Like a mysterious sphinx guarding a secret, Porsche Chief Executive Wendelin Wiedeking has said almost nothing about Porsche's strategic plans for Volkswagen since he started building a 27.4% controlling stake in Europe's largest automaker in September, 2005. The dramatic move—a small, highly profitable Porsche buying control of wobbly Goliath VW, with its high cost base and meager earnings—provoked a firestorm of criticism and speculation. Why would the world's most profitable automaker sink billions into mass-market VW with its debilitating cost structure, strong unions, and weak profits?
On Dec. 6, as he presented Porsche's financial results at the annual-results press conference, Wiedeking finally offered a few clues—comparing Porsche's investment in Volkswagen to a clever chess move that stuns opponents: "We opened the game. Other players are either striking out against us or joining us in our moves—and now everybody not acquainted with the tactics we had carefully considered in advance is feeling nervous."
Taking on Toyota
Wiedeking, who now sits on Volkswagen's board, insists the investment in VW is strategic and long-term, and refused to reveal his next move. But he dropped a big hint, indicating that Volkswagen will be groomed to challenge Toyota (TM) head-to-head in global markets. "VW, with all its brands, is the only one with the potential to stand up to Toyota," said the 54-year-old engineer. "It means hard work. But we believe the potential (to do that) is there."
Those are bold words, given the three-year restructuring underway at Volkswagen. While Toyota consistently scores among the top in quality, cost structure, and profitability among automakers, VW is still down at the opposite end of the scale in all three. And a management shakeup underway at Volkswagen that could prompt the departure of turnaround ace Wolfgang Bernhard could stall its resurrection. "The problem at Volkswagen is its high cost structure," says David Cole, chairman at the Center for Automotive Research in Ann Arbor, Mich.
Wiedeking has faced down skepticism about his ability and his strategy moves at Porsche ever since he took control of the near-bankrupt sportscar maker in 1993. It took the CEO only five years to transform struggling Porsche into the world's most profitable automaker, starting with only one model, the 911, and adding two more—the lower-priced Boxster and the high-performance Cayenne SUV.
The Wiedeking Touch
Many feared a Porsche SUV would dilute the brand and might even flop. But the three high-performance Cayenne variants, which started at 250 horsepower and ranged up to 450, were hugely successful, helping push total vehicle sales to 96,794 this year (see BusinessWeek.com, 12/06/06, "Porsche Unveils All New Cayenne"). Wiedeking has also shown skill in churning out a steady stream of new hit derivatives while timing new launches impeccably to take up the slack from aging models. That's helped Porsche earn steady profits and avoid the aging-model syndrome—despite its limited range of models.
For those expecting Wiedeking to stumble, it's been a long wait. Porsche has ranked as the global automotive profit kingpin for nine years running, and Wiedeking has steadily surpassed his own records each year. Pre-tax profit for the fiscal year ended July 31 of this year soared 70%, to $2.8 billion, as revenues rose 10.6%, to $9.7 billion. "Fourteen years ago, Porsche was not worth anything either. No one would have believed that Porsche's shares would go from 19 euros to 900," says Wiedeking, when asked to explain how a struggling VW can possibly challenge world-beating Toyota.
If there's one ace that Wiedeking holds in speeding change at VW, it's his deep familiarity with Toyota's lean-production and continual improvement methods.
During the mid-1990s, Wiedeking turned to Toyota for help in retooling Porsche's inefficient manufacturing, sending planeloads of managers to its Japanese plants and hiring Toyota managers to train workers in Zuffenhausen, near Stuttgart.
The gambit helped Wiedeking reap huge improvements in productivity and quality at Porsche. In the 2006 initial quality ranking by J.D. Power, Porsche ranks No. 1—a feat German rivals BMW and Mercedes haven't yet achieved. (J.D. Power is owned by McGraw-Hill (MHP), which also owns BusinessWeek and BusinessWeek.com.) Porsche's 2006 profit was so strong the company distributed a $4,655 bonus to each of its 8,300 employees. And for the fiscal year ending 2007, Wiedeking is targeting ambitious productivity gains of 8% to 10%. "Even if we are in great shape today, we need to improve and pull all the levers. This means stress for us and our employees—but it's the only way to stay on top," says Wiedeking.
So far, shareholders can hardly complain about Porsche's investment in VW. Shares in Volkswagen—which are traded on Germany's Deutsche-Börse—have doubled in the year since Porsche started building its stake. The $5 billion-plus investment is worth $1.3 billion more today than a year ago.
While cynics surmise Porsche is mainly angling at VW's crown jewels—Audi and Bentley—Wiedeking insists it needs Volkswagen as a long-term industrial partner. Porsche co-developed the Cayenne with Volkswagen, sharing parts, production, and development costs. And the body for Porsche's forth model, the Panamera, a four-door coupe, will be assembled at Volkswagen's Hanover plant and finished at Porsche's Leipzig factory. The joint development and outsourced production helps fuel Porsche's profits by keeping its fixed costs and capital investments low.
Porsche also took a controlling stake to ensure VW does not fall into the hands of financial investors or rivals when the German law limiting shareholders' voting rights to 20% is struck down by the European Court of Justice—a move expected in 2007. Wiedeking's boss and Porsche Chairman Ferdinand Piech, grandson of founder Ferdinand "Ferry" Porsche and chairman at Volkswagen, was also keen to stave off a hostile bid. "We have come out of our warm comfort zone and are now consciously playing by the rules of another league," says Wiedeking. "Without doubt, this involves risks. But it also opens up opportunities," he says.
To see Porsche's current model lineup, click here.