VW Strategist

Squeezing VW to Become Number One

HErbert diess picture aliance
Herbert Diess is under pressure to lower costs.
  • Why it matters

    Why it matters

    If Herbert Diess succeeds in making the core VW brand more profitable, it will boost overall earnings and the group’s share price.

  • Facts

    Facts

    • Mr. Diess, a former BMW executive, started as the new head of the VW passenger cars brand on July 1.
    • Mr. Diess had a fierce reputation for cost cutting at BMW, where he saved €4 billion in parts purchasing over four years.
    • Toyota, the world’s largest carmaker, employs 340,000 people compared with 600,000 at Volkswagen but makes €5 billion more in profits.
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    Audio

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It wasn’t long after Herbert Diess was named new Volkswagen brand chairman in December, that he toured the company’s main plant in Wolfsburg.

The former BMW manager walked down production lines and examined the latest equipment where VW workers produce Golfs, Tiguans and Tourans. The plant is equipped with many expensive robots to facilitate the work of employees.

Later, Mr. Diess was reported to have asked why, with so many robots doing the work, were there not fewer people required. Or, put another way: Why hasn’t the best technology resulted in lower production costs?

Mr. Diess officially started work on Wednesday at Volkswagen and one of his biggest tasks is to curb escalating costs for the core brand of Germany’s largest corporate group and the world’s second-largest carmaker after Toyota.

“He will tackle the problems at Volkswagen and not worry about the risk of losing.”

A former BMW manager

What makes his task more difficult is that he cannot antagonize the workforce in a company where employees traditionally have a big say.

The 56-year-old Mr. Diess is said to have larger ambitions in the corporate group, but they won’t be realized without the good will of employees and managers.

As head of VW passenger cars, the former purchasing and development chairman at competitor BMW now has the group’s second most important job, after the chief executive, Martin Winterkorn.

He will likely take over responsibility for mass brands Skoda and Seat also, perhaps as early as October – and with that command over €120 billion, or $133 billion, in sales and 250,000 employees.

But is he qualified to succeed the 68-year old Mr. Winterkorn someday?

If Mr. Diess can solve the huge problem that burdens the core VW brand, he could hope for the highest chairman’s job. But he has to prove that he understands how to win the support of the head of the corporation, the supervisory board, unions and workforce in his main mission to make German plants more efficient.

Volkswagen models range from the Up to the Golf, and the Passat to the Phaeton. Sales currently earn only 2.5 percent profit before taxation, but could foreseeably make 8 percent yields. That would mean yearly savings of €5 billion.

For 2018, Diess has been tasked of reaching a 6-percent profit margin for VW cars.

 

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The measuring stick is Toyota. The Japanese company employs 340,000 people compared with 600,000 at Volkswagen. Toyota only made €14 billion less in sales but made a good €5 billion more in profits.

Some analysts, advisors and industry managers doubt whether Mr. Diess, a mechanical engineer, can handle the challenge without Volkswagen experience and without an internal network.

It’s likely that Mr. Diess’ path will be rocky and difficult. For a taste of what’s ahead, he has only to look to colleague Andreas Renschler, the corporation’s chairman of the new commercial vehicle unit, which makes trucks and vans. Mr. Renschler wants to cut 1,800 jobs at the truck subsidiary MAN, and stop truck production in Salzgitter, in Lower Saxony.

What needs to be done at Wolfsburg-based Volkswagen, Mr. Diess already accomplished during his time at BMW in Munich. At the luxury carmaker he saved €4 billion in car parts purchases over four years.

Suppliers especially felt the crunch. Mr. Diess asked them to reach a price dictated by BMW, internally called a “best practice calculation.” Many suppliers didn’t have a chance. Mr. Diess was seen as relentless and price was everything.

In 2012, the BMW group had a pre-tax profit of €7.8 billion – almost €4 billion more than in 2007. With that, Mr. Diess rose to chairman of development.

“At BMW, he choose trusted people from all departments and then formed his own team,” said a BMW employee.

But Mr. Diess came to Volkswagen without those allies – and the differences between Munich and Wolfsburg are huge.

“BMW stands for consensus-oriented, very creative and independent work,” said a personnel advisor who knows the inner workings of both corporations.

 


Video: Herbert Diess presents new BMW cars at his former employer.

 

A prime example is the development of new electric cars with carbon fiber bodies, BMW’s i-series.

“Without BMW’s project team, the i3 and the i8 would never have come into existence,” said a supplier who worked on the car’s development.

Volkswagen, in contrast, is known for hierarchies. It is led from the top down and there is less room for new ideas and second opinions, some say. That prolongs decisions, paralyzes fresh thinking and makes organization difficult.

“Stagnation dominates at Volkswagen,” said Ernst Piëch, the brother of former supervisory board chair Ferdinand Piëch, who left earlier this year after a public dispute with Mr. Winterkorn.

In an interview with Handelsblatt, the brother of the company patriarch said Volkswagen is limping five years behind other automakers.

For Mr. Winterkorn, Mr. Diess embodies the first step toward a new corporate culture: decentralized, less hierarchical and, hopefully, more direct and faster.

Ex-colleagues and business partners say the man from Munich should be able to establish BMW’s project culture at Volkswagen. And they say he isn’t likely to compromise when it comes to making plants more efficient.

“He will tackle the problems at Volkswagen and not worry about the risk of losing,” said a former BMW manager.

In Munich, Mr. Diess was notorious as the “hard dog.”  “He polarized greatly,” said one colleague.

 

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Mr. Diess was so hard on suppliers that some didn’t want to work with BMW anymore. “Some threatened to stop deliveries,” an automobile outfitter recalled. “Mr. Diess then had to backpedal.”

The bad blood with suppliers supposedly contributed to then-BMW chairman Norbert Reithofer pulling Mr. Diess out of the purchasing department in 2012.

Former colleagues describe Mr. Diess as a man of extremes who doesn’t accept mediocrity. He supports whoever brings performance and respects employees with strong opinions – even if he doesn’t agree. “He accepts clear arguments,” said an ex-colleague. “If one is shaky, then he uses this weakness and begins to dig.”

Rigorousness and rigidity are what matter. Even if Mr. Diess should convince the Volkswagen supervisory board, there is no guarantee of success. He will need time to change the Volkswagen corporate culture.

In that, he can hope for a better fate than his predecessor. In 2005, Wolfgang Bernhard came to Wolfsburg from another competitor, Daimler in Stuttgart. Like Mr. Diess, he was to take over responsibility  for the Volkswagen and Skoda brands.

Despite a fight with the metalworkers union, IG Metall, Mr. Bernhard managed to get employees and managers behind him.

But his hard, straight-shooting style rubbed some the wrong way at Volkswagen. Mr. Bernhard supposedly became too powerful for the supervisory board chair, Mr. Piëch – and today he’s back working for Daimler.

In the meantime, the patriarch has left the field clear and Mr. Diess has one less power-conscious and dangerous overseer.

 

This article first appeared in WirtschaftsWoche. To contact the author: rebecca.eisert@wiwo.de

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