want the Hartz reforms to be renamed.
The allegations couldn't have emerged at a worse time for VW. Although it has expanded heavily into central Europe, buying up rivals and opening new plants, it faces increasing competition from Japan and Korea, and ran up €53 million losses in the first quarter of 2005.
The company is already considering closing its Brussels plant, putting nearly 6,000 jobs at risk, and moving production of its Golf hatchback and Audi A3 models to central Europe.
"Apparently the flight into the luxury market has gone to their heads," sniffed the motoring correspondent of the Frankfurter Allgemeine newspaper. "Cars like the Phaeton and Bugatti were developed regardless of market demand, while the classic VWs are too expensive for regular earners and of questionable quality as well."
The scandal investigation is in its early days, but could weaken the so-called "Volkswagen system" of co-determination that is the hallmark of the company.
The state government of Lower Saxony, where VW's Wolfsburg plant is situated, has a 20 per cent shareholding in the car giant. Traditionally, Lower Saxony was ruled by the union-friendly Social Democrats, with the state prime ministers, including Schröder at one time, serving their time on the board.
The state, along with the union-appointed employee representatives, can vote down anyone else on the supervisory board. The company is protected from hostile takeovers by the so-called "Volkswagen Law", the subject of a long-running battle between Brussels and Berlin.
But the "Volkswagen System" of co-determination, seen as a guarantor of the common good of company and workers, has been tarnished by the allegations of sleaze and cronyism - and Lower Saxony is now ruled by the Christian Democrats (CDU), no friends of Germany's powerful unions and vocal critics of the co-determination system.
Union leaders have suggested that "forces" are at work behind the scandal, with leaks timed to coincide with a likely CDU win in the autumn general election. The CDU would shed few tears for a management clear-out and the dismantling of the Volkswagen system.
The most likely winner in the scandal is 44-year-old VW brand manager Wolfgang Bernhard. He was brought on board last autumn from DaimlerChrysler, where he had made a name as a ruthless cost-cutter. Analysts say Bernhard will seize the moment and present a drastic €7 billion cost-cutting programme this morning to investors, with €1 billion savings alone at the flagship VW brand.
"We are at a crossroads," he told VW employees in a letter last week. "One thing is clear - we must negotiate, and quickly."