Volkswagen CEO, After Board Fight, Faces Challenging Road Ahead – The Wall Street Journal

Mr. Diess, these people said, now must ensure a successful launch of the ID.3 electric vehicle this summer and build bridges to labor—all while navigating a world-wide economic slump brought about by the coronavirus pandemic, which has battered an already fragile sector and disrupted its global supply chains, raising the specter of job cuts.

Volkswagen’s first-quarter net earnings fell to €405 million ($459.4 million) from €2.9 billion a year earlier. Production declined 25% to just under two million vehicles. The company has said it expects to post a loss for the second quarter.

The immediate trigger for Monday’s board decision, according to a person familiar with the situation, were comments by Mr. Diess during a videoconference last week, when he branded disclosures of confidential company information by workers’ representatives a “crime” that showed a “lack of integrity.”

For directors, the remarks went too far. Over the weekend, Mr. Diess walked back his comments ahead of a hastily summoned meeting of Volkswagen’s 20-member supervisory board at company headquarters in Wolfsburg, Germany. Half of the board’s members are IG Metall union officials.

“Dr. Diess formally apologized to the members of the supervisory board for his comments,” the supervisory board wrote in a statement on Tuesday. “The supervisory board has accepted Dr. Diess’s apology and will continue to support his work in the future.”

Mr. Diess, 61 years old, was stripped of his role as CEO of the Volkswagen brand. He retains his post as CEO of the entire company, but is now weakened, standing outside the day-to-day operations of the company’s biggest business.

He wasn’t directly available to comment. In response to a request for comment, Volkswagen said Mr. Diess “did not want to suggest that members of the supervisory board had committed crimes.” The company added that the comments were made in the context of news reports “that were apparently repeatedly based on confidential information that reached the media including matters concerning the supervisory board.”

Volkswagen said Mr. Diess made his apology over the weekend to members of the supervisory board.

Wolfgang Porsche, grandson of the original Beetle designer and whose clan controls 53% of Volkswagen, continues to believe in Mr. Diess and his ambition to transform the company, people close to Mr. Porsche said.

But they said he was also growing frustrated with Mr. Diess’s repeated clashes with labor leaders and the mounting problems at the VW brand, especially the bungled launch of the eighth generation of the Golf, Volkswagen’s bestselling vehicle, and signs that the coming launch of the ID.3, VW’s first fully electric and internet-connected car, is already faltering.

“Diess has to get these things under control,” one of the people told The Wall Street Journal.

The conflicts that led to Monday’s clash had been brewing for some time.

When Mr. Diess was appointed in 2018, the Austrian’s mandate was to transform the company—whose brands include VW, Porsche, Audi, Skoda, Seat, Lamborghini and Bentley—into an electric-vehicle powerhouse.

Since then, Volkswagen has invested tens of billions of euros to create a new model framework, whose technology it now licenses to

Ford Motor Co.

Volkswagen is building electric-battery plants in Europe and China.

Mr. Diess has formed a business unit focused on developing software for automobiles, including a standardized operating system for the company’s cars. Together with

Microsoft Corp

, Volkswagen has fashioned an automotive cloud with the goal of connecting all of the German company’s future vehicles to an ecosystem of automotive applications that could be downloaded wirelessly.

The new Golf, launched last year, and the coming all-electric ID.3 use the new technology to connect to the VW cloud and offer a variety of in-car applications, realizing Mr. Diess’s vision of making the car a smartphone on wheels.

Yet things began to go wrong.

Earlier this year, Volkswagen said the underlying software connecting the Golf and the ID.3 to the cloud didn’t work properly, slowing down the rollout of the Golf 8. To maintain the summer launch date for the ID.3, Volkswagen was forced to prepare a first generation with a stripped-down set of information-technology features while it fixes the bugs in the software.

People familiar with the company said Mr. Diess’s abrasive style and insistence on cost controls had long irritated the workforce. The botched launch of the Golf 8, essential to the preservation of thousands of German factory jobs, gave employee leaders a new reason to fight back.

In March, Bernd Osterloh, a labor official and a member of the supervisory board, complained in an internal workforce newsletter seen by the Journal that just 8,392 Golf 8 models were produced last year, not the 100,000 that were originally planned.

“Overambitious executives want to cram too much technology too quickly into the car and have failed,” he said. “Where is the management board?”

Mr. Diess wasn’t available for comment.

Mr. Diess’s difficulties in executing his strategies and his worsening spats with labor representatives added to the board’s existing concerns about his temperament after a series of communication blunders, one of the people familiar with the situation said.

In a 2019 interview with the BBC, Mr. Diess was pressed to take a stand on the reported existence of camps in China’s Xinjiang region where human-rights groups say ethnic-minority Muslims such as Uighurs have been detained in recent years. Volkswagen operates an assembly plant in the region.

“I’m not aware of that,” Mr. Diess told the reporter, setting off a storm of criticism.

That same year, Mr. Diess sought to motivate the company’s top executives to drive down costs and boost profit, saying: “Ebit macht frei.” (Earnings before interest and taxes will set you free.) When protests arose over the comment, Mr. Diess said he didn’t intend to reference the phrase “Arbeit macht frei” (Work will set you free), which stood over the gates of the Auschwitz death camp.

“I am exceedingly sorry if I have unintentionally hurt anyone’s feelings. I would like to formally apologize for that,” Mr. Diess said in a written statement at the time.

Last month, the company had to withdraw a promotional video from Instagram and apologize after it prompted accusations of racism. The short film showed a white hand pushing aside a black character to let a Golf drive through the frame.

“We posted a racist advertising video on Volkswagen’s Instagram channel,” Jürgen Stackmann, Volkswagen’s sales chief said on May 20. “We understand the public outrage at this, because we’re horrified, too.”

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