Herbert Diess

VW's marathon man

Inside The 2016 Consumer Electronics Show
Herbert Diess has a vision for VW's future. Source: Bloomberg

Herbert Diess may not have fully appreciated the size of his task when he became chief executive of the VW brand in the larger VW Group in July 2015, just two months before the diesel emissions scandal broke. He inherited a rigidly hierarchical structure, and the scandal proved an unstoppable catalyst for change. In the aftermath, the firm promised a management revolution, with a move toward a model based on encouraging individual initiative. There is pressure for the transition to be rapid, but that’s OK with Mr. Diess: He says he’s in it for the long haul, and is under no illusions about the challenges facing his company and the German auto industry.

“We’re at kilometer five of a marathon,” he told Handelsblatt when asked how the world’s largest automaker was getting on with the cultural revolution. “Volkswagen is a company with more than 600,000 employees; something like that takes time. The change doesn’t happen in three months.” He said the company must become quicker and above all take decisions more quickly, and managers must take more responsibility.

The path forward is fairly clear, said the former BMW manager. “When I joined, VW wasn’t a modern company. But the brand has tremendous charm and huge potential.” His ambitious plans for a turnaround include cutting as many as 23,000 employees in Germany by 2020 and achieving annual savings of almost €4 billion ($4.7 billion).

“We’re still too conservative and aren’t embracing change fast enough.”

Herbert Diess, CEO, VW brand

He praised his boss, group CEO Matthias Müller, for having made progress in driving cultural change. He also added that the independent monitor appointed earlier this year by the US Justice Department to oversee VW — part of a plea agreement over the diesel scandal — was also helping. The monitor, former US deputy attorney general Larry Thompson, was bringing in his experience on culture, processes and integrity, according to Mr. Diess. “I see the monitor as a chance to drive forward cultural change. The company needs to reform and has a lot still to do,” he said.

One example of managers taking more responsibility could be seen in VW’s South America region, which had developed two cars itself, something that would have been impossible under the old system, Mr. Diess said. He admitted that he had thought twice about taking a job at a company run almost autocratically by then-group CEO Martin Winterkorn and supervisory board chairman Ferdinand Piëch. “The brand was in a very poor state even before the diesel scandal. At that point, it had already been in a global downtrend for four or five years,” he said “There were many problem areas: no product program for Latin America, no plan for the US, a retreat in China. In SUVs we were five years behind the competition and had no strategy for an electric future.”

However, he has become more optimistic that VW would succeed in turning its management style around. He has previously said there was a 50 percent chance of it working; now he thinks it’s well over 50 percent. “We’re having the first successes in the US and in South America. The new Volkswagen models are well received. The brand is running the biggest model roll-out in its history and the results are positive.”

But Germany’s auto industry, long accustomed to success, also needed to embrace change, he warned.

When asked whether the outlook for German automakers was worrying given the looming digital change, Tesla’s growth in electric cars, waning faith in diesel technology and new competitors emerging in China, he said: “That worry is justified in my view. The auto industry is undergoing an unprecedented transformation with new technologies and new competitors.”

The car will change drastically in the coming 15 to 20 years, according to Mr. Diess. “Our biggest challenge is to grasp the car as part of the internet; we’re still a bit spoiled in Germany,” he said. “We German manufacturers were dominant in vehicle technology and production and dominate the premium segment — everyone lived well with that. It’s all getting rougher and more exciting now.”

Cars will soon become wired hubs and must be equipped accordingly with connectivity and software — that’s the main hurdle German automakers must overcome in competition with tech giants such as Apple or Google, he added. “We must be in a position to teach the car of tomorrow more intelligence.”

The internet giants have the edge in digital technology, he admitted, whereas German automakers have mastered complex automobile production. Google, Amazon and other tech firms want to get into cars because they’re interested in the data generated by driving. The key is to find partners to cooperate with in digital technology. The new business models should be seen as an opportunity rather than a threat. “And that’s where criticism is warranted: we’re still too conservative and aren’t embracing change fast enough,” he said.

By contrast, German automakers had already made a lot of progress in e-car technology, Mr. Diess added. VW and other manufacturers were working to set up a charging infrastructure, and his company had developed a new platform for e-cars that will ensure they are fully web-connected and capable of being updated. “With this approach we’re democratizing innovative technology and will have a significant advantage as a mass producer over Tesla at the price limit of around €30,000 ($36,000),” he said, adding that VW was also working on hydrogen and fuel-cell technology but warned they had drawbacks in terms of energy consumption and cost.

When it comes to which technology will win out, Mr. Diess believes regulation will play the key role and shape the future of the market. China is transitioning rapidly to electric cars due to government support, for example, and that momentum will help boost the global introduction of e-cars.

“We see in China that, like everywhere else, state regulations are decisive. People don’t primarily drive what we produce,” he said. “Our customers mainly drive what regulations dictate. We have markets with an 80 or 90 percent diesel share because diesel is subsidized through tax there. Then there are countries where we sell virtually no diesel cars — because the relevant subsidies aren’t there.”

But as e-car technologies vie for pole position, VW remains focused on the technology that made VW a world leader: the combustion engine. Of the 56 new cars the group is currently working on, only seven are fully electric, for example, and even by 2025, e-cars will make up just 20 percent or slightly more of VW’s auto production. Diesel, Mr. Diess argues, will remain important, especially for larger cars.

Peter Brors is Handelsblatt’s deputy editor in chief. Grischa Brower-Rabinowitsch leads Handelsblatt’s coverage of companies and markets. Stefan Menzel writes about the auto industry focusing on Volkswagen. To contact the author: brors@handelsblatt.combrower@handelsblatt.com, menzel@handelsblatt.com

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