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CNBC Transcript: Herbert Diess, CEO, VW Brands

Following are excerpts from a CNBC interview with CNBC reporter Nancy Hungerford and Herbert Diess, CEO, VW Brands at the Paris Motor Show.

NH: Thank you so much for taking the time to speak to CNBC. A very exciting new car sitting here and the overall message at Paris seems to be to encourage everyone to think new is the slogan. Got a lot of anxiety still around the diesel crisis one year on. When you look at what happened to the share price yesterday on mere reports surrounding the DOJ it shows how anxious investors are. As the head of the group's most important brand, what is your message to reassure them?

HB: I think we're turning around and it's probably now, from Paris on it's going upwards. I think we made a lot of progress solving the issues. We are well prepared. We have a nice product cadence coming now for the next years. The future is ideas, the future is electric which we are presenting here in Paris.

NH: That idea is part of a very ambitious 2025 plan that you've set out. People are quite excited about this but they are concerned over the lingering uncertainty. If that DOJ fine comes in much higher than Volkswagen expects, does that throw your plan up in the air? Will you have to go back to the drawing board. Or is there a Plan B?

HB: I can't today comment on that but we think that the situation is under control. We're making good progress and we have stable communication with the agencies in America. With also the legal departments, with DOJ. So I'm confident that we will get out of this very soon.

NH: And getting out of this - part of that is the electric strategy.

HB: Midterm strategy is electric. But before that we have, for America, ery nice product is coming. The SUV... so we will together with our dealers launch many very exciting cars for the American public, the American customer. We will solve the problems, repair our cars and then probably by the year 2021 become fully electric with a new platform entirely designed for the future and also to challenge the Teslas and probably the Apples of the world.

NH: Does that suggest by that year diesels in the US will be gone? Will diesel Volkswagens eventually disappear?

HB: By the year 2020 for sure.

NH: Let's talk about the electric strategy in more detail. Because, taking on Tesla, taking on the competitors - you've set out very ambitious targets, eventually talking about two to three million unit sales a year. That's really outpacing the entire industry at the moment. How are you going to get there given you're a relatively late mover?

HB: I always think we are the right mover because we really think that electric mobility will take off by the year 2020. That's our judgement of the future. We are very strong in China. We have a market share of 14, 15 percent in China - we are by far the biggest producer in China. China will probably be the lead market for electric cars. Or very likely to be the lead market. We have a very stable manufacturing base there, good suppliers. From there we will really grow volumes very steeply. So we think that the Volkswagen brand will sell by the year 2025 one million electric cars and probably we will be market leader by then.

NH: And part of catching up with the rivals of course is price. This car is priced very competitively you might say. This of course raises the question of margins, at a time when you really came into the company as costcutter in chief, if you will, there is constant pressure to reduce costs. Yet the industry is demanding more investment than ever. How do you reconcile these two factors?

HB: Actually it's not about price. You know, Volkswagen was always famous to bring the innovations to the broader public. You know, to a broader audience. So the Volkswagen Beetle was the first car really to bring mobility to the whole world. Then with the Golf I think we made another very bold statement - changing the world of mobility. And the new idea follows the same content. You know, we will bring innovation to a broad range of people. Make it accessible for many people. And so make it the real Volkswagen.

NH: Innovation, though, is expensive. So a lot of investors are wondering when will you hit 6% operating margins?

HB: We are working on that. But we think also innovation is expensive, but sharing the innovation between many cars is a good way to bring a huge step of innovation to a broader public. We showed that we are probably the core competence of Volkswagen to bring innovation to a broader public crowd and we will be able to demonstrate that in the new era of automotive mobility as well.

NH: You mentioned that price is not the only thing involved here. It raises messages of what many with the old Volkswagen being growth at any cost. Is that still the moto? What is your moto today?

HB: No, the moto is still build a very versatile family car which you can use day in day out, which you can use for holidays. Comfortably seating five people, luggage compartment, high residual values, high quality, but also on the limit of innovation what you really can spend on. This is the Volkswagen formula and we can do that because we have a big scale effect within the company, we are present in all the important regions worldwide and we have a very thorough level of technology.

NH: Let's talk a little more about the cost side when it comes to what's going on with discussions with the Works Council and the Unions. How would you characterize your relations with the Works Council today?

HB: I think it's really improving, we had some tough times as you know but the Works Council is convinced that we have to change a lot. Company's changing now very, very rapidly and we're making progress by the day. The next four, five years will be really hard getting more productivity into the company. Also cutting some costs out. At the same time we can afford to spend into new technologies. So I think by the year 2020 we will be in very, very good shape.

NH: And those new technologies, you expect them eventually to bring down overall volumes significantly?

HB: Within the group we also have the advantage that we have premium brands which are on the edge of innovating for autonomous driving, for connectivity. We can use that competence in scaling up for a broader range.

NH: Just going back to the union discussions for a minute. How do you think that you're positioned after the diesel crisis. Do you think in fact you have an upper hand now because the workers really understand and Volkswagen can't afford to have any more issues, or is it the other way around - the workers don't want to be dragged into this or even blamed for it?

HB: Actually, even before the diesel crisis we were not in really good shape, not when it comes to margins. In some of the global markets. Not really successful in the United States. We were struggling in Latin America. So we have to do our homework... Diesel probably accelerated to change process. We have a totally new team in the board of Volkswagen, in the group. We have a new understanding of how we interact between the brand Volkswagen and the group Volkswagen. So these have probably accelerated the change process.

NH: And you of course are one of the outsiders now in a top position over Volkswagen considering you in only a few months on the job when the news of the diesel scandal broke. Do you think the company has gone far enough to change corporate governance and the culture?

HB: We are. Actually we are changing. I think we are really changing significantly. This process is still going on. I think Matthias Muller is doing a great job in changing the company, the mindset and culture of the company. The board - half of the board - are new eople so I think we are making good progress..

NH: And progress in making the customers happy?

HB: As well.

NH: How far along are you?

HB: The big volumes, big scale we have here in Europe - it's about 10 million cars waiting for a software update. We now have released more than 60 percent from the agencies here in Europe. We are well prepared, the first phase now of communicating very very intensively with the American agencies. We're making good progress so I think we will satisfy the customers very soon.

NH: And just finally on that idea, given the focus is mobility technology, as a company will you continue to innovate from within, or do you expect additional partnerships and acquisitions?

HB: No we will innovate within. In the new world you need different partnerships. We need 30, 40 percent of the value of this car will be batteries. We need to understand a lot about batteries. This car is always online so we need contracts and alliances with Internet companies. We are working on that. Also, it's bit different from the United States to China and to Europe. I this new world you can't win alone.

NH: And in this new world a lot of people invest in electric vehicles, but some people are saying demand is simply not there. Do you need more help from the government? What needs to be done to get demand to match for the automakers are willing to produce?

HB: I think it's really, the first question it's really a range no and when range is available people are really prepared. There are some locations some spots in the world where the rate is already quite high. Look to Norway where you already have 30% electric cars, it's because of legal constraints and huge incentives. So it's working it can be done and you know, so many people driving cars and people just getting more acquainted, just seeing what is the advantage. This car is doing everything better than the current Golf. It has the same range, the same price. But it has much more safety features, it's a much more comfortable car. So I think with the product content which is coming, coming soon we will through Google come in to customers. Okay. Thank you very much.