A software spat likely triggered the demise of Volkswagen Group CEO Herbert Diess, but he ultimately fell victim to the weird, cumbersome management structure that allows politicians and unions to veto strategic decisions.

It was only a matter of time. Diess had infuriated the powerful engineering workers’ union with his aggression. They didn’t like his speech about needing to cut tens of thousands of jobs as VW sues Tesla
TSLA
for electric car leadership, as he expressed his admiration for swaggering, union-busting Elon Musk.

Due to the adversarial relationship between VW executives and the board, investors have likely already started the clock to measure the tenure of Diess’s replacement, Porsche subsidiary CEO Oliver Blume. Blume’s whiskey and gun moment will no doubt come unexpectedly, probably quite soon after VW renews its contract. A year ago, VW extended Diess’ contract until 2025.

Other Volkswagen subsidiaries include the VW brand, Audi, Skoda, SEAT, Bentley and Lamborghini.

Blume’s big tasks will be how to develop software – whether in-house or outsourced – and struggling companies in China and the US

VW is controlled by a 20-seat supervisory board where the unions control half the votes and two Lower Saxony state politicians often vote with the workers. For decades, investors have shunned getting into VW shares because the clumsy management structure has stalled many attempts to turn VW into a normal company where profit-minded shareholders call the shots.

Diess has been at the helm of VW since 2018 after being hired from BMW. VW needed an outsider who was untainted by the “dieselgate” emissions scandal. Diess aggravated the unions with his expressed desire to streamline VW production along Tesla lines and cut 30,000 jobs in Germany. Diess also said it took VW around 30 hours to make an electric car, compared to Tesla’s 10 hours, a figure disputed by the union. VW hopes a stake float from Porsche later this year will help fund its more than 50 billion euro ($51 billion) electrification plans.

VW gave no reason for Diess’ departure, which reportedly came after shareholders of the Porsche-Piech family called a meeting to discuss his future.

Investors said it could be related to concerns about the software glitch. VW’s Cariad software subsidiary was created in 2020 to coordinate software development as the company ramped up development of electric cars. The recent setbacks had cast a shadow over plans to develop a single software platform for the VW brand’s next-generation Trinity EV project in 2026. But there had been no hint that it might be serious enough to put end to the Diess regime.

A common complaint, according to VW’s owner websites, is the poor software quality of its first electric car, the ID.3

“The supervisory board’s hope must be that the group’s new CEO, Blume, will be more successful in guiding the group’s software strategy. However, it will take months to develop a new plan and create turmoil as the group heads into a difficult year 2023 is not the right time in our opinion,” Bernstein Research said, in a report titled “Volkswagen is doing poor governance situation. even worse – Blume is now part-time CEO for VW and Porsche”.

Professor Ferdinand Dudenhoeffer, Director of the German Automotive Research Center (CAR
AR
) said the software would be Blume’s most pressing task.

“I think a big issue will be the realignment of the software strategy. Cariad will not stay as before. The plan to do everything independently and centrally should be reconsidered. Cooperation and individual brands will become more important. There is a central VW Group operating system for vehicles of all brands seems less realistic. In my opinion, the failures of the single solution and the resistance of individual brands will lead to a general overhaul. What will Cariad’s role be? in the future is unclear,” Dudenhoeffer said.

Some investors say they saw some uncertainty surrounding Diess’ position.

“We were initially impressed with Dr. Diess’ strategic vision and aggressive repositioning of the group on electric vehicles and we have seen operational progress during his tenure. However, we believe he has not transformed his understanding of challenges and his ability to engage with investors to effect internal change at VW and he has alienated core VW voters. At this point, it looks like VW has lagged behind in some key developments – sales, software implementation – while the strategy remains capital intensive, including mergers and acquisitions and vertical battery integration,” he said. said investment researcher Jefferies in a report.

According to the media, the extremely expensive program to switch to electricity could have been considered too ambitious. Others said VW’s massive business in China was not working well enough. VW has said 70% of its sales in Europe by 2030 will be battery-electric.

VW has been praised for the strength of its electric commitment, but there are fears that when EU CO2 rules make small internal combustion engine (ICE) vehicles unaffordable, VW and other mass automakers will Europe are ill-prepared for the supply. inexpensive electric runabouts. It’s an open door for Chinese companies to devastate up to half of European car sales.

VW is jostling with Japan’s Toyota for global leadership in auto sales. Last year, Toyota easily led the sales rankings with 10.5 million sales. VW was 2nd with 8.9 million, although in normal times the counts would probably have been much closer. But the key fact here is that Toyota is doing it with about half of VW’s workforce. VW’s market share in the first half of 2022 was 23.8% in Western Europe in 1st place, compared to 25.3% in 2021, out of sales of 1.2 million

Meanwhile, in 2022, VW shares have performed poorly. VW preferred shares hit around €193 in January and fell around 30% to just over €134 on Friday. During the same period, the STOXX 600 Europe Auto index fell by around 24%.

CAR’s Dudenhoeffer expects Blume to stick with VW’s electric plan, although he may allow individual brands like Audi or Porsche to pursue different cell-structure solutions. China and the United States presented problems to be solved.

“Blume will be measured by the success of the VW Group in China. Over the past two years, there has been a clear loss of market share. This needs to be fixed and should be one of the very big challenges for Blume and his team. And then comes the eternal USA problem. Since the days of the Beetle, VW has done nothing sensible in the United States. VW needs a strong position in the US market. Blume will therefore continue the Scout strategy and conquer the American market with the electric pick-up. In principle, this is also the continuation of the strategy of Diess, ”said Dudenhoeffer.

VW recently set up Scout in the US to build electric pickup trucks and sport utility vehicles.

Jefferies is fed up with governance issues but sees some hope in a fresh start.

“A new dawn, again, for VW Preference shares? We have been here before, with a new direction or a crisis bringing hopes for change. Nonetheless, with accelerating industry challenges and a growing number of new and fast-paced challengers, the new leadership offers the opportunity to revise strategy or re-ignite stalled relationships with a leader familiar with VW Group culture. and navigating the intricacies of governance,” Jefferies said. .