CNBC Interview with Volkswagen CEO, Herbert Diess

Below is the transcript of an exclusive interview with CNBC's Nancy Hungerford and Volkswagen CEO, Herbert Diess, from Auto China 2018 in Beijing.

NH: Thank you for speaking to CNBC today. So many things have changed since we last spoke but let's talk about changes in the home country for Auto China. China recently announced changes to foreign ownership rules – the biggest changes they've announced in decades. Are you actively looking at ways to change the way Volkswagen does business in China as a result?

HD: First of all we think it's a positive move forward – not to open up but to make foreign investment easier. Possible that should generate additional growth in investment in this country. From our side we are really settled up set up very nicely here in China. We have very competent joint venture partners with FAW in the north, (inaudible) in the south so we have a trustful relation over many product life cycles over many years and I think we are so strong because we have strong joint venture partners and China is very specific so I think alone we wouldn't be as strong as we are. So for the moment we don't have any plans to change that structure but I think it's a positive move for the country to open up more.

NH: If you're not going to go it alone in the near term, what about buying a stake from one of your partners to get majority ownership? Is that appealing?

HD: You know car industry is not only 50/50 joint ventures. All the components are mostly in one ownership – no there's very little joint venturing around this. We also we own for instance our gearbox plants and some components plants. When it comes to the new structures like battery cells batteries said we change once again. So and we are looking for investments in some key areas of technology.

NH: With improved profitability though if that was an option on the table to increase your stake and majority ownership..

HD: We are really well settled here. We have high market share. We are busy now adopting to the new technologies – a lot of technology and technological development happening here in China. China's pioneering electric cars, also is taking the lead now in the autonomous driving. This is very specific business approach in China. We need to partner with low tech enterprises. There's a lot to do but that might be one or the other investment opportunity as well. For instance just recently we started our mobility business here, a service business here, which is investment. We invested in a few startups here so investment is always an option.

NH: You mentioned the big election push here which of course Volkswagen is taking part in, stepping up investment in electrification globally – when you look at the Chinese approach it is shifting from incentives and subsidies to more aggressive approach if you will when it comes to quotas and standards. Is Volkswagen prepared to meet those new rules which kick in in 2019?

HD: Yes we are prepared, definitely. Now we are and we are preparing ourselves. You know we have to accept that a society is choosing a way, a route forward and I think for China electric cars make a lot of sense. The density of population is huge, air quality is still to improve a lot. So electric cars here in China make a lot of sense. There's a huge commitment towards electric cars and we are taking part of this and we think it could be also beneficial for Volkswagen because it allows us a big volume based economies of scale which we then can use in other countries.

NH: Does it make the domestic brands more competitive though, and increase the competitive threat facing VW right here?

HD: Yea, you know we have to face competition all over the world and we have to accept that also Chinese brands become more competitive like they shouldn't, and they're learning fast, really they are really learning fast. We see that also from our joint venture partners they are building now very competent cars. We have to be one step ahead.

NH: Another proposal Beijing has put out there is lowering import tariffs on vehicles – how significant of a move would that be for your profitability in the country?

HD: It depends on the brand. Volkswagen is deeply localized. I would say our cars, the value chain of cars is probably 95, 98 percent localize, so we're not really depending on import tariffs. Our premium brands, yes, they have imports and also I think the reduction of import taxes is a positive move, to move to to open up the market so we congratulate the government.

NH: And these opening moves, if you will, are really seen as somewhat of an olive branch to the United States. Was President Trump right to push China to do more to level the playing field for the Auto sector?

HD: I think always you know there are still, even if we talk about reduction of import tariffs, a lot of of constraints in China when it comes to the technology offering. You have to comply with very specific rules and regulations. So and it's not always fair no compared to other countries, so I think the discussion about that, to make the world a more liberal open world is always positive.

NH: So could VW emerge a winner in the trade spat between the US and China?

HD: I wouldn't say that and we don't want to become a winner because of that but we have, first we are strong in China, we are aiming to remain strong in China. China is very important for us. We want to get stronger in the United States. There's still a lot of improvement but I think generally the way forward should be less import tariffs, a more liberal world market that would help that would help probably every nation.

NH: You talk about the tech and R&D taking place here, is intellectual property transferred still a concern for you doing business in China today?

HD: Not as it was I would say some 10 years ago and that's not, that's also not so much to protect anymore because China really has grown up. Meanwhile a lot of research going on in China and there are many aspects where China is on par with the rest of the world, or let's say getting to that level very fast. So far we were able to protect our intellectual property, we have fees for our licenses which we are playing here, we have a long tradition to do so. There's no complaints from our side.

NH: All this electrification is expensive. Recently when you become CEO you announced broad restructuring of the group and many analysts and investors have been waiting for quite some time. Can you give us a better idea of these synergies you hope to achieve under the new groups? When will that materialize with a financial benefit?

HD: You know it's a long-term approach. We look for those synergies and the new organization because this world is changing so fast and we have to become faster in our decision making. Volkswagen is a big company worldwide now with 12 brands to coordinate those to take all the decisions on what level, takes time. And that is why I decided to split up in three groups on the passenger car side, dedicating their efforts more or less to a specific customer group which we call volume, premium and super premium where we have really specific customer demands, and I would say super premium customers like for Bentley or Bugatti, they would look for another retail experience than we have on the (inaudible) side. So that means that we are we said new grouping of the brands we think we have a chance to get faster and still keeping the synergies.

NH: Change takes time, as you say. The share price went up when you were announced as CEO. One reason is many consider you the cost killer if you will. So, speaking of time, how long will it take for you to substantially bring down those costs?

HD: To be open and honest I think this time in the industry it's not about cost. It's really about speed and innovation because we are we are really getting new competitors from everywhere, from the tech companies, from new emerging nations like China. So it's really now about building up new capabilities and to be able to build up those new capabilities, yes, you need profits, you need income, so you have to work on both sides. But this I would say this decade in automotive alone will not be about to be about cost (inaudible).

NH: Another way to free up money for more investment would be to sell off some units. Is that something you're considering now that you're at the helm? Looking at some of the non-core brands and spinning them off?

HD: I wouldn't call it non-core brands but we have non-core assets. No we have to reconsider whether our value chain, a lot of investment is going into our value chain is still appropriately spent, no, because we have to invest in the new technologies – in software and batteries – and also we have to consider we have some non-core assets where we either we have we have to develop a business plan forward, for gross, for more value, or we have to consider to also spin off something.

NH: Is the sale of Ducati back on the table?

HD: Ducati is not back on the table as a sale. My background I have to say as a motorcyclist I was in charge of a motorcycle brand worldwide for a few years, so I think two wheelers have a future, and we have to decide now what could be the way forward. Would it be a multi-brand strategy, would it be more electrification. I think two wheelers will play a role in individual mobility, individual mobility will be our driving theme also for the next 10 years or so. So what we have to do now is we're going to Ducati forward strategy.

NH: And there's no secret the the works council was opposed to the Ducati sale when it was taken up by your successor. What did you do to really bring Bern Ostollow to the table and kind of bury the hatchet if you will, because it hasn't always been easy…

HD: No it hasn't always been easy, but I have to say that Bern Ostollow is a, he has for many years in the company and he always was as head of (inaudible) council he knows the company from inside out but he's also very strategic thinker. He's also very strategic thinker, and this is where I think we have, we are quite close in our estimation how the future looks, what challenges are we facing. And that allowed us finally also to from both sides to agree to a plan which is we will reduce our workforce considerably in Germany but also allow us to invest in future technology. And I think at the end the (inaudible) concern is is how many work places know how many of the places we have saved and are future proof. And there is I think we found an alignment.

NH: Just finally sir. Speaking of the future – many saw your appointment as CEO as a way to really put the diesel crisis behind the company yet just a few days ago still news surrounding Porsche and Audi. When are you confident that you will be able to say, it's over, there are no more diesel skeletons?

HD: Ah, that will be, that will be very nice but we have to we have to if you look reasonably at this, we have so many still problems around the world which needs to be need to be sorted. We have lost so much trust in some of our customers though that will require a few more years that we really can say we have left diesel behind. We will we have to dedicate resources and time also for the foreseeable time. The company still requires a lot of change, cultural change. I think we have we have monitored Larry Thompson which is advising us. I think it's helpful for us. It's really it's a good exercise and he will help us to become a more futureproof company, much more compliant than we have been. So it's a lot to be done, still many months to to go through until we can say bye bye diesel.

NH: Thank you very much for your time today sir.

ENDS

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