By William Boston
ZWICKAU, Germany -- Five years and nearly $50 billion into the
auto industry's biggest bet on electric vehicles, Volkswagen CEO
Herbert Diess and his guest, Chancellor Angela Merkel, stood in
anticipation as the first ID.3, Germany's long-awaited answer to
Tesla, rolled off the assembly line.
The event at the company's flagship EV plant just over a year
ago marked a "systemic shift from the combustion engine to the
electric vehicle," said Thomas Ulbrich, leader of the ID.3
The car, however, didn't work as advertised.
It could drive, turn corners and stop on a dime. But the fancy
technology features VW had promised were either absent or broken.
The company's programmers hadn't yet figured out how to update the
car's software remotely. Its futuristic head-up display that was
supposed to flash speed, directions and other data onto the
windshield didn't function. Early owners began reporting hundreds
of other software bugs.
After years of development, Volkswagen decided in June last year
to delay the launch and sell the first batch of cars without a full
array of software, pending a future update, which is now scheduled
for mid-February. Tens of thousands of ID.3 owners will have to
bring their cars in for service to have the new software
"After that the software will be regularly updated over the
air," Mr. Ulbrich said in an interview.
Volkswagen, the world's largest car maker, has outspent all
rivals in a global bid by auto incumbents to beat Tesla. For years,
industry leaders and analysts pointed to the German company as
evidence that, once unleashed, the old guard's raw financial power
paired with decades of engineering excellence would make short work
of Elon Musk's scrappy startup.
What they didn't consider: Electric vehicles are more about
software than hardware. And producing exquisitely engineered
gas-powered cars doesn't translate into coding savvy.
The ID.3 debacle is raising the temperature at Volkswagen. Mr.
Diess nearly lost his job last year amid a revolt of Germany's
powerful IG Metall labor union and shareholder anger over the
botched launch of the Golf-8, the VW brand's breadwinner, and the
bungled launch of the ID.3. He was stripped of his leadership of
the VW brand, VW's biggest business, but kept on as CEO of the
entire company without day-to-day operational responsibility.
The ID.3 is gaining traction, outselling Tesla's Model 3 in
Europe in December, according to Jato Dynamics, with sales fueled
by a price tag that is about $12,000 less than Tesla's model, and
by Germany's decision last year to increase incentives for EV
purchases. The ID.3 has also garnered negative trade-press reviews
and is still missing key features.
Ever since Tesla launched its first car in 2008 "there was this
feeling that the really serious players are going to come," said
Peter Rawlinson, CEO of electric car startup Lucid Technologies and
the former chief engineer of Tesla's Model S. Now, he says, "the
Germans have finally come, and they're not as good as Tesla."
Other legacy car manufacturers including General Motors, Ford,
Renault, Peugeot and Toyota are bringing new electric models to
market this year. Failure to keep up could redraw the global auto
map, costing German car makers -- Volkswagen, BMW and Daimler --
their leadership status in high-end products.
Mr. Diess is drawing lessons from the mistakes on the ID.3
project as he overhauls the company's software effort to prepare
for a successor model, dubbed ID.4, which goes on sale in the U.S.
later this year and will be produced at first in Europe and China
and next year in Chattanooga, Tenn., as well. VW says the ID.4, its
first all-electric car to be sold world-wide, will deliver on its
"In order to be successful in this new world and secure the
prosperity of many people...VW must completely change," Mr. Diess
wrote in a recent LinkedIn post.
When Mr. Diess, then head of the VW brand, launched his first EV
effort five years ago, he asked Fredmund Malik, an Austrian
economist, to hold a "syntegration workshop" for senior brand
executives. The goal, Prof. Malik said, was to persuade managers
lulled into complacency by their company's high profitability that
Tesla represented an existential threat.
A second workshop was held a month later, after VW was exposed
for cheating on diesel emissions. Mr. Diess wanted to use the jolt
of the crisis to overcome internal opposition to electric vehicles,
Prof. Malik said. It was at this meeting that VW decided to build
what would become the ID.3, complete with custom software to run
the vehicle and in-car apps.
Software has been running in gas-powered cars for years. An
average passenger vehicle typically includes about 80 parts fitted
with chips that perform discrete tasks. These chips run code that
remains static over a car's lifetime.
With the shift to electric, computing has become the heart of
the vehicle, with a central processor managing the battery, running
the electric motors, brakes, lights and other critical systems as
well as additional features such as entertainment or heating in the
seats. Just like a gas-powered car should be serviced regularly, a
modern electric vehicle may receive software updates to improve
safety and performance, offer new in-car services, or unlock
sources of revenue for the manufacturer.
"The key here is taking this distributed system in the car,
dozens if not hundreds of applications, and centralizing
everything," says Danny Shapiro, senior director of automotive at
Nvidia Corp., the graphics chip maker that has become a player in
self-driving car technology. "This is very complex, especially with
a car where the safety level is critical. You can't just flip a
switch and be a software company."
In the early years of the ID.3 effort, the task to code software
for the car was scattered across the organization. VW's appointment
of Christian Senger, previously head of digital services and
electric mobility products, as leader of VW's entire software
development, came only in 2019, months before the vehicle's planned
The group's first task was to create a coherent organization out
of the thousands of programmers spread around the group and begin
to shift critical development in-house. The first major project was
VW.os, an operating system for ICAS1, the car's central computer
that could be updated remotely.
Another source of complexity was that VW picked different
vendors to develop different parts of its software ecosystem. To
build its industrial cloud for factories, VW teamed up with Amazon
Web Services. For the automotive cloud connecting its cars, it
joined with Microsoft Corp. And to build ICAS1, VW turned to
Continental AG, the lead partner in a team of 19 suppliers working
on developing the system.
Typically, car makers order finished components from suppliers
and install them in the vehicle on the assembly line. But the
software for a connected car is never finished. Like an iPhone, it
is constantly evolving and requires the supplier and customer to
work interactively, something that VW and Continental first had to
learn as the ICAS project was under way.
VW and its suppliers had to adopt new ways of working together
to build the ICAS and connect the ID.3 to the cloud. They created
integrated teams that met in workshops at regular intervals to
assess the state of play and plot out the next steps. During these
workshops, VW often placed new demands on the group as its
requirements of the ID.3 evolved, Mr. Ulbrich said.
"The iPhone today is not the same product it was in the
beginning. It has evolved, it is an evolutionary process. And that
is the process that VW is going through now," Mr. Ulbrich said.
The experience convinced Mr. Diess that he needed to reboot VW's
software business. In April, he brought back Prof. Malik for a
three-day workshop with about 40 of his top executives. Prof. Malik
said Mr. Diess posed a simple question for the group: What do we
have to do to catch up with Tesla by 2024?
The CEO opened the gathering with a blistering critique of VW's
progress. He showed a slide comparing the ID.3 to the Tesla Model
3, pointing out that while VW's car excelled in old-world features
such as spaciousness and design, Tesla beat VW hands down on such
metrics as battery range and advanced computing.
At the end of the workshop, the management team had the outlines
of a reboot. It would produce a new fully electric and largely
self-driving car by 2025, shift more resources from the company's
old business to EVs and digitization, expand battery manufacturing,
and explore new revenue streams and payment systems.
As the summer 2020 launch date for the ID.3 approached, VW told
Continental to focus on critical functions. By then, Mr. Ulbrich
and senior VW executives concluded that the ID.3's remote updates
weren't yet secure enough to go on the road, Mr. Ulbrich said. The
updates not only changed apps and kept the navigation up-to-date,
they also made changes to core functions such as the electric
"In mid-2020 we had to make the decision that we would have to
ask the first 50,000 vehicles to come to the service stations for
an update," Mr. Ulbrich said. "Updating the vehicle's core software
is a complex process and we have to make sure at any time that our
vehicles are safe."
VW didn't make Mr. Senger available for comment.
Karsten Michels, the senior Continental engineer working on the
project, said the main problem was the teams simply ran out of
time. "Maybe we underestimated how much work is involved and how
little we could actually rely on existing legacy software," Mr.
Michels said in an interview.
Mr. Diess restructured the software development teams. He tapped
Audi CEO Markus Duesmann, poached earlier from BMW, to be VW's new
Mr. Diess also reached outside VW for help. He discreetly asked
Dirk Hilgenberg, a BMW executive and IT specialist focused on tech
turnarounds, if he would replace Mr. Senger as head of the software
Mr. Hilgenberg said he had no hesitation. He had spent 28 years
at BMW and his track record most recently included turning around
production of BMW's X-series SUV in Spartanburg, SC. In recent
years, however, he said he had become frustrated by the
Munich-based auto maker's reluctance to dive headlong into electric
BMW declined to comment.
"I'd been watching what Diess was doing in terms of turnaround
at VW," he said. "I really liked it because it was decisive, bold,
consistent. I've seen nothing in the auto industry that even comes
close to that."
Mr. Hilgenberg's first day at VW was August 1 and he immediately
started work on fixing VW.os. The first version, 1.0, is a blend of
open source software and custom code by Continental and VW. To fix
the current glitches, VW said it would publish an update of the
software, version 1.1, in February. A more advanced version --
VW.os 2.0 -- is targeted for 2024 and will include advanced
self-driving car features.
VW's goal is to eventually build at least 60% of automotive
The biggest challenge, said Mr. Hilgenberg, isn't the
technology, it is the mind-set of the people -- their reluctance to
embrace radical change until circumstances force them to.
"In the middle of success it's not easy to understand why you
need to change now," he says.
Another component of the reboot was the Artemis project, a new
in-house design team that would take the software developed by Mr.
Hilgenberg's group and integrate it in a new electric,
self-driving, and internet-connected vehicle within three
"We fairly quickly came to the conclusion that we needed a
separate unit and needed to give it the freedom to develop, a bit
like a rocket," said Alexander Hitzinger, a Porsche and Apple
veteran who presented the idea to the meeting, dubbing the project
"Mission T" -- as in beat Tesla. The notion was so outlandish at
the time that the executives eventually chose to name the project
Artemis, after NASA's planned manned mission to the moon in
"Over the past 20 years the auto industry became more
integrators than developers," said Mr. Hitzinger. "Software is
written by suppliers. This was good for a while because it drives
down costs but you lose control. That's what the auto industry has
to reverse now, bring in deep technical knowledge. That's the hard
To build his leadership team, Mr. Hitzinger is reaching out to
tech companies and startups, bringing the automotive and technology
worlds together. His catch so far includes executives from Apple,
Tesla, Nio, Jaguar Land Rover, and other companies.
The small team, expected to expand to about 250 people this
year, moved into their offices in December, and have begun working
on preliminary designs for the new vehicle. Scrapping the
conventional auto design playbook, which begins from a vehicle
platform, Mr. Hitzinger says he's putting the customer experience
inside the car first.
Change is coming, Mr. Diess wrote on his LinkedIn page, and VW
must move faster. "The global transformation of the industry will
take roughly 10 years," he wrote. "With or without Volkswagen."
Write to William Boston at email@example.com
(END) Dow Jones Newswires
January 19, 2021 11:47 ET (16:47 GMT)
Copyright (c) 2021 Dow Jones & Company, Inc.