Volkswagen’s chief battles to keep electric dream alive
Herbert Diess seeks to secure backing of unions and shareholders in drive to be electric heavyweight
As European governments combat a resurgent pandemic, the chief executive of Volkswagen, the world’s largest carmaker, is fighting his own battle.
Since taking the top job in 2018, Herbert Diess has been driven by a fear that the German group will be left behind as the era of the combustion engine gives way to that of the electric vehicle.
“Many of our differentiators, all our knowledge, our actual capabilities, will not be as important any more,” Mr Diess told the FT in an interview at VW’s sprawling headquarters in Wolfsburg.
“This is exactly what happened to Agfa or Kodak” he added, referring to the photography companies upended by the digital revolution. “They knew what was coming, but they still couldn’t change.”
Volkswagen has already pledged to spend €33bn on its electric vehicle business, an investment Mr Diess hopes will eventually triple the company’s market capitalisation to €200bn and secure its future as a heavyweight that can compete against pioneers such as Tesla.
But as the coronavirus crisis threatens to inflict more pain on the car industry, pointing to the complacency of the likes of Kodak may not be enough to persuade everyone — inside and outside VW — that a profitable electric future is within his grasp.
After shutdowns at battery plants this summer delayed deliveries of VW’s first mass-market electric car, the ID.3, and Audi’s e-tron, the group is in danger of missing tough EU emissions targets in 2020, and could be fined hundreds of millions of euros.
Unions have also bristled at the cost cuts needed to pay for the transition, while shareholders worry that recent missteps have weakened the 62-year-old’s leverage in a highly political organisation.
It is a predicament that has even drawn sympathy from Tesla founder Elon Musk, who tweeted last month that Mr Diess was “in a tough position with so many constituencies to please”.
Some of Mr Diess’ woes are self-inflicted. In June, the Bavarian was forced to apologise to VW’s supervisory board, which includes workers’ representatives, after accusing members of being responsible for damaging leaks about software complications with the new Golf model.
He subsequently relinquished control of the VW brand, the largest of the group’s 12 marques, a position he had held since 2015, when he joined the company from rival BMW.
In his office overlooking the Wolfsburg plant, Mr Diess acknowledged the summer’s boardroom drama had led to “scepticism” about his ability to transform VW.
“We have to prove that governance is working” he added. “Is it still hard work to convince all stakeholders; to take them along? Yes, because it’s complex. It’s very unionised. There are different interests within the group.”
He also dismissed suggestions that troubles may flare as VW’s truck subsidiary, MAN, plans to axe 9,500 roles to fund an expansion into electric technology. When the unit’s management tore up an agreement with unions in September, the head of VW’s works council, Bernd Osterloh, warned that the company would be “well advised to not link restructuring with the spectre of unemployment”.
After the turbulence of the early summer, something of a truce has been achieved.
“It seems [Mr Diess] came to terms with how things are run here at VW,” said a person close to the works council, who added that the executive is much more communicative with union bosses.
But even if relations with the unions improve further, it will do little in the short-term to revive VW’s share price, which has lagged behind European rivals this year.
“VW lost some pace in the last few months,” said Ingo Speich, a portfolio manager at institutional investor Deka, and was engaged in “a power struggle”.
Mr Diess said shareholders should wait a few months before delivering their verdict. “The proof point will be towards the end of this year and into next year when people will see that [the transition is] working, that we can sell the cars, that the demand is there, that we can deliver on our promises” he said.
And VW is pulling ahead of traditional rivals in the electrification race. The group recently overtook the Renault-Nissan alliance to become the largest seller of electrified vehicles in Europe, and is on course to become the largest in the world within a couple of years.
After a slow start, it is also nearing full capacity for production of the ID.3 and is about to launch several more battery models, including its first dedicated electric SUV, the ID.4.
The bigger concern for Mr Diess, however, is to ensure that an electric future for VW is also a lucrative one.
The danger is that electric cars, which contain far fewer parts than combustion engine models, will be commoditised. It is a scenario Mr Diess hopes to combat by owning the valuable customer data generated by vehicles that are ever more automated and connected to the web.
Modern vehicles contain more lines of code than a smartphone, but Volkswagen relies on suppliers for 90 per cent of its models’ software. Unlike rivals such as Daimler, which has partnered with tech giant Nvidia, VW is ploughing €7bn into building a subsidiary with 5,000 staff, tasked with increasing the amount of proprietary software in VW cars six-fold.
Yet competing with Silicon Valley giants, whose cash reserves alone are larger than VW’s entire market value, is not straightforward.
“We have a chance, because the car is really complex and Google can’t do a car today,” Mr Diess said. “Elon [Musk] can make a car, but also with some limitations still. Can we get to his level? Yes, I think so. Many of the people working for West Coast tech companies are Europeans.”
Pursuing his electric and software ambitions is not the fastest route to the €200bn valuation Mr Diess is aiming for. Analysts instead recommend floating a part of lucrative brands such as Porsche.
“VW has such valuable assets, if they were to restructure to a holding model, they could lift so much capital and use it to innovate at such an amazing pace,” said Arndt Ellinghorst, an analyst at Bernstein.
But Mr Diess is aware that such decisions would have to win the approval of the Porsche-Piëch family, who own more than 53 per cent of VW’s voting capital and remain cautious about restructuring the company’s portfolio.
In a year turned upside down by the pandemic, the VW boss also knows he needs to stay focused on keeping the company, whose pre-tax earnings have fallen 85 per cent so far this year, in the black.
“If we can keep the economy running and plants running, we should still be able to deliver a good last quarter,” he said. Amid the crisis, he added, VW is “making progress” in restructuring its internal supply chains, and reducing costs.
“Is it fast enough for the capital markets?” he asked aloud, referring to the electric race VW is running. “Probably not, but, it’s quite fast for Volkswagen.”