Change Management VW boss wants to make history as well as cars

In the next five years, Herbert Diess must revolutionize Volkswagen, making it a leaner, cleaner, technology-focused company. If he fails, it could spell disaster for the car industry, and maybe the entire German economy.
Emporer Diess.

Colleagues of Volkswagen Group CEO Herbert Diess say he is unpredictable, capable of switching from charming to frightening in an instant. Not one to suffer fools gladly.

If the Munich native demands a lot of his executive team, it is because he faces one of the greatest challenges in the history of German industry. In five years, he must turn Volkswagen from an old-industry behemoth, still stained with the dirt of Dieselgate, into a cutting-edge technology firm, manufacturing clean, self-driving electric vehicles.

The outcome will have implications far beyond Volkswagen: it will also pass judgment on the future of German industry. Can a country which has largely failed to produce digital champions transform older industries for a new technological age? If not, it could be game over for Germany’s social market economy.

What Diess is attempting at Volkswagen is nothing less than a revolution from above. At every level of the company, staff will have to change, not simply in the cars they make, but in their entire way of doing business.

To force through this change, Diess has spent six months establishing his authority in the world’s largest manufacturing company, with 640,000 employees worldwide. He now enjoys the support of the powerful works council, which represents employees, as well as the Porsche-Piëch family, which controls 52 percent of the company. Diess has also taken over as chair of several Volkswagen subsidiaries, including Audi, Skoda and Seat, placing allies in key positions.

His style is said to be hard but fair: subordinates are encouraged to speak up, but once Diess decides, everyone pursues the common agenda. “Diess sets very ambitious targets, but he makes it clear what he wants. Everyone knows where they stand,” said Oliver Blume, CEO of VW subsidiary Porsche.

The Diess revolution has three goals: electromobility, autonomous driving and greater efficiency. To get there, medium-term planning is king: agreed targets are like divine commandments. In a key step, on Friday, the VW board confirmed extensive plans to invest €35 billion ($40 billion) over the next five years.

Crucially, this includes converting existing Volkswagen factories in Germany to produce electric cars, with job guarantees for some factories until 2028. Overseas production would be cheaper, but this allows Diess to exert closer control over the transformation.

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In the medium term, Volkswagen wants to build almost a million electric vehicles per year. To do so, battery production will be crucial. Unlike rivals BMW and Daimler, VW has chosen to produce its own batteries, in collaboration with SK Innovation, a South Korean firm.

If all goes well, Volkswagen will go from the world’s leading producer of internal combustion engines to its leading producer of electric cars. In effect, VW hopes to become a tech company, producing its own innovative industrial software, and – with luck – driving its stock market value into the same league as Apple, Alphabet and Amazon. That would amount to a tenfold increase on its current market cap, around €74 billion.

For Volkswagen’s owners, Diess is the man to bring them into that future. His predecessor, Matthias Müller, had the unenviable job of cleaning up after the Dieselgate scandal, which centered on VW’s deliberate falsification of emissions data, in order to evade environmental regulations. So far, the scandal has cost the company over €25 billion, not to mention reputational damage. Six months ago, the board ran out of patience with Müller, replacing him with Diess.

The common touch, and a Ferrari

Müller's predecessor, Martin Winterkorn, was famous for his autocratic style. By contrast, Diess makes sure to publicize the occasional common touch: he sometimes drives himself to work, and at weekends returns home to Munich on commercial flights, rather than the VW jet.

His office at VW HQ is spartan and immaculately tidy. Three years after joining the company from BMW, he still has no home in Wolfsburg, preferring to stay in a company-owned hotel.

Unlike Winterkorn, Diess is not prone to outbursts of temper. But he does have a provocative style, unafraid of confrontation. Early in his tenure, he suggested that one-third of VW managers were “inadequate,” warning the other two-thirds to raise their game. Impatience is a weak point, say sources close to the VW board, and he can rub people the wrong way. “He pushes a lot of people to their limits,” said one source.

Diess is driven by the prospect of the greatest transformation of the car industry in his lifetime. Some firms will thrive, others radically fall away. Speaking to a gathering of VW suppliers last month, he pointed to the decay of many great auto-manufacturing cities, including Detroit, Cowley and Turin. In each case, he suggested, decline came about because companies failed to respond to radical new challenges.

Senior figures at Volkswagen feel the German government had not yet grasped the magnitude of the challenge. If handled badly, an increasingly digital future could see 100,000 direct VW jobs disappear, they suggest, along with 1 million among suppliers and other dependent businesses. Diess told suppliers there was only a “50/50” chance that German carmakers would remain dominant in 10 years’ time.

This context explains Diess’s deep opposition to diesel bans and other restrictions on automobiles: although diesel may be slowly on its way out, the car industry simply doesn’t need more burdens placed on it from Berlin.

Diess is a self-made man, and is not known for modesty, false or otherwise. Originally from a working class background, his boundless self-confidence helped him earn a PhD in engineering. After beginning his career at Bosch, he later moved to BMW, where he became known for ruthlessly driving down costs.

Smooth operator

After his years at BMW, Volkswagen’s inefficiencies and powerful labor unions were a shock. One early attempt to justify cutbacks saw him loudly booed at a factory meeting.

But astute politics have since smoothed his path. Six months into the job, Diess is now close to powerful labor leader Bernd Osterloh, and also to VW’s family owners. He has also made allies in the company’s powerful Technical Development department, seen as the company’s heart and soul, where future models are designed.

As well as personally supervising many VW brands and subsidiaries, Diess has built a powerful team, bringing in former CEOs of suppliers and other manufacturers to sort out problematic areas. Company-wide, he wants to drive profit margins up to 8 percent, from the current low 4 percent level.

In his private life, despite the unwritten rule that VW managers only drive VW brands, Diess can sometimes be seen driving his favorite Ferrari, complete with personalized number plate. Along with his wife and son, he owns “Itxaso,” a fashionable tapas restaurant in Munich, inspired by memories of years living in Spain.

On Friday, the VW board signed off on what Diess regards as his masterpiece: a strategic plan to concentrate electric vehicle production in Germany, while cutting 14,000 jobs by 2020. Electric car factories need 20 to 30 percent fewer employees than traditional manufacturing.

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Please don’t go to jail

The board also began discussions on developments until the year 2028. By then, Diess hopes, VW will be closely cooperating with major IT companies, leveraging the vast data flows generated by autonomous vehicles.

But there is a rather large cloud on the horizon. As part of criminal inquiries into Dieselgate, public prosecutors in the city of Braunschweig are investigating Diess on suspicion of failing to properly inform shareholders. Diess had barely joined the company when the scandal broke, and he denies all accusations. But there are rumors of documents showing his presence at a meeting where the fraud was discussed.

If authorities were to prosecute Diess, the VW board would find itself in a tricky position. The last thing they want is yet another new CEO. But the case of Rupert Stadler shows the company will be ruthless if it must. Stadler, Audi CEO during the crisis, stands accused of influencing witnesses, and spent several months in prison awaiting trial. Volkswagen recently confirmed his dismissal.

VW investors continue to express confidence in Diess. If he succeeds in guiding the giant company through a historic transformation, he will have made automotive history.

The challenges seem daunting, but they are not unprecedented. In the 1980s, the challenge of Japanese manufacturers led many to write off the German car industry. But companies learned lessons from the new arrivals, cut costs and beat the Japanese at their own game.

Diess hopes similar resilience can help turn VW into a hybrid car-technology company, ready to compete with Google and Apple as well as Tesla and Uber, ready to ride the wave of innovation to continued success.

Hans-Jürgen Jakobs is a senior editor at Handelsblatt and a former co-editor-in-chief of the paper. Stefan Menzel writes about the auto industry focusing on Volkswagen. Martin Murphy covers the steel, car and defense industries for Handelsblatt. Christoph Rickens is a Handelsblatt editor in Düsseldorf. To contact the authors: [email protected], [email protected], [email protected], [email protected]