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Over the past few days, the German luxury automaker Porsche has moved into high gear with the launch of its latest model, the Panamera, a 4-door, 4-seater sedan that it hopes will reverse flagging sales and maintain its status as the world's most profitable auto maker. But even as the motoring press descends on Stuttgart to test drive the new car, the Panamera launch is being overshadowed by a bizarre feud in the company's founding family that is starting to damage both Porsche and its sister company, VW.

It's a nasty, vindictive battle that, in keeping with bad cases of sibling rivalry, risks spiraling out of control and hurting everyone involved, including the shareholders, customers and workers at the two German automakers. And, as so often in family battles, it seems to center on power and control rather than substance.

The key players in the feud are Ferdinand Piech and Wolfgang Porsche, both of them grandsons of the visionary automotive engineer Ferdinand Porsche, who invented both Porsche and VW back in the 1930s. Wolfgang Porsche is chairman of Porsche, while his cousin Piech is chairman of VW.

The Porsche and Piech families together own about 50% of the common stock of Porsche Automobil Holding SE, which in turns owns more than half of VW stock. And the two companies have been working ever more closely together, including sharing a slew of joint operations. The Porsche Cayenne SUV and its VW equivalent, the Touareg, for example, share the same chassis and are built in the same plant.

But family discord has been on the rise since 2005, when Porsche's fiercely independent CEO Wendelin Wiedeking started buying up VW stock in order to safeguard the luxury sports carmaker's future. His vision was to merge the two companies into a single holding that would create substantial economies of scale and enable Porsche to avoid being penalized under new European rules governing auto emissions and fuel consumption standards; by being part of the bigger VW group with its range of low-emission, fuel efficient cars, Porsche's sports cars wouldn't stand out, Wiedeking reasoned.

So much for the theory. As Porsche has acquired ever larger blocks of VW shares — this January its stake passed 50% — VW's strong labor unions have grown increasingly alarmed at the prospect of being subjected to Porsche management, especially as Wiedeking has a reputation for toughness. To Wolfgang Porsche and Wiedeking's surprise, Piech has sided increasingly openly with VW's unions in bad-mouthing and openly opposing Wiedeking. Behind the scenes, other members of the Porsche family have tried, with limited success, to calm things.

The feuding has now escalated to a brawl, as Piech has pounced on an unexpected weakness in Porsche's acquisition strategy. Wiedeking and Porsche CFO Holger Härter have been amassing the VW stake through a sophisticated options-trading strategy that has provided the company with massive profits over the past three years, as well as giving them ownership of VW. But it has also ballooned Porsche's debt to $12.5 billion. Under normal circumstances, Porsche would have no trouble financing that debt — its VW stake alone is worth about $50 billion — but in the current economic crisis, even a company as rich as Porsche can no longer snap its fingers and find the money. (Last year, thanks to windfall gains from the option-trading strategy, its profits before taxes of $11.6 billion were actually larger than its total revenues from sales of $10.2 billion.)

Complicating matters, Porsche has amassed additional options that would take its stake in VW to about 75%, but it's unclear how it would finance those extra purchases. Auto industry sources and financial analysts are buzzing about whether Porsche somehow locked itself into a contract that obliges it to buy that additional stake. Porsche won't say; from the beginning it has refused to reveal all but the scantest details of its hedging strategy.

To get out of its fix, Porsche turned to the German government for help, but was rebuffed. Wiedeking has been negotiating with the Gulf state of Qatar over a cash infusion, but has so far failed to reach any deal. Piech sees the crisis as an opportunity to turn the tables and for VW to take control of Porsche, rather than the other way around. He's offered to buy Porsche's auto operations — but in a manner that provoked a furious response. Last weekend, the usually press-shy Wolfgang Porsche fired off an angry statement to the media accusing his cousin of issuing an ultimatum that he termed "blackmail." Piech shot back denying that it was an ultimatum. But a phrase in Porsche's statement points to the shock and bewilderment in the family camp about the deterioration of relations. "The 21st century is not the time for ultimatums," he wrote. "We wonder what the whole matter is really about and whether the focus is still on our common cause at all."

Wiedeking still has some trump cards up his sleeve, the biggest of which would be to sell some of the VW shares Porsche has amassed to pay down the debt. But people who know the companies well say that something much bigger is at stake here than just paying off debt. "It's just like any family feud, where the arguments drag on and on for no logical reason, and just when you think that you have it sorted out, it flares up again," says Peter Schmidt, who runs a British-based consultancy called Automotive Industry Data. Already, he worries, the fighting "is detrimental to both companies, not just on suppliers and workers but also on the way it's affecting their image in a negative manner."

And there's the rub. For both Porsche and VW, image is key for their future — every bit as much as the new $90,000 Panamera.

• Peter Gumbel
• A family feud between the grandsons of Ferdinand Porsche threatens to damage two of Germany's most successful companies — and two of motoring's greatest marques