Management errors, China trouble, stock market weakness: Volkswagen currently has many problems. The race to catch up with the thoroughbred electric car manufacturer Tesla has begun, but is hardly reflected in the sales statistics. Here, VW driver Herbert Diess comments on the six biggest challenges for the VW Group.
When the VW supervisory board meets for its regular meeting on Friday, there is one special feature: this time it is not a matter of life or death for CEO Herbert Diess. The group has problems dozens of times, but no management problem. At least not at the moment.
Yesterday I met Herbert Diess in Berlin, during a one-hour drive through the capital (in the new VW T7 bus), to stratify the problem mountains together with him. What exactly is his ambition? Where did he go wrong? How does he view a world where it seems an ambitious Elon Musk, a belligerent Vladimir Putin and a China-critical US President are conspiring against Volkswagen’s global plans? At the wheel was a CEO who combined driving pleasure with the joy of intellectual friction.
VW problem number 1: The group’s software division, which started with great expectations, has not yet delivered. CARIAD, as the software unit founded in 2020 is called, is to provide central software for all brands of the group – a uniform operating system as a basic requirement for autonomous driving. Around 5000 developers, engineers and designers are currently working for Cariad. A McKinsey report, which is available to the supervisory board, comes to the unflattering verdict:
“Serious management mistakes.”
Diess does not deny the problems, but puts them into perspective. At the beginning of the year, he took over the operational supervision of the unit and now no longer wants to develop the one software for everyone, but initially gives the individual brands such as Audi and Porsche the freedom to find their own software solution.
His advantage: no one on the supervisory board questions the need for an in-house software company. In addition to battery production for the drive train, it is considered to be the heart of a modern automobile. Diess has prevailed with his view: The software is going from being a supplier to an integral part of the business model.
VW problem number 2: 95 percent of VW sales in 2021 were combustion cars. The race to catch up with the thoroughbred e-car manufacturer Tesla has begun, but is hardly reflected in the current sales statistics, also due to the long product cycles in automobile construction. In the first quarter of 2022, the VW Group sold a total of 99,000 electric cars. Tesla more than three times as much.
One reason: In Europe and the USA, the electrified VW vehicles are simply sold out. Chips are still missing, the war in Ukraine and the partial lockdown in China have exacerbated the tense delivery problems. By the end of the year, Diess wants to have reduced the gap:
“We have to show that we are closing the gap to Tesla, that we are technically at eye level.”
VW problem number 3: Volkswagen is highly dependent on China. In 2021, the Chinese will account for 40 percent of the group’s sales – and a presumably higher part of the profits. China is by far the largest growth market for VW.
However, the problem arises less from a Chinese or German perspective than from an American perspective. With its policy of demarcation – which is referred to as decoupling – Washington has shed new light on German-Chinese economic relations. The German economy is being urged to reduce dependencies.
Herbert Diess contradicts the American position. He doesn’t see China as a rival, but as a partner. He wants to further expand his position there and considers the Biden government’s fantasies of de-globalization to be unworldly and a violation of American interests:
“I think decoupling is dangerous, especially for Europe, of course. But the Americans also have a lot of business in China and I don’t think that decoupling can promise a better position for America in the long term.”
VW problem number 4: The plant in the Chinese region of Xinjiang – home of the persecuted Uyghur minority in China. In this region there are large re-education camps for the mostly Muslim Uyghurs; According to the UN General Assembly, there are “systematic violations of human rights, torture, forced sterilization and sexual violence”.
VW would like to continue producing there. The plant is “an integral part of Volkswagen’s strategic direction in China,” says the group. Diess does not even think of withdrawing, especially since it is important to him that there is no oppression and no forced labor in his work. On the contrary, the company set up prayer rooms for the various religious groups. This says:
“As far as we know, our standards are respected there. That’s why I’m also convinced that it’s better if we stay there. A withdrawal would not improve the situation of the people there.”
And he announces that he wants to resume his travel activities, which were disrupted by the pandemic. A visit to the province and the plant there, which Volkswagen shares in a joint venture with the Chinese state-owned company SAIC, is on the agenda:
“I’ve wanted to go there for a long time. Unfortunately, due to Covid, it has not worked so far. But I definitely intend to go there.”
VW problem number 5: The market price of the VW share is not moving. International investors are not buying the Diess story. During the CEO’s term of office, i.e. from April 2018 to the present day, the stock price has lost a lot of value. Tesla boss Elon Musk was able to increase the value of his company by 1300 percent to $706 billion in the same period. However: This is lucky in misfortune. In his car company, which is largely controlled by unions and the SPD, the share price does not play a significant role. And the Porsche and Piëch families are richly rewarded by the separate IPO of Porsche AG.
Gabor Steingart is one of the best-known journalists in the country. He publishes the newsletter The Pioneer Briefing. The podcast of the same name is Germany’s leading daily podcast for politics and business. Since May 2020, Steingart has been working with his editorial staff on the ship “The Pioneer One”. Before founding Media Pioneer, Steingart was, among other things, Chairman of the Management Board of the Handelsblatt Media Group. You can subscribe to his free newsletter here.
The main risk of the generally low German car prices (Mercedes and BMW are no better off) and the high Tesla stock price lies in the takeover opportunities that result for Elon Musk. He could take over important competitors from petty cash and thus gain important economies of scale in global auto poker. This says:
“You could imagine scenarios where Tesla might buy a competitor, maybe a weaker one than us, and then scale faster. That’s a scenario to keep in mind.”
VW problem number 6: VW is a political company that does not primarily serve to make a profit. The supervisory board consists of two politicians, Stephan Weil, SPD prime minister of Lower Saxony, and Bernd Althusmann, the CDU’s top candidate. This also gives IG-Metall, which has Jörg Hofmann as Vice President on the Supervisory Board and other Supervisory Board members Daniela Cavallo and Jens Rothe, the status of a countervailing power. Diess feels the relationship is more relaxed than it was a year ago:
“I see a clear improvement. “
In addition, as long as profits are bubbling up, social conflicts within the company can be resolved or at least cushioned. For 2022, the CEO expects a solid and possibly even record-breaking profit.
Conclusion: Volkswagen is envied by many other companies, also because of its problems. The group is moving at high speed. One would like to call out to the many snipers with Henry Ford:
“Do not look for mistakes, look for solutions.”
