Porsche: Takin' Care of Business

Houston, Texas, June 2007

In my opinion, Stuttgart, Germany's Porsche (Dr. Ing. h.c. F. Porsche AG) is the world's most successful auto company.

Not the biggest, but always among the best. Quality products, consistent sales growth, and satisfied customers add up to the industry's fattest profit margins.

But will the broadening of the product line and problems with the Volkswagen takeover lower expectations for Porsche?

Critics say that Porsche's investment in Volkswagen will dilute the brand's longtime focus and coherence.

Market Position

With less than 38K vehicles sold, only .2% of the US market, this is a niche player.

Low volume would present problems for many makes, but not for Por-sha.

US sales represent only one third of total volume, and this is declining.

The company routinely generates double digit global sales growth as the car market tanks and even Toyota's gains are flattening.

Newly wealthy entrepreneurs flock to mushrooming Porsche dealerships in China, Russia, and India.

The niche market, air-cooled, rear-engined, stiff riding, tight handling sports car, which the brand defined, has also long constrained the brand. Legions of loyal owners and wishful fans love these cars.

Like the "tough biker" image that supports Harley-Davidson sales to aging baby boomers, a mystique surrounds the Porsches which exceeds the sum of the actual parts.

But at Porsche those parts have historically been on the cutting edge of technology.

The question is whether that leadership can continue as the company expands outside the hip traditional niche.

Corporate Culture: Porschewagen

The company, through its founding families (Porsche and Piech), has always had a close relationship with Volkswagen, a large company with large problems.

As of March 2007, the PorscheAG stake in Volkswagen, Europe's biggest car manufacturer, stood at nearly 31%, giving Porsche veto power over VW management.

Now the white knight can prevent a hostile takeover of VW, eyed by hedge funds and private equity groups, and protect founding family interests.

Management's immediate goals are to increase Porsche's influence over VW product planning, and accelerate the companies' joint projects.

Although the two product lines don't overlap much, there is a conflict between the platform-sharing VW and Porsche SUV projects.

Whose new SUV will get produced and promoted quickest?

This has worsened the disarray within VW management, and created new tensions between the companies.

While management steadfastly declares the racy brand's character will not be diluted, weaknesses in the badge engineering strategy have shown up in other companies world wide. How will Stuttgart be different?

They also denied plans to increase shareholding in VW, even as the buyout progressed.

Increased reliance on VW and Audi components and engineering, plus rumors that Porsche's new Panamera could be partially assembled by Volkswagen, suggest risk. A Diamler-Chrysler type debacle is at least possible.

Management

With the VW buyout came executive and boardroom changes to consolidate control.

VW chairman Ferdinand Piech, grandson of Ferdinand Porsche, and controlling shareholder at Porsche, is widely seen as the motivator.

Dr. Wendelin Wiedeking took over as Porsche CEO in 1993, during the brand's low point, a time when the company was vulnerable to a takeover. Widely admired as a leading auto executive, Wiedeking has built Porsche into a modern and profitable company.

No automobile manufacturer can touch Porsche's 17% profit percentage on gross sales.

Quality: Sugar Magnolia

A main theme of this website is marketing verses engineering. The best companies are dominated by engineering, they build quality products people want.

Two such companies are Porsche and Honda, engineering companies at opposite ends of the market.

Porsche still does a majority of vehicle production in Germany, where key people are highly motivated, brilliant product engineers.

The 2007 J.D. Power Initial Quality Study, awards the Porsche nameplate top ranking, with only 91 problems reported per 100 vehicles.

The most recent JD Power dependability study (2004 models) ranks Porsche 10th of 37 nameplates.

Consumer Reports has a "recommended" rating on only the Boxster.

Very low depreciation is a Porsche hallmark, 53% 5-year residuals are common.

J.D. Power and Associates 2006 Customer Retention Study rated the brand 13th with 46.5% of customers returning to buy again.

Dealer Network

Porsche Cars North America, Inc. (PCNA), based in Atlanta, Ga. supports approximately 190 US dealers, who sell an average of 15 cars monthly.

For lesser marques, this would be insufficient sales volume, but not with the margins earned here.

Cars this high priced do not need dealerships in every mid-sized town, they just need to be close their customers.

There are seven dealers in Texas.

Porsche is known for building multiple versions of a few base models, reaching a wider range of buyers without retooling.

Very pricey option packages account for a big slice of the margins.

For instance, Cayenne starts at $45k and tops out around $100k.

Conclusions

I think the brand lost its legendary sports car focus when the extra cash found its expression in 5,500 pound SUVs, well before the full assault on VW.

A company moving a pricey non-essential product like this must keep an eye on the economy. Previous recessions hurt the company badly, threatening family control.

So the decision to broaden the worldwide customer base, ultimately including four-door sports sedan production (Panamera), is a sound business move. If there is one brand that can pull this off without self destruction, it's the one from Stuttgart.

Despite widespread speculation like that printed here, business continues to boom at Porsche, the worlds most profitable car company.