VW CEO Gears Up for Labor Fight With Overhaul on the Line

(Bloomberg) -- Volkswagen AG is facing crunch time to deliver on a pledge to become a global juggernaut shaping future transportation.

Nearly a year into his reign, Chief Executive Officer Herbert Diess has stepped up crucial parts of an overhaul of VW’s 12-brand global empire to gain speed and efficiency and fight new and old rivals. He’s also trying to push through a partial share sale in VW’s trucks division and make other structural changes.

VW CEO Gears Up for Labor Fight With Overhaul on the Line

Diess will have to contain rumblings of growing discontent among the ranks of VW’s powerful labor representatives who’ve previously derailed plans on asset sales and deeper cost cuts. The next opportunity to press for change comes at VW’s annual earnings press conference this week, and his first official large-scale meeting with analysts and investors since becoming CEO in April. VW already presented preliminary earnings in February that met expectations and forecast a rise in revenue this year despite challenging conditions.

It’s fitting the event coincides with the Ides of March, the date in the Roman calendar that’s become imbued with an ominous sense of downfall since the assassination of Julius Caesar. Diess, known for hard-as-nails tactics and a healthy appetite for a fight, risks losing momentum if he can’t keep in check rising tensions said to center on a plan to add a low-cost plant in Eastern Europe or Turkey, while a number of German factories have surplus capacity and production delays.

Golf Delays

At VW’s headquarters in Wolfsburg, output of the revamped Golf is said to lag at a fraction of planned volumes for this year due to issues with the car’s electronics system, said two people familiar with the situation.

At Emden, a new version of VW’s bread-and-butter Passat has been delayed to the third quarter, after an original plan to start output during the last three months of 2018, according to documents seen by Bloomberg. The plant has sat idle or with reduced hours for 131 days. A third factory in Lower Saxony, Osnabrueck, is only used as a spillover site for brands like Porsche that don’t have enough assembly capacity.

VW, seeking to finalize picking a site for the new plant in time for the next supervisory board meeting in May, declined to comment on the production delays.

Porsche Backing

While Diess has the backing of Wolfgang Porsche, a leader of the Porsche and Piech owner family, worker representatives hold half of VW’s supervisory board seats. They often vote as a block with the state of Lower Saxony, which holds a 20 percent stake. Together they can easily block deeper cutbacks among VW’s high-cost German workforce, and have resisted structural changes like selling non-core assets such as the Ducati motorcycle brand.

With VW’s namesake brand and Audi, its biggest profit center, continuing to trail competitors in profitability, Porsche last week slammed VW’s “fossilized structures” and the strong sway of unions standing in the way of progress.

VW’s top labor representative, Bernd Osterloh, wasted no time turning the lens back on management failures, citing the mishandling of new emission tests in Europe that cost the company about 1 billion euros ($1.1 billion). And then there’s the diesel-emissions cheating crisis that’s so far cost VW 28 billion euros.

“All of these are management issues, which have nothing to do with the workforce,” Osterloh said in a statement. “This has cost the owners several billions already, and that’s what the supervisory board should focus on.”

Main points in focus for VW this week:

  • Preparations for a final decision to sell a minority stake in the Traton SE trucks division, valued at as much as 30 billion euros. The plan has been under consideration for more than two years.
  • Finalize and potentially broaden a cooperation with Ford Motor Co. on light commercial vehicles to areas like self-driving technology. Since VW’s Hanover-based van unit is a traditional union stronghold, an escalating labor spat could complicate matters.
  • Boosting efficiency at the VW and Audi brands. The group’s two biggest divisions lag behind direct rivals on profit margins.
  • Plans to ramp up electric-vehicle production on a global scale and expand software operations without eroding profits.

“VW has an incredibly strong executor at the top -- if he can’t turn VW into a more agile and value-oriented business, we wonder who can,” said Arndt Ellinghorst, a London-based analyst at Evercore ISI. “VW’s governance remains the root cause for the tiring power-struggle between management, the supervisory board and the works council.”

©2019 Bloomberg L.P.