‘Ruffling feathers’: How VW fell in love with Herbert Diess

When Volkswagen boss Herbert Diess’s fiercest competitor, Elon Musk, parked his electric cars on the German group’s turf by building a factory just 200km from the historic Wolfsburg headquarters, the response from the Bavarian leader was warmer than many expected.

Publicly, Diess told anyone who would listen that Tesla was “paving the way” and “good for the industry”. He was effusive in his praise of Musk’s achievements, even inviting the world’s richest man to lecture a room full of VW executives and trying to emulate his use of social media. Privately, Diess joked that he wished Musk had moved his plant “1[ads1]00km closer” to VW’s home, so workers could see the American company on the horizon.

Although Diess had developed a reputation for gaffes, these provocations were deliberate. “He felt that if he ruffled feathers, he was moving in the right direction,” Bernstein analyst Daniel Röska says of the executive’s efforts to transform a company that had been tarnished by the diesel emissions scandal into a nimble, electric pioneer. “It was kind of an all or nothing strategy.”

That effort was halted on Friday when, at the request of the Porsche-Piëch clan, which remains VW’s largest shareholder, the company’s supervisory board held an extraordinary meeting and agreed to defend Diess with almost immediate effect, hours after the director had left on summer vacation.

Beyond the automotive world, Diess had become best known for a series of public blunders. He told the BBC in 2019 that he was “not aware” of internment camps in China’s Xinjiang region, and continued to defend VW’s presence there. He was forced to apologize for using the phrase “EBIT macht frei” at a company event, referring to profit incentives but echoing a Nazi slogan.

Earlier this year, he sparked outrage in Ukraine after suggesting that Europe should try to negotiate with Russia, a view not uncommon in Germany but rarely expressed on the international stage.

At home, Diess became known for several domestic issues – particularly his clashes with VW’s powerful works council, which represents 60,000 employees in Wolfsburg and most of the other 230,000 employees in greater Germany. He angered the organization – which has effective control of the supervisory board via a loose alliance with the state of Lower Saxony, VW’s second-largest shareholder – by suggesting the group was outnumbered by 30,000 in the country.

Last year he also pointed out that while it took VW about 30 hours to produce an electric car, Tesla employees did the same in just 10. This calculation was contested by unions.

As a result of such confrontations, Diess suffered several bruises in his four-year tenure, including being relieved of direct responsibility for the group’s biggest brand, the VW brand, in 2020, and for his role as head of VW’s China operations last year.

“He made decisions without being sentimental about his colleagues’ feelings,” said a person close to the executive. But Diess believed a combative approach was the “only way to move VW” and secure the group’s future, the person added.

Diess’ achievements, which included the roll-out of VW’s first purpose-built electric vehicles as part of a €52bn investment into the technology, earned him an early contract extension from the supervisory board last year.

“It was always a mixed picture,” said a person familiar with the board’s decisions. Until very recently, the person added, Diess’ management skills had “more strengths than weaknesses”.

But on Friday, all members of the 20-seat board voted to oust Diess, and the 63-year-old was not given a chance to defend his case. He was informed of the impending decision only a couple of days in advance, according to a person familiar with the events.

Neither the company, the unions nor the shareholders would publicly confirm why Diess’s position was suddenly deemed untenable. But works council chief Daniela Cavallo had complained that VW’s software arm, for which Diess had taken personal responsibility, had not worked well, forcing VW’s premium brands Audi and Porsche to rely on their own systems while they waited for group-wide technology to catch up .

More importantly, Cavallo had pointed to VW’s lackluster performance in China, which for decades has been the engine of the company’s growth and by far its largest and most profitable market. VW’s new electric vehicle, the ID range, has not sold as well in Asia as the company had hoped, in part, Cavallo argued, due to an inability to cater to local consumer preferences, such as the provision of in-car karaoke machines.

In recent weeks, the Porsche-Piech family believed Diess’ contract extension had been a “mistake”, according to a person close to the shareholders.

The auto chief struck a more conciliatory tone when he spoke to workers last month, telling employees he believed VW would overtake Tesla in global electric sales by 2025 and pointing to Musk’s recent difficulties in getting plants to run at full capacity. But “we started to realize that he hadn’t really changed,” the person added.

The board concluded that Diess’ nominated successor, Porsche CEO Oliver Blume, was “perhaps the more complete leader, [able to look] into the operational side of the business,” the person close to the supervisory board added. The 54-year-old has the added advantage of being born near Wolfsburg and having spent his career at the VW group, unlike Diess, who joined from BMW in 2015.

Wolfgang Porsche and Hans Michel Piëch, speaking on behalf of the Porsche-Piech family, said Blume had had their “express confidence for many years”. He oversaw the rollout of Porsche’s electric Taycan, which is now more popular than the big 911, they added.

But Blume’s appointment threatens to derail the long-awaited launch of the Porsche brand – the most profitable in VW’s stable – later this year. Blume, who will retain his role at Porsche in Stuttgart even when he takes the top job in Wolfsburg from September, will be forced to split his time between running the world’s second-largest carmaker and preparing for what is likely to be Germany’s biggest public offering. for several decades.

This arrangement runs counter to VW’s stated goal of the partial float, to give Porsche more “entrepreneurial freedom,” Bernstein’s Röska argued.

“If you’re trying to give Porsche AG more independence . . . this move does exactly the opposite” while raising concerns about VW Group’s labyrinthine corporate governance structure, Röska said.

Nor will it be a brand new start in Wolfsburg, where the day-to-day running of VW will be the responsibility of finance chief Arno Antlitz, a former McKinsey consultant who has been promoted to chief operating officer, and aligned with Diess on the need for aggressive cost-cutting at the group’s German plant.

Late on Friday, Diess tweeted a photo of him smiling happily next to an electric VW minivan. Earlier, in a LinkedIn post, he had stressed that VW’s recent difficulties were partly due to events far beyond Wolfsburg, citing semiconductor shortages, other supply challenges and rising commodity and energy prices.

But even more favorable financial conditions did not shield his predecessors from VW’s various power brokers. Diess is the fourth manager in a row to not serve out his contract.

“There are too many different interests in this company,” said the person close to the outgoing CEO. “It’s a publicly traded company, but is very much in private hands.”