Herbert Diess, chairman of the board of Volkswagen, speaks during the World premiere of Volkswagen's new Polo in Berlin, Germany June 16, 2017. REUTERS/Stefanie Loos - RC17D1727E00
Herbert Diess, VW chief executive, first realised the future for cars was electric after playing with his son’s miniature battery-powered helicopter © Reuters

On the first weekend of September 2015, the newly-hired boss of the Volkswagen car brand gathered his top 40 executives to develop a multiyear turnround plan. Two weeks later, VW was thrown into crisis with the exposure of the decade-long diesel emissions scandal.

Herbert Diess, who has since taken over as chief executive of VW Group, the parent of VW brand and 11 other marques, looks back on that month as a turning point for the world’s biggest car manufacturer.

The emissions scandal was an accelerant for an already-needed turnround strategy, as the VW brand was achieving margins of just 2 per cent. Now VW is in a strong position to dominate the car industry of the future, Mr Diess said.

“We put all our problems on the table [on that weekend] and we came out with about 42 items and 16 really crucial initiatives,” he told the Financial Times at his office in VW’s headquarters in Wolfsburg, Germany.

The strategy involved making the German carmaker competitive against a slew of deep-pocketed tech companies, ride-hailing groups who threaten to kill car ownership, and electric car start-ups led by Tesla and a host of Chinese rivals.

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It included an electric chassis, known as MEB, which could enable VW to become a world leader in developing electric cars “for the millions”, pushing aside rivals including Tesla, the Californian pioneer that VW says makes battery powered vehicles “for millionaires”.

It was eight years ago that Mr Diess’ electric vision was first formed when he brought home a miniature helicopter for his son after a trip to America.

“We flew the helicopter and the bloody thing flew for about 10 minutes,” he said, recalling how impressed he was given the small battery size. After that moment, he became convinced that electric vehicles could be the future of automotive.

“A helicopter is the most inefficient machine in the world. It has no aerodynamics, it’s awful, you need another propeller just to stabilise it. It is probably five times less efficient than an aeroplane.”

Mr Diess, who was a BMW board member at the time, said he quickly surmised the implications: “If you can fly a helicopter, then it is easy to do it for cars.”

But the VW boss, who has a PhD in mechanical engineering, conceded it is “not clear” whether it is Volkswagen or the emerging start-ups who have an edge in creating electric cars. The likes of Tesla can begin with a clean slate and scale up, while the giants selling millions of vehicles must overhaul existing operations.

“I think Tesla is doing a good job. They don’t have to care about the legacy. They don’t have to care about the next generation of gasoline in motors and so they can really focus on the future. It’s an advantage.”

Where he sees Volkswagen pulling ahead is in ramping up production, an area where start-ups are “really struggling.” The VW Group only sold 40,000 all-electric cars last year, but it aims to build as many as 200,000 next year and up to 3m by 2025.

“Some of our competitors have much more speed when it comes to software — software deployment and capabilities where we are still lagging behind,” he said. “But we are good at scale and so we have a chance.”

His model for success is Apple, a company less known for being first with innovations but best-in-class at integration and execution.

“If you look at Apple, they are basically still a hardware company,” he said, alluding to how 62 per cent of Apple revenue comes from iPhone sales.

“The product is very sophisticated because of the software. You get a lot of customer loyalty because of the ecosystem software, but at the end the margins are coming from the hardware business. I would see automotive . . . probably developing very similarly.”

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Volkswagen has plans for eight factories on three continents to build electric cars, beginning with Zwickau in Germany this year.

“If you can deploy software to 10m cars, it’s just 10 times cheaper against a company which can deploy software into 1m cars. That should give us, by 2023/24, a huge advantage over a start-up company.”

Volkswagen has committed to spending €30bn on electrification in the next five years and it has already awarded €50bn in contracts to secure batteries for the 50 all-electric models the VW Group plans by 2025.

Whether that is enough to be the leader in 2030, he is reluctant to say.

“What will be the names of the big players, I can’t tell you. It might be Tesla, it might be Apple, it might be someone from China. I hope that it will be still Volkswagen; we are working hard.”

VW’s plans for autonomous cars is less clear. Mr Diess said he believes in a future of self-driving robotaxis but he thinks their prospects are “several years” away.

Some analysts have given Waymo, the Google self-driving car project, sky-high valuations greater than Volkswagen’s on the belief that big city populations will soon hail driverless cabs and stop buying personal cars.

“It [Waymo] is probably under-valued if they really could deliver what they promise,” Mr Diess said. “If it really would work, if Waymo would be able to substitute all the taxi drivers and lorry drivers of the world, this would be a huge advantage and also it would lead to a very high valuation of the company.”

He added: “Are robotaxis thinkable and feasible by 2030? Yes, probably.” But by then, “we will have the right strategy to cope with. They are dreaming that they are the only ones.”

On ride-hailing, VW is working on efforts to enter the fray, albeit not directly. Its van-based ride-pooling service, Moia, is now in two German cities, and its “We Share” fleet of short-term, free-floating electric cars can be rented in Berlin.

Mr Diess is optimistic that such new services can compete, even in areas where market leaders have established dominance.

“We see that Lyft and Uber have struggled in the United States,” he said. “Both of them are not really becoming profitable. We have the same situation with Didi in China.

“If you want to conquer a city with ride-hailing, it is probably a question of spending €50m or so, or €100m in marketing, being more aggressive and cheaper. This is not a winner takes it all game.”

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