Diess Elevation At Volkswagen Pleases Financial World.
His Record At VW Brand Outshines, Dooms Mueller.
“Dr Diess track record so far, his ability to engage with investors and his career background at BMW are all strong positives”
The promotion of Herbert Diess to replace Matthias Mueller as Volkswagen Group CEO and a shakeup of the company’s structure was welcomed by investors and analysts as a credible start to the long awaited move to improve corporate governance, investor accountability and profitability.
The Financial Times Lex column was a minority critic.
“Optimists hope successor Herbert Diess will further shake up the great German carmaker…….. he will probably fail,” said Lex
But most analysts said the sudden elevation of Diess to VW Group CEO reflects his success as VW brand chief when he stunned observers by managing to do a deal with the unions to cut costs and improve profitability. The fact Diess is not tainted by the dieselgate scandal also counts strongly in his favour.
Volkswagen has long been criticised for being a slumbering giant, controlled by local Lower Saxony politicians and unions to serve their interests rather than the bottom line or shareholders.
Investors have been dreaming that one day things will change and VW will emerge as a normal international corporation which concentrates on profit margins not politics.
The installation of Diess answers another big long-term shareholder demand; he is an outsider, recruited from BMW in 2015, just before the dieselgate scandal broke. Diess has also shown courage in facing down the unions and can point to the deal in 2016 which will mean the loss of 30,000 jobs over the long-term and savings of €3.7 billion.
Mueller, the former head of Porsche, took over the VW Group after the dieselgate scandal erupted in 2015. Mueller had been contracted to serve until 2020. Mueller has been under pressure and has endured some embarrassing moments in media interviews. Perhaps his most recent high profile gaffe was his declaration at last month’s Geneva Car Show that diesel will see a renaissance soon, as sales in Germany plummeted with sales prospects worsening.
Truck spinoff plan remains
The VW statement that announced Diess’s elevation also included big organisational changes by creating six business areas and a special role for China, its biggest market. Mass car making will bring VW, Skoda, Seat and vans together, Premium will mean Audi, and Super Premium will group Porsche, Bentley, Lamborghini and Ducati motorbikes. Another big plus for shareholder is an apparent embrace of the plan to spin-off VW trucks.
Investment researcher Evercore ISI applauded the moves.
“VW, everything we could have asked for,” said Evercore ISI analyst Arndt Ellinghorst in a research note.
“VW has opted for 1) a quick CEO succession to the right candidate, Herbert Diess, 2) a streamlined structure, allowing it to better address its diseconomies of scale and 3) preparation for the IPO (initial public offering) of the Trucks business, which we assume in early 2019.” Ellinghorst said.
In an earlier note, Ellinghorst pointed out that some of VW’s costs were way out of line with competitors. Its material costs to sales ratio was 76.9 per cent compared with BMW’s 58 per cent and its labour costs/sales ratio was 16.9 per cent versus BMW’s 12.2 per cent.
Investment researcher Jefferies was disappointed with the lack of detail and the premature leaks to the media, which pointed to internal frictions at VW. It liked the appointment of Diess though.
“Dr Diess track record so far, his ability to engage with investors and his career background at BMW are all strong positives, in our view,” said Jefferies analyst Philippe Houchois.
Juergen Pieper, analyst at Bankhaus Metzler in Frankfurt, praised the change, and was impressed with how VW has emerged intact from the huge costs of the dieselgate scandal.
Toughness, energy, smartness
“It is a change for the better in the end. Of course, the family (the Porsches are big shareholders), Lower Saxony and the unions are still powerful parties but Diess has the toughness, the energy and the smartness to get along quite well with these “factors”,” Pieper said.
“The giant that is VW is on one hand stumbling but it also has lots of power – especially on the product side. Financials have been almost always better than expected over the past 10 years, EBIT (earnings before interest and tax) margin of close to 8 per cent is at all-time highs despite Dieselgate and high expenses for future technologies. Is there another company that could throw €26 billion out of the window and still be in good shape,” Pieper said.
UBS analyst Patrick Hummel also was positive about the changes in a report headed “Out of the Diesel darkness into shining Diess era?”
“Diess might revisit the 2020 business plan later this year, which currently just implies a preservation of what has already been achieved in terms of margins and cash flow. We think his strong track record at the VW brand so far and previously at BMW could well result in more ambitious targets, and several brands – VW core, SEAT, Bentley, MAN (trucks) are still well below potential in terms of profitability, in our view,” Hummel said.
The FT’s Lex backed up its negative view by underlining the familiar obstacles.
“VW’s culture may no longer spur criminality (dieselgate). But it remains a family affair. The Porsche dynasty indirectly controls half the voting shares. The state of Lower Saxony has another fifth. Trades unionists are powerful within German companies. Particularly so at VW. Union resistance is one reason Mr Diess may struggle to lift VW’s operating margin a percentage point or so to about 7.5%, in line with Toyota and General Motors,” Lex said.