By Andreas Cremer and Jan Schwartz
BERLIN/HAMBURG (Reuters) - Martin Winterkorn will stay on as chief executive of Volkswagen (DE:VOWG_p) in an unprecedented defeat for Ferdinand Piech, the German carmaker's powerful chairman and patriarch of its founding family.
Piech, who turned 78 on Friday, provoked a showdown with his CEO last week by planting a comment in a German magazine saying he had "distanced" himself from Winterkorn, who has nearly doubled revenues at Europe's largest auto group in his eight years at the helm.
But at a meeting of senior supervisory board members on Thursday, which was called to resolve the leadership crisis, Piech was completely isolated, with all other representatives on the six-member panel backing Winterkorn, sources told Reuters.
The committee issued a statement on Friday giving Winterkorn its "full support" and announcing that it would propose extending his contract beyond its December 2016 expiry date at a board meeting next February.
VW shares rose over 2 percent on the news before falling back to trade marginally lower.
"Winterkorn has received pretty clear support," said Daniel Schwarz, an analyst at Commerzbank (XETRA:CBKG). "It is important that he is not only staying in his post, but also getting a contract extension."
Under Winterkorn's direction, VW has expanded from eight to twelve brands, more than doubled the number of production plants to over 100 and boosted unit sales by 64 percent to a record 10.1 million vehicles last year.
But he has also faced criticism for the company's underperforming operations in the United States, its failure to keep pace with rivals like BMW (DE:BMWG) on fuel efficient technologies and the slowness of its push into budget cars.
Another problem has been declining profitability at the core VW brand.
The 67-year-old Winterkorn is trying to cut billions of euros in costs and revamp structures to revive profit margins, but Piech, who pushed out Winterkorn's predecessor Bernd Pischetsrieder, appears to have lost patience.
Sources told Reuters that in recent meetings of the supervisory board Piech had been vocal in his criticism of the U.S. operations and the VW brand's profit gap with rivals such as Toyota (T:7203).
"VW needs more change to address its significant structural shortcomings," London-based analyst Arndt Ellinghorst of advisory firm Evercore ISI said.
Ahead of the Thursday crisis meeting, an Evercore survey of 50 investors showed many believed VW's share price would rise if both Winterkorn and Piech left, because this would allow the Wolfsburg-based firm to unlock greater earnings potential.
Crucially, Winterkorn seems to have the support of the company's unions. He has included labor representatives in discussions on how to implement the 5 billion euros in cost cuts that VW wants to make in its namesake brand by 2017.
"We will continue our successful course with Winterkorn," said works council chief Bernd Osterloh, who participated in the Salzburg meeting. "He's the right man in the right place."