By Andreas Cremer and Jan Schwartz
BERLIN/HAMBURG (Reuters) - Volkswagen CEO Martin Winterkorn has survived a challenge from powerful chairman Ferdinand Piech, but their row remains a distraction for the carmaker as it struggles to boost profits and revamp its ailing U.S. business.
Piech, the 78-year-old patriarch of the family that founded Volkswagen, triggered a showdown with Winterkorn last week by criticizing him in a magazine article.
But at a meeting of senior supervisory board members on Thursday in response to the crisis, Piech was isolated, with all other members on the six-seat 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 early next year.
It looked like an outright defeat for Piech, however analysts said it was too early to write him off or declare an end to the dispute.
Less than a decade ago, Winterkorn's predecessor Bernd Pischetsrieder was pushed out by Piech half a year after his contract was extended.
"No one who has dealt with Piech should rush to say that he has lost," said Ferdinand Dudenhoeffer, head of the Center of Automotive Research at the University of Duisburg-Essen. "Winterkorn has been damaged."
VW shares jumped over 2 percent on the news that Winterkorn was staying, but soon fell back and were trading 1.2 percent lower by late afternoon. They have fallen 5 percent since the row erupted a week ago.
The power struggle has rattled management at a crucial time for the Wolfsburg-based auto giant, which is debating a new long-term growth strategy.
Under Winterkorn's direction, VW has expanded from eight to twelve brands, more than doubled the number of production plants to over 100, boosted unit sales by 64 percent and nearly doubled revenues.
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 (BMWG.DE) on fuel efficient technologies and the slowness of its push into budget cars.
Another problem has been declining profitability at the core VW brand, which has led the 67-year-old Winterkorn to unveil a 5 billion euro cost-cutting program.
Piech, a canny strategist and demanding manager who declared in his 2004 autobiography "my desire for harmony is limited", appears to have lost patience.
Sources told Reuters this week 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 .
"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 firm to unlock greater earnings potential.
The support of the company's unions played a crucial role in helping Winterkorn survive the Piech challenge. The CEO has included labor representatives in discussions on how to implement his massive cost-cutting plan.
"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."
But despite the promise of a contract extension, Winterkorn will be running Volkswagen in the knowledge that Piech, who has a history of pushing out executives he has fallen out with, has lost confidence in him.
In addition to Pischetsrieder, Piech also axed Porsche boss Wendelin Wiedeking in 2009, signaling his fate in public comments to the press.
"Piech has lost the battle but does this put an end to the war," asked Ellinghorst. "We suspect Piech won't back down easily."
(Reporting by Andreas Cremer; Editing by Noah Barkin and Giles Elgood)