FRANKFURT -- Volkswagen brand will have a new boss for the first time since 2007 when former BMW development boss Herbert Diess takes control on Wednesday. Diess's tasks as successor to Martin Winterkorn, who remains VW Group CEO, include reining in costs, increasing profitability and making the brand a stronger player in the U.S.
The immediate priority for Diess, 56, will be ensuring the smooth execution of an efficiency program started by Winterkorn to add 5 billion euros in overall earnings by the end of 2017. This will be crucial to boosting the VW brand’s operating margin to more than 6 percent in 2018 from 2.5 percent last year. The challenge is that half of the savings have yet to be identified, let alone implemented.
“If there is anyone who can do it, it’s Diess. If you look at his track record at BMW, he did a fantastic job there and the company never should have allowed him to leave,” said JP Morgan auto analyst Jose Asumendi.
Diess takes on the post just as vehicle sales are slowing down at the brand, which accounts for 60 percent of VW Group's volume. VW brand global sales fell by 5.9 percent in May to 499,500 as slowing momentum in China and declines in South America outweighed gains in Europe -- the seventh decline in vehicle sales in eight months.
An Austrian national, Diess developed a reputation as a cost killer during his time as purchasing manager at BMW from 2007 until 2012. Senior level BMW sources said Diess was the right person at the right time to help execute badly needed cuts following the Lehman Brothers collapse in late 2008. Diess was not, however, a serious challenger for BMW Group’s CEO post, which went to Harald Krueger, because he could not secure the backing of BMW’s unions that sit on the supervisory board, the sources said.
Diess's skills at squeezing suppliers and eliminating waste may be advantageous in the short term at VW brand, but other cost-cutters poached from rival carmakers and lacking an internal power base in Wolfsburg have often been forced out.
Daimler’s Wolfgang Bernhard, who eliminated a fifth of Chrysler’s workforce more than a decade ago and called Mercedes-Benz a restructuring case where "blood would flow" was celebrated by shareholders when he joined as VW brand chief in 2005. He lasted less than two years before resigning in January 2007 shortly after winning a hard fought battle to cut German jobs.
As a result, analysts warn Diess will have to develop a greater sense of finesse when dealing with entrenched German unions. Organized labor plays an even stronger role at Volkswagen than at other German carmakers, in part because of the company's statutes that stipulate no assembly plant anywhere in the world can be closed without union approval. The most recent closure of a major VW plant was the company's factory in Westmoreland, Pennsylvania, in 1988.
Said JP Morgan's Asumendi: "Diess has to gain the confidence of the unions at Volkswagen. There needs to be an element of trust involved -- that is simply how this company ticks. There are plenty of well known examples of people that are no longer with the organization because they did not take the unions seriously."
Clean up tasks
Stefan Bratzel, director of the Center of Automotive Management at the University of Applied Sciences in Bergisch Gladbach, believes Diess will have a risky balancing act on his hands, boosting efficiency without eliminating jobs. "There are savings possible beyond turning the screw on the employee side. One measure he will certainly take is to save considerable costs on the supplier side," he said.
Instead, Bratzel believes Diess should focus on reducing complexity in design and manufacturing. VW for example already has decided to discontinue building the two-door Polo subcompact and its 1.4-liter three-cylinder TDI diesel.
"I am sure he will also comb through the diversity in the product range and examine closely whether certain derivatives are needed. There is a lot of cleaning up to be done there," Bratzel said.
In the long term, Diess will need to focus his attention on Winterkorn's Future Tracks strategy -- if he is able to survive the political intrigues endemic to Volkswagen. Future Tracks is the company’s attempt to provide answers to the major challenges confronting the industry, which VW believes is facing one of the greatest periods of upheaval since the invention of the automobile.
Should Diess be able to complement his cost-cutting skills with a strategic vision to grow VW Group’s biggest brand, his chances of inheriting the CEO post from Winterkorn will look much more promising.