VW's CEO Knows the Future is Electric -- First He -2-

WOLFSBURG, Germany -- Matthias Müller was appointed as chief executive of Volkswagen AG, the world's No. 1 auto maker, to clean up after its emissions scandal and drag it into the modern world of electric and self-driving cars.

He has been buffeted by a formidable counterforce -- VW's own managers, many of whom still yearn for the old autocratic corporate culture and remain skeptical of moves to downgrade the business of cars powered by fossil fuels.

"There are definitely people who are longing for the old top-down leadership," Mr. Müller, 63, told an industry gathering in Germany in May, speaking of the corporate culture he inherited. "I don't know if you can imagine how difficult it is to change their mind-set."

That mind-set, people inside and outside the company say, included a conviction among many at VW that the internal-combustion engine, especially the diesel, is a proven and superior technology that can meet emission standards for years. That conviction, they say, helped lead engineers to rig diesel-engine software to appear to meet such standards, the crux of the scandal, which broke open in 2015.

It also left VW dragging its feet in electric vehicles and created internal skepticism about new ways customers were using cars -- ride-hailing services such as Uber Technologies Inc., car-sharing business like Zipcar Inc. and apps that help steer drivers to businesses and services.

Almost immediately after taking over in September 2015, Mr. Müller presented a plan to move beyond VW's huge business in diesel and gasoline vehicles and generate at least 25% of sales from electric cars. He argued VW needed to create a "significant share of revenue" from apps and services.

"What are you doing?" demanded one angry executive during a meeting of top managers last fall, referring to the CEO's stress on shifting beyond conventional vehicles, according to people present. "You are driving the nails into our own coffin."

Such exchanges have been frequent and continue to this day, say some company insiders.

VW, which owns brands such as VW, Audi, Porsche, Skoda, Seat and Bentley, is facing a perilous moment. Its emissions-tampering scandal, which has cost it nearly $25 billion in fines, penalties and customer compensation, has been followed by a market-share erosion in its core European markets.

VW declined to make Mr. Müller available for interviews, directing inquiries to his public statements. "Volkswagen must change," he said in the May meeting, "because our industry is going to change more deeply in the coming 10 years than in the 100 years before."

As Mr. Müller tries to move VW beyond the diesel debacle, it continues to haunt him. The European Union's top antitrust regulator last month confirmed that, after a 2016 tip from VW, it has been investigating whether VW, BMW AG and Daimler AG violated antitrust rules through collaboration on diesel emissions and other technology going back more than 20 years. Volkswagen declined to comment on the substance of any antitrust investigation. BMW denied any collusion. Daimler declined to comment.

Later last month, the German government said it found illegal software that manipulated emissions on Porsche's Cayenne and ordered a recall. Porsche said it alerted German authorities to the issue and is cooperating with them. A Porsche spokesman said Audi, as the engine's manufacturer, was responsible. Audi and VW declined to comment on the recall.

Shareholders are largely supportive of Mr. Müller's efforts but say VW has lost precious time. "This shift to electric and digital mobility services is the right thing to do, but it comes five or six years too late," says Ingo Speich, a fund manager at Union Investment, a VW shareholder. "Volkswagen has lost any first-mover advantage because they kept clinging to the old way of doing things."

Mr. Müller has support from some VW executives who agree on the urgency. If VW's passenger-car business can't reorient toward new technologies by 2020, says one senior executive, "the Volkswagen brand will be dead meat."

Internal backlash

Mr. Müller's first steps came almost immediately. So did the backlash.

Three weeks after his promotion, he met secretly with Johann Jungwirth, one of Apple Inc.'s top car-project engineers. Mr. Müller peppered him with questions about automotive efforts by U.S. tech giants such as Apple, Uber and Alphabet Inc.'s Google and the threat they posed. After talking for an hour, recalls Mr. Jungwirth, Mr. Müller posed a final question: "When can you start?"

Two weeks later, Mr. Jungwirth was at VW headquarters, preaching the digital gospel and "getting on a lot of people's nerves," according to one executive. A person close to Mr. Müller says he has repeatedly defended Mr. Jungwirth in front of skeptical colleagues.

Mr. Müller's challenge is to win over VW's more-than-600,000 employees at a company that last year sold 10.4 million vehicles, more than any other single company, generating EUR217 billion ($237 billion) in revenue.

In new executive appointments, people close to him say, he has sometimes passed over a generation of executives to bring in outsiders and tech-savvy executives. He has jettisoned the idea prevalent at VW that it had to make most everything itself, entering partnerships to develop critical technologies. VW has teamed up with BMW, Daimler and Ford Motor Co. to build a pan-European electric car-charging network and is jointly developing artificial-intelligence applications with Nvidia Corp.

He has pushed VW into app-based businesses, such as an Uber-like ride-hailing service, and plans to launch a new generation of electric self-driving vehicles in 2020. VW has said it is tripling its investment in developing electric vehicles to $10 billion through 2025.

Mr. Müller is also pushing to overhaul some of VW's traditional businesses -- and facing backlash there, too.

When Herbert Diess, CEO of the VW brand, last year pushed for big productivity gains at the unit, the IG Metall labor union reacted vehemently. Mr. Müller intervened and scaled back targeted gains.

When Mr. Diess took the stage in a February assembly of VW-unit workers, thousands turned their backs in protest of job cuts and productivity-gain targets. A week later at a meeting of the board of Volkswagen, the parent company, half of the 20-member body -- those representing workers -- walked out to protest Mr. Diess' pursuit of cost cuts, say people familiar with the meeting. Mr. Diess says unions hold excessive influence.

The seeds of VW's emissions scandal were sowed about a decade ago, when the U.S. was drafting new emissions rules. Some car makers began to develop electric vehicles and hybrids. U.S. environmental officials urged VW to develop hybrids as Toyota did.

Under VW's then-chairman Ferdinand Piëch and then-CEO Martin Winterkorn, the company instead pushed to come up with a diesel engine that would meet U.S. emissions targets. When the engineers failed, VW has said, they rigged the engines to cheat on emissions tests.

A lawyer for Mr. Winterkorn didn't respond to requests for comment. Mr. Piëch couldn't be reached, and his lawyer didn't respond to requests for comment.

Electric push

When Mr. Müller ascended to the top job, VW's obsession with diesel engines had left it lagging behind in electric vehicles, which it needs to meet European carbon-dioxide-emissions targets in 2020, company executives say.

VW sold 63,392 plug-in vehicles in 2016, achieving an 8.2% share of global plug-in passenger-car sales of 775,417, according to EV-Volumes, a research group. Mr. Müller in March unveiled plans to launch 30 new electric-vehicle models over coming years across all its brands.

The company is developing a new family of electric cars, named I.D. A prototype unveiled at the Paris auto show last year resembles VW's best-selling Golf. It would drive autonomously, connect to cloud-based services and be ready for an array of digital services, said VW, which plans to build it in Germany, China and the U.S. starting in 2020.

VW is also behind on new "mobility services" such as car-sharing and ride-hailing. Car companies must move into such services, the argument in the industry goes, to replace revenue lost as consumers using them buy fewer cars. Car companies with their own sharing services would also be in a strong position to provide the cars used in those services.

In the past, many VW executives scorned car-sharing and ride-hailing as fads, some VW executives say. One internal evangelist was Ole Harms, a 42-year-old economist who is now head of VW's group handling new business models and mobility services.

Until Mr. Müller took over, the company pursued few of Mr. Harms' ideas, they say. Meanwhile, rival Daimler AG was building its Car2Go unit into Europe's biggest car-sharing company, with 2.3 million members world-wide.

Daimler veteran Andreas Renschler, who joined VW months before the emissions scandal broke, says he asked then-CEO Mr. Winterkorn about VW's car-sharing plans. "I hear those cars are always dirty," Mr. Winterkorn replied dismissively about Daimler's car-sharing service, says Mr. Renschler, now VW's truck chief.

"The quality of the discussion has improved a lot," Mr. Renschler says.

Mr. Müller's new strategy chief, Thomas Sedran, after joining in 2015 from General Motors Co.'s Opel unit, persuaded the CEO to take a stake in Gett, an Israel-based ride-hailing company.

Over several months, Mr. Müller hosted VW-executive retreats at the company's guesthouse in Wolfsburg. Skepticism lingered about Gett at one retreat on April 22, 2016, the day VW reported a EUR4.1 billion loss due to the diesel scandal. Mr. Harms launched into his pitch, say people who were at the meeting, with slides of sales projections and showing the strategic fit with VW's brands.

When the floor was opened for questions, these people say, Frank Witter, VW's finance chief, asked: "Do we really have to do this? Is this sensible?"

"Yes, we do," shot back Mr. Renschler, who said VW needed to seize new revenue created by such services.

Mr. Renschler, Mr. Harms and another participant confirm the exchange, saying Mr. Witter was concerned about mounting costs from the emissions scandal. Mr. Witter declined to comment.

"It was a development process," says Mr. Harms, "and then at some point everybody was convinced."

The board backed the acquisition of Gett, which is now the nucleus of VW's Moia brand run by Mr. Harms. Gett drivers use their own vehicles now, but VW says it eventually wants to build vehicles for the service. Gett is the world's 10th largest car-hailing service, with about 1% of the market, according to industry consultants Frost & Sullivan.

Behind Mr. Müller's push in app-based businesses is also the notion, growing in the auto industry, that data-heavy applications may create revenue streams inside the car -- location-based services, for example, that steer drivers to hotels or restaurants. Some believe data generated in the car -- where a driver travels or what parts are wearing down -- could be sold to third-party vendors offering services.

A 2016 McKinsey study projected shared-mobility and data services could create up to $1.5 trillion in additional revenue for the auto industry by 2030. To capture this new revenue, analysts say, auto makers need to develop digital technology and business models or risk seeing technology companies like Google fill the gap.

At the Geneva car show in March, VW unveiled its vision of where electric self-driving vehicles and mobility services can converge. Dubbed Sedric, the company's first fully autonomous vehicle, has no steering wheel or pedals.

"Dieselgate was bad," says Yung-Joo Presciutti, senior exterior designer on the Sedric project, "but now we have a good chance to change our way of thinking.

Write to William Boston at william.boston@wsj.com

(END) Dow Jones Newswires

August 01, 2017 10:52 ET (14:52 GMT)