Subs exclusive: Why Herbert Diess has left Volkswagen

Was ousted Volkswagen Group chairman Herbert Diess a victim of the frozen middle? The suspicion that the Tesla-admiring Diess was given the push from VW because he failed to convince change-resistant junior managers – the so-called frozen middle in business terminology – is hard to ignore. Volkswagen is a difficult ship to steer at the best of times, and Diess was in charge of overseeing the biggest structural change to the company since it rebuilt following its industrial involvement in the Second World War. He was hired from BMW in 2015 as Volkswagen brand chief and made overall group chairman in 2018. His lack of previous history at the group following the scandal of Dieselgate was a big plus in his appointment, but that lack of a past network within the company might have cost him when it came to pushing through changes. Volkswagen’s pivot to electric started with his predecessor Matthias Müller in 2016 with the unveiling of a concept that strongly hinted at the 2020 VW ID 3. But after Müller’s ousting, it fell to Diess to implement the plan and it was on him that the blowback was directed from the German workforce and their representatives when it became clear just how disruptive the shift to electrification was going to be, particularly when it came to jobs. Diess was often publicly admiring of the disruptive force unleashed by Tesla and its CEO, Elon Musk. It was often reciprocated too. “Diess deserves a lot of credit for moving VW rapidly towards electrification. They’re lucky to have him,” Musk tweeted in April this year. Volkswagen’s supervisory board backed Diess in his plan to spend big on new technologies, with the bill coming to €73 billion between 2021 and 2025, or 50% of total investments. Volkswagen has always been vertically integrated, and Diess wanted the same control over the new technologies such as battery production, software and autonomous driving. The list included moving to a direct sales model, and were all strategies that have proven to work at Tesla. The problem was that, unlike Musk at Tesla, Diess serves many masters. The key shareholder at Volkswagen is Porsche SE, the holding company looking after the interests of the Porsche and Piëch families, which has a 31.4% stake but 50.7% of the voting rights. The VW chairman must also answer to the German state of Lower Saxony, which has 11.8% of shares but 20% of voting rights. Lower Saxony is home to VW’s flagship Wolfsburg plant and takes a keen interest in decisions that affect the VW Golf plant’s approximately 60,000 workers and any investment there. Finally, there are the workers themselves, who take half the seats on the company’s supervisory boards via representatives and are highly resistant to drastic change. Guiding a path satisfactory to all stakeholders was never going to be easy, particularly during a time of unprecedented disruption. Just how disrupted was revealed at the start of the year when VW disclosed that output at Wolfsburg had plummeted in 2021 to 400,000 vehicles from a normal output of 780,000 as a greater proportion of scarce chips were directed to higher-margin cars built by the likes of Audi. Then there was the gulf between management goals and the reality. As one automotive analyst put it recently: “As CEO you can say what you want to happen but there’s no guarantee your staff will enact it.” The software that would enhance the ID 3 and subsequent models - boosting connectivity, reducing buttons and bringing a more tech-led vibe to the interior – was beset by delays and glitches, sparking complaints that the VW brand had lost its leadership in mainstream automotive interiors. Volkswagen’s bet was that it could benefit from controlling the software, just as rival car makers, including BMW, chose to embrace Google for an easier, less capital-intensive path to improve their infotainment systems. More recently, software glitches are reportedly delaying the Artemis platform roll-out underpinning future electric cars for Audi, Bentley and Porsche, with Audi’s Landjet flagship set back three years to 2027. Other battles that could have knocked support for Diess include the always vexed position of the Volkswagen brand in the US, which has long lagged the local competition as well as the Koreans and Japanese. The group decision to revive the off-road Scout brand there as an electric stand-alone company was hailed by many, but not by dealers, who worried that the company would move to a direct sales model and cut them out of the loop. Investors initially impressed with Diess’s open communication skills and ability to grasp the changes needed to take the company into the future became frustrated that he couldn’t move the needle on the share price, with the company still valued at 10% that of Tesla’s. Philippe Houchois, automotive analyst at the bank Jefferies, took issue with his lack of ability “to engage with investors to effect internal change at VW” and said “he alienated key VW constituents” in an investor note. Diess’s “marginalisation”, in Houchois’ words, were publicly revealed when he was stripped of the VW brand CEO title in December and handed, amid his continuing role as chairman, leadership of VW’s software arm Cariad. An appointment that now looks like a 'hospital pass'. The hope now is that Diess's successor, Oliver Blume, who joined the group back in 1994, will be able to use his long-established connections and deft touch with local politicians to navigate a path that brings about the change needed at Volkswagen while thawing the frozen middle enough to follow him down it.