Online Extra: Porsche's CEO Talks Shop

Wendelin Wiedeking on the thinking behind the sports-car maker's first SUV and how he keeps his company so profitable

When Wendelin Wiedeking became CEO at Porsche in 1993, the then 41-year-old mechanical engineer faced one of the toughest turnaround jobs in the auto industry. Porsche's sales were in free fall, and losses threatened it with a looming liquidity crisis. The venerable sports-car maker's days as an independent seemed numbered. Now, a decade later, sales are surging to record levels, and Porsche has become the most profitable auto maker in the world, outperforming even the Japanese, with a net margin of 10%.

Wiedeking, 51, now ranks among the industry's most widely admired executives. His latest coup: the gutsy launch one year ago of a third model line. The sporty Cayenne SUV, which costs from $56,000 to $110,000 and is the fastest SUV in the world, has helped produce record sales and profit for fiscal 2002-03. Wiedeking, who enjoys an occasional spin in the country on his vintage Porsche tractor, spoke with a group of journalists including BusinessWeek European Correspondent Gail Edmondson in Stuttgart following the company's report for the fiscal year ended July 31. Here are edited excerpts from their conversation:

Q: You've produced nine straight years of steadily growing profits. What's the key to Porsche's success?


It's no secret. Behind the success is a lot of hard work and intensive effort developing future projects. We laid out a strategy for medium to long-term success, securing the conditions for our own development. We're able to develop new products at prices and conditions that large companies can never achieve.

Q: Without the Cayenne, wouldn't Porsche be in a crisis today?


Not at all. If we had not done the Cayenne, we would have produced another sports-car model. Naturally, the 911 and Boxster sales are declining as the Cayenne moves up. We earned a large profit in fiscal 2002-03, and it helped us secure our future. We want to remain independent.

Q: Is there a risk of Porsche losing its identity with the Cayenne?


That was the most important question in thinking about the development of the Cayenne five years ago. The biggest asset of the company is its brand image. In the past Porsche, was only a sports-car maker. Now Porsche is known for making the sportiest cars.

After Cayenne, we introduced the Carerra GT, a super sports car which we decided to build after the large auto makers decided to enter the market for super sports cars. We surprised ourselves by coming to market before the competition. We were surprised we beat the competition to market.

Q: What's your vision for Porsche? Where will the company be five years from now?


Porsche will continue to launch attractive new products. There are some prototypes, but not even I am allowed to drive them yet. We have products on the drawingboard which are future concepts –- outside the existing segments of sports car and SUV. We haven't made a decision on them. We have the resources –- we have big reserves to execute. If you look at the big manufacturers, their accounts are not in as good a shape as ours.

We have a clear model strategy through 2012 on all three model series. Those decisions give us everything we need for growth. For any additional model series, we need to fulfill two conditions. First, it must fit Porsche's core brand qualities. Second, we must be able to finance the growth ourselves. We will not ask any banker in the world to give us a loan. We only finance through our own funds.

Q: Where exactly do you enjoy a cost advantage over larger rivals –- is it in R&D or production or both?


We follow different rules. Large companies have different hierarchies and different philosophies. In the production line, they have different configurations and different tooling. It's much more cost-intensive for a large company to develop a model than for us.

If we were a carbon copy of BMW or Mercedes, we would be broke tomorrow. Our structures allow us to develop attractive products at a lower price. We're constantly asking ourselves, "How can we prepare the next quantum leap in growth without increasing costs?" I always try to take the next step with very little added fixed costs.

With the Cayenne, we have increased revenues very significantly at a very low increase in fixed costs. We have board members with competence all the way down to the shop floor, and they talk and interact with workers.

Q: Do you speak with workers?


I get information directly from people at all levels. I keep in touch with people on the ground –- people write to me directly. This is possible in a small company. I love talking to people. In many cases, I get information I otherwise wouldn't have gotten.

Q: Why did Porsche turn down $60 million in state subsidies for the new plant in Leipzig which builds the Cayenne?


We're a very conservative company. We don't believe in subsidies. Some car companies have departments which do nothing else but look for subsidies all the time. If Germany is going to have a tax reform that's honest, and we need one, then we must do without subsidies.

Luxury goods and subsidies don't go together in the first place. If companies don't pay taxes, the country can't pay for social services. So it's no surprise my goal was to be the biggest taxpayer in Stuttgart –- and we are now, even though we're by far not the biggest company.

Q: How flexible is your plant in Stuttgart?


We produce almost all models [13 out of 14 variants of Porsche 911 and Boxster] on one line. This is a high standard of flexibility. Larger companies can't match that.

Q: Boxster sales are down 40% in the last four months. Do you have to shift your development priorities?


Boxster is in its eighth year of production. Everyone knows that an aging product means a decrease in sales. We were aware the Boxster would suffer because of its age. And we will not allow it to decline to zero. But some markets are still doing well or rising. The Boxster is selling in Britain.

I'm proud of the Boxster –- it has been an economic success for the company no matter what the figures this year. Last year, we sold 18,400 Boxsters –- and when we launched the car we figured the peak sales year would reach 15,000 cars. So [even] in a weak year [like 2002-03], we sold 3,500 more than we thought our top goal would be. We've been spoiled. If we're suffering, it's at a very elevated level.

Q: Isn't there a contradiction in your goal of developing high-valued-added cars but reducing the value-added in your final product by outsourcing?


We want on average to retain 15% of the value added in-house. We've defined our core competencies as R&D. That's where we define the product and give it its life. Then we see who can produce the components best. We have limits on our resources. When it comes to cost, we tried to optimize our system. I'm convinced that the product gets its skill, competence, and flair in the R&D phase. Then we make sure the suppliers do things right.

We did that with the Cayenne. We helped [the suppliers], we went to the factories to make sure they did a good job. And it made us able to build at a very good price. Look at the value for price in the Cayenne. That has scared many [competitors] already.

Q: Who's your toughest competitor?


I take all competition seriously, without fear. I give them respect. But I feel sorry for those who get into building sports cars as a hobby because they look nice [but don't earn profits]. I don't know how long shareholders will allow it. We compete in our own niche with companies that aren't making money on their products. I'm convinced only a brand that makes money can survive.

Q: Has the Cayenne achieved your goal for financial independence at Porsche?


With Cayenne, we set the foundation for Porsche's independence. We will no longer suffer the ups and downs of the economic cycle. The cycle for SUVs behaves differently than the cycle for sports cars. Our strategy of fishing in other manufacturers' ponds is working out well.

Q: How do you see sales shaping up for 2003-04?


The Cayenne will have very good growth. The 911 will decline slightly, and the Boxster will decrease more significantly.

Q: What's your operating profit target?


What irritates me in the auto world is everyone communicates operating profits. That's the biggest lie around. It doesn't include interest payments. You could have big debts or close a factory and say it has nothing to do with earnings.

It's bottom-line results that count. Operating profit is a bag of lies. Any company that's looking to take over another company should look at its cash position –- then they might be surprised what's really happening behind the numbers. It's the only measure that counts.

Q: What's the biggest challenge ahead?


The biggest task we have is to maintain the level of performance we've achieved and to expand on sales. We've reached a level many wouldn't have believed, in terms of return on investment. The vital thing is to have enough money in the pipeline for forward development of attractive models. You can't live on earnings –- we have to maintain our power to produce capital.

Q: How do you continue to reap lower costs after having streamlined production so radically in the 1990s, using Japanese kaizen methods?


We get together with our Japanese colleagues and establish international benchmarks regularly. We visit them regularly, and they come three times a year to check out our production. It has become a kind of competition. We also go together to check out other companies. I'm very proud of what we've achieved together. We are striving for 6% to 8% improvement in productivity every year.

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