The 7 Billion Euro Volkswagen Repair Man

(Bloomberg Gadfly) -- When Volkswagen AG admitted in 2015 to rigging 11 million cars to cheat emission tests, few people would have guessed its sales would surpass Toyota the following year -- thus securing its crown as the world's biggest seller of automobiles.

The German carmaker's 2016 earnings, released late on Friday

After a stomach-churning 12 months, VW investors will be tempted to relax. Yet a public spat over cost cuts between the company's labor chief Bernd Osterloh and the man hired to slash costs at the core VW brand, Herbert Diess, shows it's still too soon to breathe easy.

For a good precis of the saga, read Bloomberg News's Christoph Rauwald here. Industrial relations plumbed new depths last week when Diess said he was examining claims that promotions at VW were often tied to being a member of the IG Metall trade union.

Though it's true that nothing of importance happens without the union's say-so (workers fill half the supervisory board seats and can veto plant closures), Diess is grabbing the third rail of VW politics by challenging worker power. You just don't go there.

German press reports casting doubt on his future have proven unfounded so far. On Friday both the Porsche/Piech families (big shareholders) and VW group CEO Matthias Mueller defended Diess. Even so, the situation is hazardous. Arndt Ellinghorst, an analyst at Evercore ISI, says a Diess departure would push VW's stock down more than 10 percent, equivalent to about 7 billion euros of market value. 

Why attach so much importance to one man? Since VW poached him from BMW AG in 2014, the skilled cost-cutter has become the great hope for fixing the company's two biggest problems:

1. The substandard profitability of the core VW brand;
2. VW's weak corporate governance, where workers and the State of Lower Saxony have too much influence.

If Diess left, investors would probably conclude that the plan to raise the VW brand's profit margin to 4 percent by 2020, from 1.5 percent in the most recent quarter , won't succeed and that protecting workers, not investors, is the priority.

It's not as if what he's proposing is radical. Peugeot SA achieved a 6 percent operating margin last year. And while VW said it would cut 30,000 jobs in November, that's not as bad as it sounds. Total headcount rose to a record 627,000 at the end of December. There won't be compulsory redundancies in Germany.

The question over who calls the shots at VW is one reason investors don't give much credit to its hefty profit. The carmaker trades on less than 7 times estimated 2017 earnings. The fate of Diess's efforts will show how far that discount is justified.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Chris Bryant is a Bloomberg Gadfly columnist covering industrial companies. He previously worked for the Financial Times.

1. VW hasn't yet reported full fourth quarter and results. Those arrive on March

To contact the author of this story: Chris Bryant in Berlin at cbryant32@bloomberg.net.

To contact the editor responsible for this story: James Boxell at jboxell@bloomberg.net.