How many times can the same chief executive make a “gaffe” before investors should start taking him at his word?
Volkswagen CEO Herbert Diess infuriated Ukrainian officials this week by suggesting the EU should prioritise a rapid settlement with the country’s Russian invaders for the sake of economic growth. “I think we should do the utmost to really stop this war and get back to negotiations and get back to trying to open up the world again,” he said.
Diess’s four years as VW chief are littered with tin-eared comments but this one appears more deliberate. VW has been forced to cut back on production because of war-related supply chain problems. Ukraine was a big supplier of “wire harnesses”, the cables needed for vehicle electric systems.
The VW CEO was also saying out loud what many in German industry are thinking privately. Most companies have dutifully suspended or sold operations in Russia to comply with sanctions imposed since the invasion. But that is a relatively small sacrifice compared with what Ukraine is undergoing — or the impact on all of Europe if the conflict intensifies. Should Moscow decide to retaliate for Berlin’s support of Ukraine by cutting off natural gas supplies, Germany would lose an estimated 12 per cent of output.
The high-profile call for a negotiated settlement is also firmly in line with Diess’s laser-like focus on improving VW’s profitability. While generally a good thing in a chief executive, such absorption can make one blind to other considerations. In a 2019 management meeting, Diess repeatedly used the phrase Ebit macht frei (earnings before tax and interest will set you free). The slogan was uncomfortably close to Arbeit Macht Frei (work will set you free), the slogan that appeared on the gates to the Nazi extermination camp at Auschwitz.
That same year, he professed remarkable ignorance about the politics of one of VW’s largest markets, telling the BBC he was “not aware” of China’s mass detention of Muslims in Xinjiang province. Diess has also angered VW’s powerful unions over sometimes ham-fisted efforts to cut labour costs, including blithe comments last year that 30,000 excess staff in Germany were holding back VW’s ability to compete with Tesla.
Such controversial comments would be disturbing in any chief executive, but they are especially troubling at Volkswagen. This company has a long history of governance woes and perpetrated one of the biggest scandals in modern car making when it installed cheating software to allow its diesel engines to pass emissions tests. It has now shelled out more than €32bn in fines, legal fees and customer compensation.
VW poses a thorny dilemma for investors who argue that using environmental, social and governance factors to evaluate companies is an effective way to boost returns.
On environmental concerns, VW now looks to be on a positive track, although it is moving slower than some smaller rivals to phase out petrol cars. The group is spending €52bn on electrification, the largest such outlay of any traditional manufacturer and it was Europe’s top provider of plug-in cars last year, accounting for one in four EVs sold. Before the Russian invasion scrambled supply chains, VW had set a target of passing Tesla globally by 2025.
The company last month also announced plans to shift from trying to sell ever more cars to concentrating on producing fewer, more profitable vehicles. A sensible move both for the planet and investors.
VW’s progress on social and governance goals is more mixed, as Diess’s repeated controversies underscore. Having bet hard on China, it has worked hard to stay on the good side of Beijing. Some analysts agree with the CEO’s complaints that German union rules have kept costs higher and slowed production. But worker demands also helped drive VW’s massive investment in electrification by insisting last year on more money than initially planned.
VW’s complex ownership structure, dominated by its founding families and the state government of Lower Saxony, also makes it very difficult to push through rapid change and limits the influence of other shareholders.
There is another wrinkle: Diess has recently courted social media attention as a way of reshaping public opinion and competing with Tesla’s Elon Musk. This has had mixed results. Last year, he used his LinkedIn account to blast the service at an EV charging venture co-owned by his company. VW was also forced to apologise for a joke about renaming the company Voltswagen that fell flat.
Investors should be clear that his brutal frankness about the Ukraine invasion is no one-off. Profit not purpose is his priority.
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