How Volkswagen's New Leader Survived the Ax

How Volkswagen's New Leader Survived the Ax

Herbert Diess.

SourceODD ANDERSEN/Getty

Why you should care

Because it’s a new era for autos.

Herbert Diess stood before more than 10,000 workers at Volkswagen’s Wolfsburg headquarters. He took the mic to speak — but was forced to wait several minutes for the whistling and booing to stop.

It was February 2017, and the lowest point in Diess’ tenure as head of the Volkswagen brand since joining the German carmaker from rival BMW in the summer of 2015. Some analysts even speculated he was about to be fired.

Since then, his stock has risen sharply as he is poised to take over the No. 1 job at the world’s biggest carmaker by sales.

Diess replaces Matthias Müller as chief executive of the entire 12-brand VW Group, which includes VW, Audi and Porsche, after the company’s supervisory board took some investors and analysts by surprise last week.

Loved by investors but feared by the unions, Diess is a controversial choice who is renowned for his ruthless cost cutting.

Although Müller has always been considered a stopgap appointment since he took over from Martin Winterkorn as chief executive at the height of the diesel scandal, a decision on who was to be his successor was not expected this soon. Müller was due to step down in 2020.

But, for the next stage in the VW evolution, Diess seems more like the person best suited to take the reins, with Müller looking increasingly like the temporary, safe-pair-of-hands caretaker appointment he was always meant to be.

Even as Diess cut costs and focused on improving profit margins, this lean and ambitious Bavarian has shown he has been prepared to compromise in the interest of the company and his career.

He has managed to mend relations with the powerful head of the group’s works council, Bernd Osterloh, who back in early 2017 had accused Diess of trying to cut jobs “as soon as the ink” was dry on a then 3.7-billion-euro cost-saving plan.

His improved ties with Osterloh mean that the company’s workers are not expected to oppose his appointment, a major step for a man who faced pickets and protests a year ago.

“I don’t think they will holiday together,” Max Warburton, an analyst at Bernstein, says of Diess and Osterloh, “but I think they know they are pulling in the same direction.”

Still, a quid pro quo is expected.

Gunnar Kilian, who is close to Osterloh and is general secretary for the works council, will take over from personnel chief Karlheinz Blessing, with a place on VW Group’s management board.

A position on the management board is significant because it means Kilian will be in a strong position to monitor decisions by Diess and their effect on the company’s workers.

Despite a reputation as a no-holds-barred cost cutter, Diess appears to have learned about his responsibilities to the workforce, according to another person at VW.

He has been aggressive, successfully doubling operating margins from 1.8 percent in 2016 to 4.1 percent last year, but he has learned how to play nice with Osterloh and cut waste and trim complexity in the production process without targeting workers.

It was an important lesson to learn because the labor unions are powerful at VW, with the state of Lower Saxony, where the company is based and whose interests tend to be aligned with the workers, controlling a large chunk of the company’s shares.

VW unions “are probably the strongest among all car companies,” says Ingo Speich, portfolio manager at Union Investment.

Diess will retain the chief executive role at VW brand as well as heading the overall group, moving in a different direction from Müller’s stated belief in more decentralization at a company that has been widely criticized for its poor corporate governance, which some felt was responsible for the diesel scandal.

Investors are likely to support the appointment, not least because Müller had made it clear he would not stay for the long haul.

“Diess is the right man for the job. But why does Müller leave now? Volkswagen has to answer this question,” says Speich.

Müller’s recent swipe at government intervention on pay in Der Spiegel when the German weekly asked him if he could live with a salary cap of 5 million euros — half of what he received in 2017 — did not help his position, upsetting some board members. His reply that it sounded like something done in Soviet-controlled former East Germany prompted an angry response from Stephan Weil, a VW board member and prime minister of Lower Saxony.

“To compare a limitation of manager salaries of 5 million euros per year with the conditions in the GDR [former East Germany] is completely absurd,” Weil said.

Significantly, Diess’ ascension, with the blessing of the unions, could signal genuine reform at VW at an important time for the carmaker as it attempts to grapple with a shift to electric and self-driving cars.

This is critical for Diess because there is far too much inefficiency at VW with more gains in profitability needed to fund the big shifts in the car industry over the next decade. This need for increased margins also more than likely means more cost cuts.

“He was controversial when he came in,” a longtime VW investor said of Diess, before his appointment was announced. “He’s pushed back on the unions, pushed as hard as he can inside the structure that exists to bring margins on the VW brand up. If he’s made CEO, it’s a validation of all that.”

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By Patrick McGee

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