Diess survives losing key VW role, for now

FRANKFURT — Herbert Diess may want to watch his back.

The Volkswagen CEO, who earned almost €10 million ($11.3 million) last year, no doubt remembers how he came to run the carmaker: The ambitious Austrian went behind his aging predecessor's back to convince directors he was the best man to lead VW into the future.

Following a series of blunders by Diess, 61, largely centered around its flagship Golf model, the board may now be getting other ideas.

After finding themselves on the receiving end of a Diess attack, the 20 nonexecutive directors — split equally between shareholders and unions — delivered what can only be seen as a public censure of their CEO: Under pressure, he was forced to cede control over the VW brand to Ralf Brandstätter, 51, the operations chief installed at the behest of labor leaders.

"The unions have weakened Diess — he's wounded," a source close to the board said. "As long as Lower Saxony doesn't side with them [to create a majority], they cannot get rid of him, though."

Despite suffering his biggest defeat since taking over in April 2018, insiders at the company say the hot-tempered and demanding Diess is not the type to back out of a fight or give in to adversity. He also continues to retain overall control over the volume brands that include Skoda and Seat as well as VW, and also groupwide responsibility for sales and for China.

A series of missteps around the all-important Golf hatchback — built in Wolfsburg, near the company headquarters — was the catalyst behind the warning he received.

Trade unionists had been furious with what they called "enormous pressure" to meet the car's launch date in December, when most Germans were planning for Christmas holidays. Not only did Diess dismiss their concerns, he inflamed them by describing it as "one of the best ramp-ups we ever had" in a LinkedIn post.

"In the time frame envisioned, it demanded everyone work at the limits of their capacity," said a company source. "We brought it a month too early."

But delaying it would have been costly, too. Since the hatchback lacked a standard center airbag — required for a five-star safety rating as of January — VW would have fallen short with its signature car, which one official said would have been humiliating.

Making matters worse, the subsequent European rollout, already difficult because of the coronavirus outbreak, was marred by a problem with a mandatory eCall safety system. All 30,000-plus Golf 8 models delivered in Europe had to be recalled, and VW stopped delivery of others for three weeks.

Tempers rose further after a controversial 10-second Golf ad was posted on Instagram that critics argued hid a racist message. An internal investigation found no racist intent, but VW apologized for the video, calling it "inappropriate and tasteless."

Finally, Diess was furious over a media report that published an internal VW document revealing that as much as 60 percent of the Golf production on a single day could somehow be flawed.

Personally embarrassing for him was another that aired his demand for an early contract extension — possibly hoping for an outward expression of confidence in the midst of all these difficulties.

During an internal conference with more than 3,000 managers, he accused directors of being the source of the leaks and hence breaching compliance.

"It was an unprecedented faux pas," an insider familiar with the board's thinking said.

The other source close to the board added: "He effectively accused company directors of acting criminally. It was a serious error."

Volkswagen's official position is that the management change coincides with the completion of the first phase of the brand's transformation plan, allowing Brandstätter to focus on VW's ambitious electric vehicle rollout.

But it's unclear whether shareholders will protect Diess through any more blunders, sources say.

For now his position is secured by the Porsche and Piech family, fellow Austrians who control a majority of Volkswagen.

Deeply loyal, having supported ex-Audi CEO Rupert Stadler all the way up to his arrest two years ago, the two clans have virtually all of their wealth tied up in the company founded in 1937 by the German government, which commissioned Ferdinand Porsche for its first designs.

Should another executive as ambitious as Diess promise to steer the ship to calmer waters, they might dump Diess as quickly as they did his predecessor, Matthias Müller, who was CEO for less than two and a half years.

It's considered extremely unlikely Brandstätter could replace his boss as his support among labor leaders could discredit him in the eyes of the family.

"Look at his CV. He's from the hometown, starting out doing his apprenticeship as a shopfitter at Volkswagen in Braunschweig. And after getting his degree, he spent his whole career at the company," the source said, explaining Brandstätter's appeal to the labor bench. "He has the right background and pedigree for the unions."

That contrasts with VW Group purchasing and components chief Stefan Sommer.

Last week, the former ZF Group CEO behind the TRW acquisition elected to leave VW at the end of the month.

After less than two years in Wolfsburg, sources said, he was fed up with the parochial politics and didn't even bother to negotiate an exit package.

The group's American operations led by Scott Keogh, meanwhile, have little to fear from Wolfsburg's latest internal drama — even if the pandemic and recession mean the unit will likely fall short of the goal of breaking even this year.

Software problems dogging the company's European ID3 model are also not expected to delay the U.S. launch of the key ID4 electric crossover in the spring.

Asked whether Brandstätter's promotion could affect the U.S. operations negatively, the company source said, "I wouldn't know why. Scott is doing a super job."

Diess has bought himself time by humbling himself before the board for his outburst.

In a statement, Volkswagen said that directors had accepted his formal apology for his "inappropriate and wrong" comments and "will continue to support him in his work."

Still, Diess might want to post lookouts in Austria's Zell am See, home to the Porsche family farm, to keep tabs on any Volkswagen executives leaving the Schüttgut estate of Wolfgang Porsche.

Word is the family is grooming 52-year-old Oliver Blume to one day take over as group CEO.

Like Brandstätter, he was born and raised just outside of Wolfsburg and is a career VW executive.

But he enjoys one major advantage: For more than four years, he's been successfully running the sports car maker that bears their dynasty's name.

Blume's day could come relatively soon, if Diess commits any more blunders.