Ruffling feathers': How VW fell out of love with Herbert Diess

Volkswagen sacked its CEO Herbert Diess on Friday after a bruising four-year tenure. Photo / Getty Images

When Volkswagen boss Herbert Diess's strongest competitor, Elon Musk, parked his electric cars on the German group's lawn by building a factory just 200km from its historic Wolfsburg headquarters, the Bavarian executive's response 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 hall full of VW managers and attempting to mimic his social media use. Privately, Diess joked that he wished Musk had moved his plant "100km 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 was ruffling feathers he was going in the right direction," says Bernstein analyst Daniel Röska of the manager's attempt to transform a company that had been tainted by the diesel emissions scandal into an agile, electric pioneer. "It was a kind of an all or nothing strategy."

Those efforts were brought to a screeching halt on Friday when, at the request of the Porsche-Piëch clan who remain VW's largest shareholders, the company's supervisory board held an extraordinary meeting and agreed to defenestrate Diess with almost immediate effect, hours after the executive had left for a summer holiday.

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

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

Back home, Diess gained notoriety for more domestic issues — particularly his skirmishes with VW's powerful works council, which represents 60,000 employees at Wolfsburg and most of the additional 230,000 staff in wider Germany. He angered the organisation — which has effective control over the supervisory board via a loose alliance with the state of Lower Saxony, VW's second-largest shareholder — by suggesting the group had 30,000 excess staff in the country.

Last year he also pointed out that while it took VW roughly 30 hours to produce an electric car, Tesla employees managed the same in just 10. This metric was disputed by unions.

As a result of such confrontations, Diess sustained several bruises in his four-year tenure, including being relieved of direct responsibility for the group's largest brand, the VW marque, in 2020, and of his role as head of VW's China business last year.

"He took decisions without being sentimental about his colleagues' feelings," said one 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's achievements, which included the rollout of VW's first purpose-built electric vehicles as part of a €52bn push into the technology, won him an early contract extension from the supervisory board just last year.

"It was always a mixed picture," said one person familiar with the supervisory board's decisions. Until very recently, the person added, Diess's 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 plead his case. He was informed of the impending decision just a couple of days in advance, according to one person familiar with the events.

Neither the company, unions or shareholders would publicly confirm why Diess's position was suddenly deemed untenable. But works council boss Daniela Cavallo had complained that VW's software arm, for which Diess had taken personal responsibility, had not been performing well, forcing VW's premium brands Audi and Porsche to rely on their own systems while they waited for the group-wide technology to catch up.

More importantly, Cavallo had pointed to VW's lacklustre 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 vehicles, the ID range, have not sold as well in Asia as the company had hoped, in part, Cavallo argued, because of a failure to cater to local consumer preferences, such as the provision of in-car karaoke machines.

In recent weeks, the Porsche-Piëch family came to believe that Diess's contract extension had been a "mistake", according to one person close to shareholders.

The car boss struck a more conciliatory tone when speaking 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 running at full capacity. But "we started to realise he had not really changed", the person added.

The board came to the conclusion that Diess's nominated successor, Porsche chief executive Oliver Blume, was "maybe the more complete manager, [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 VW group, unlike Diess, who joined from BMW in 2015.

Wolfgang Porsche and Hans Michel Piëch, who speak on behalf of the Porsche-Piëch family, said Blume had enjoyed their "express trust for many years". He oversaw the rollout of Porsche's electric Taycan, which is now more popular than the storied 911, they added.

However Blume's appointment threatens to derail the long-awaited flotation 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 as 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 largest public listing in decades.

This arrangement flies in the face of VW's stated aim for the partial flotation, to give Porsche more "entrepreneurial freedom", Bernstein's Röska argued.

"If you are trying to give Porsche AG more independence . . . this move does exactly the opposite" while adding to concerns about the VW group's labyrinthine corporate governance structure, Röska said.

Nor will there be an entirely fresh 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 was aligned with Diess on the need for aggressive cost-cutting at the group's German sites.

Late on Friday, Diess tweeted a picture of him smiling contently next to an electric VW minivan. Earlier, in a LinkedIn post, he had emphasised that VW's recent difficulties were partly down to events far beyond Wolfsburg, citing semiconductor shortages, other supply challenges and rising raw material and energy prices.

But even more favourable economic circumstances did not shield his predecessors from VW's disparate powerbrokers. Diess is the fourth boss in a row not to serve out their contract.

"There are too many different interests in this company," the person close to the departing chief executive said. "It is a listed company but is very much in private hands."