VOLKSWAGEN has been an economic bellwether of German industrial might for nearly 50 years.

It created the first "people's car" in the Beetle and went on to even greater things in the 1970s, churning out hit after hit, culminating in the iconic Golf, a car so popular that it defined an entire class. VW's rise and rise seemed to mirror the German economic miracle itself.

Yet Wolfgang Bernhard, the man who runs the VW brand, has inherited a troubled company. He accepts that reform is needed, but finds his hands tied by the company's history, its culture and, in some cases, the law itself - some of it once meant to protect VW from foreign predators.

Last month, the group's chief executive officer, Bernd Pischetsrieder, announced a swathe of job cuts. Although the final total is yet to be decided, many experts estimate that about 14,000 employees will leave the company.

For Mr Bernhard, that may not be enough. He plans to slash costs in the next three years, launch new products and improve quality. Reduced spending and improved quality don't always go hand-in-hand - just ask Mercedes Benz.

He will outline how he plans to do this at next month's board meeting, but he was characteristically blunt when asked why such measures were necessary.

He said: "For a company in crisis, it is very important to make everybody aware that we have a problem. The country, especially VW, has to face the competition head on and not lie about it."

Everyone can see the problem - VWs are too expensive to make. Although they are well built and reliable, that is not enough in a global economy.

Wages in the German auto industry are the highest in the world. Worse still, VW's wages are on average 20 per cent higher even than that. Nor are enough of its components being made abroad in cheaper markets. Even the seat covers are made in Germany.

The company seems to have boxed itself in. Last year, the powerful auto unions managed to extract a "no lay-offs" pledge until 2011 in return for a 28-month wage freeze. Everyone now accepts this may not be possible.

A recent study concluded that VW was operating at 65 per cent capacity. Its factories need to be at 90 per cent to make a profit. That is why VW is losing money on every car it ships to the US, the world's biggest automotive market. VW's troubles have provoked a wider debate in German society. Right wing politicians are asking if the law is now strangling manufacturing competitiveness.

Companies such as VW operate under a system known as co-determination, meaning they have to allow labour representation in the supervisory boardroom. In VW's case, this represents seven workforce representatives and three trades union officials.

The group has also been rocked by an on-going scandal. Executives are under investigation after allegations of bribery to secure support for building a low-cost factory in India.

Mr Berhard is determined to pare down the fat. He was appalled to discover that the Golf had a rear axle that cost considerably more than key rivals, even though most customers couldn't tell the difference. That will not happen again during his watch.

The new boss is also heading for a showdown with unions over a decision to switch production of a new vehicle from Germany to Portugal. Mr Bernhard says it cannot be built profitably in the home country. If he cannot build abroad, it will not be built at all. "We can't waste anyone's money on products that are not profitable," he said.

The threat to move production abroad could yet force unions into making more concessions (Mr Bernhard wants them to agree to dropping the night shift to shave further costs) but no one is sure who will blink first.

Mr Bernhard has come a cropper in Germany before.

He turned around Chrysler for Daimler and was handed the reins at Mercedes as reward. Unfortunately, his prediction of a "bloodbath" at the group led to him being dumped before he had even walked through the door.

Volkswagen is more willing to consider what, until recently, may have been the unthinkable. With the new rivals from Asia closing in, the group has to work out a new, more profitable, way forward, and Mr Bernhard looks like the man to do it.