The first days of the new year are eventful and the change in the automotive industry is becoming increasingly evident. Although the sales figures for 2019 give rise to high feelings among German manufacturers, the uncertainty can no longer be denied. At CES 2020, German manufacturers have cut a very poor figure and are already serving as a warning to other industries. The Porsche Taycan, for example, has received the poorest rating of all current electric cars for its range; Mercedes and BMW showed a lack of innovation and motivation that is unparalleled at CES, while at the same time they are blowing up repeated smoke grenades and believe they can get away with it; and then Tesla’s market value has increased to such an extent that Volkswagen has almost been overtaken as the last German manufacturer.
Nevertheless, too many car managers still seem to have failed to recognize the change of times. The opinion still prevails that “Tesla will soon be bankrupt and disappear” and that everything will “be back to normal again” and one can “finally focus on his diesel engine again“.
Even if it is understood, then only in parts. In response to a question from employees of a German manufacturer, I made a list of what their electric car should be able to do, so that I would switch from my Tesla Model 3 to one of theirs. And at the moment, not a single car from them fulfills even the first item on the list completely.
The only German top manager who seems to have recognized the extent and urgency of the danger, is VW-CEO Herbert Diess. And since he has been at the helm, he never tires of rousing his employees and setting the course for Volkswagen to suffer the fate of Nokia. In a speech to the management team on Thursday he even referred to Nokia and does not mince words. Here is the transcript of the speech in its entirety.
„Ladies and Gentlemen,
the world is on the move. Politically and technologically, we live in an incredibly dynamic time. A turn of an era stands before us – from the dimension of the industrial revolution. And Volkswagen is in the midst of the storm of the two greatest transformation processes:
Climate change and the associated pressure to innovate towards zero-emission driving.
And digitalization, which is fundamentally changing the automobile as a product.
- Climate change and the associated pressure to innovate towards zero-emission driving.
- And digitalization, which is fundamentally changing the automobile as a product.
Our Group does not always have the best prerequisites for reacting quickly and consistently enough to these developments. Measured against this, we have not done badly so far. This is also acknowledged by market observers. In 2019 in particular, analysts have gained new confidence in our strategy.
Kepler Cheuvreux attested to us earlier this year: „We think VW is the best positioned player in the industry to master the CO2 challenge.“ Und Goldman Sachs meint: „We expect VW Group to continue to prosper this year as a result of ongoing positive sales developments at VW brand, a pick-up in sales at Audi, and broadly flat margins.“
In the Litigation area, we are making the risks from the diesel crisis more manageable step by step. In terms of corporate culture, we are seeing tangible and measurable progress. I am pleased that we have increased our integrity by three points in the sentiment barometer.
Our modern model range built on the MQB basis in volume and the new Porsches, Audis, Lamborghinis and Bentleys convince the customers. We improve the quality of our business. Revenue and earnings are growing faster than sales. In China, we increased our market share by 1.4 percent in a sharply declining market. This is a great achievement, which hardly anyone would have expected from us. Congratulations to Stephan Wöllenstein and his team on their outstanding performance!
In South America, we are returning to profitability for the first time, and we have also turned our business around in Russia. In North America, we have significantly improved our earnings and aim to break even this year. Volkswagen Financial Services will have a record year in 2019, and the component has made decisive steps in battery development and production.
At Audi, the e-tron has got off to a successful start, development costs have been reduced and a comprehensive cost reduction program has been launched. Porsche has once again delivered excellent figures and cars and has set an example with the Taycan. Seat conquers new and young customers with Cupra. Skoda is running at full speed and will present the new models in India, an important future market for us, at the beginning of February.
VW Commercial Vehicles has put the extremely important Ford cooperation on track, and Traton has completed its IPO. We see positive trends at Bentley, Ducati, Bugatti and Lamborghini, and Bentley in particular is back in the black. The Volkswagen core brand has worked hard to further increase returns. All in all: good developments.
But honesty also means that the storm is just beginning. And today is an opportunity to examine ourselves and each other: Are we well enough prepared for what’s coming? 2020 will show how weatherproof, agile and responsive we have become.
Last week, I was in New York with investors and analysts, where I promoted our strategy. I explained the steps we are taking for 2020 and 2021. In comparison, we are receiving more and more buy recommendations for our shares. 88 percent recommend buying VW shares. We are gaining credibility. That is of enormous importance for us.
But: The development of Tesla’s share price has recently been far more dynamic than the increase in VW’s share price. In terms of market capitalization, Tesla is now almost on a par. Ladies and gentlemen, we are valued like an automobile company, Tesla like a tech company.
In the future, the automobile will be the most complex, valuable Internet device suitable for the masses. We will spend more time in the automobile of the future than today, perhaps two hours instead of one. That’s why it will not be a grey box, but will be much more comfortable, homely and above all more networked and multifunctional than today. In the car, we will be continuously online, delivering far more data than smartphones, but also getting more information, services, security and convenience from the Internet.
The networked car will almost double Internet time. The car will become the most important “mobile device”. When we see this, we understand why Tesla is so valuable from an analyst’s perspective. We at Volkswagen want to get there too. The big question is: Are we fast enough? The honest answer is: maybe, but things are becoming increasingly critical. If we continue at our current pace, things will actually get very tight.
I remember a situation in which I had Nokia employees – I had taken over a few hundred – explain to me how they went down in the fight against Apple. The logic was: “We have 43 different mobile phones, the right one for everyone, nobody wants touch, you have to charge the iPhone at least once a day, while our battery lasts for a week“. And: Nokia had record years, but was practically already dead.
Steve Jobs, on the other hand, had understood that the function of the device was fundamentally different. Access to the Internet became more important than the phone itself. And loading time was no longer so critical for customers. A few years later, Nokia was history.
Ladies and gentlemen, this is precisely the situation that is being repeated in the automotive industry. The car is no longer just a means of transport. And that also means that the era of classic car manufacturers is over. The future of Volkswagen lies in the digital tech group – and only there. And we will need an additional catch-up program to mobilize all the potential in the Group for this.
We have what we need. There is a great deal of technical know-how in our group of companies. We have a top management team, as the Future Executive Development Program has shown us. And we can use the proceeds of today’s technology to finance the transformation from our cash flow.
What we lack is above all speed and the courage to take a radical change of course, if necessary. Ladies and gentlemen, that is what it is all about: a powerful change of direction. Otherwise it could soon be too late. 2020 is now just around the corner. Three points are crucial:
Firstly, meeting the new CO2 limits by making our e-strategy a success and bringing ID.3 on the road. 2020 is the year of truth for CO2 compliance. With a difference of 30 grams to the limit value, which we will have to close in two years and which can only be closed with e-vehicles and plug-ins.
At the beginning of January, the analysts at UBS put it bluntly in a nutshell: „We reiterate our view that the ID3 is VW’s ‚must-get-right‘ vehicle in 2020, as it spearheads VW’s second-to-none EV offensive. Also, the ID3 is key to CO2 compliance for VW in the EU.“ The ID.3 has to get on the roads. To do this, we must meet the challenges at the start. The challenge is the complexity of the software and electronics.
In addition, in order to comply with the limit values, we also have to supply, build and deliver batteries to Seat Mii, VW Up!, e-Golf, e-tron and Taycan. All in all, this is perhaps the most difficult task that Volkswagen has ever had to face.
Second: Implement the e-strategy without losing profitability. Margins in 2020 must at least be sustainable. We have the potential to do so if we really take the seriousness of the situation as an opportunity to fully exploit the potential of this Group and, where necessary, slaughter sacred cows.
We will use the synergies within the Group much more consistently and must reduce complexity even more. To this end, we are forming the synergy families. The idea of using the greatest possible synergies between the brands in model development is not new.
Exploiting the strengths of the Group also means: We need maximum profit pool utilization across all segments. To this end, we have agreed the brand territories.
It is completely understandable that some brands would pursue a different strategy if they were alone. But we operate as a group. Each brand is judged by the fact that it makes full use of its own territory. The corporate goal is above the brand goals. Just as important: with the six percent for research and development and for investments, it must be clear: That is the maximum ceiling. Toyota – not to be compared with us in all consistency – runs at three to four percent in these disciplines – and is considered innovative and environmentally friendly.
We need to make further progress on productivity. Cost-cutting programs are underway in all brands. The German locations in particular offer potential here. And they also have a lot of leverage. Reducing complexity also means that we regularly review our activities and ask ourselves: what can be eliminated, what do we need new?
To name a few examples: …the fuel cell and the Liquid Fuels we’re running at ground level. For a foreseeable time horizon of at least a decade, they are not an alternative to car engines. We need to concentrate fully on the breakthrough of electric mobility.
We will also significantly reduce expenses at Moia. We want to keep our foot in the business. But we have to extend our commitment over time until the conditions for profitability are better. This applies not least to the expensive vehicles.
In addition, the portfolio is being restructured with a clear focus on the core business. The IPO of Traton was an important step. A first step. We are actively engaged in discussions on industrial solutions for Renk and MAN Energie Solutions.
In order to achieve and sustainably increase our target margins, we also need a fundamental rethink. Away from volume orientation, and toward earnings quality.
Take Bentley, for example: 10,000 deliveries – that’s a strong performance by the team, which we did not think possible not so long ago. Congratulations for this and a thank you to the team. But the news would of course be even more impressive if we were to achieve a return greater than zero. If I’m completely honest: I’d rather have 5,000 deliveries and a return above 20%.
Counter example: Mexico. Here, the market share will have fallen slightly in 2019 – caused by the pricing and shutdown of low-yield vehicles. However, corporate earnings improved from a clearly negative contribution to just below break-even. This is expressly an excellent development! We must succeed in the paradigm shift away from volume and towards quality of business. In the future, we will focus even more strongly on sales, return on sales and cash as core reporting figures.
Thirdly: Making the Car.Software.org a success and creating impact. The Car.Software.org is launched. Now it must become operational. This also means that we must not wait until all organizational issues have been resolved down to the last detail, but must get started. We all have a clear demand: The success of the Car.Software.org will decide our future!
These are the building blocks for reaching the 200 billion euros in enterprise value. The program for this is the “Together 2025+” strategy, which we agreed upon last year in Fleesenseev, with the five modules Best Governance, Best Performance, Best Brand Equity, Software Enabled Company and Excellent Leadership. These five modules describe the right direction for the transformation towards a Tech Group.
Turning Volkswagen from an automotive group into a digital tech group – that is a gigantic challenge. It sounds unlikely that it can be mastered. Nevertheless, I believe that we can master it. To do so, we need a radical restructuring of the Group. We need to make use of our strengths, but we also need to leave out and abandon everything superfluous that is not going to get us anywhere.
That is the task of all of us. In these challenging times, it is all about new thinking and joining forces. And, of course, it is still a matter of making Volkswagen a company of sustainable integrity. We have it in our own hands. 2020 is the year of opportunities for faster, more consistent restructuring.
Before Christmas, I congratulated the best trainees from the entire Group in Wolfsburg. I said to them: This company is their company. And if this company is not to become an industrial monument, then they must put aside the monuments of everyday life. I said that to our trainees. And I say the same to you.
We need a shared understanding of the radical nature of change. In the magnitude of our task. And in the short time frame. It gives us exactly one single attempt to secure Volkswagen for the future. Let’s use it.”
This article was also published in German.