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    Porsche on first page of Wall Street Journal

    Staff Reporter of THE WALL STREET JOURNAL

    ZUFFENHAUSEN, Germany -- The world's most profitable car company doesn't report quarterly results to investors. Its profit outlooks are defiantly vague. It typically starts every fiscal year with the promise: "We expect profits and sales to at least match the previous year."

    Bankers? "I don't trust them," says Porsche AG Chairman Wendelin Wiedeking. "They only want to loan you money when you don't need it." So Porsche carries no bank debt. The rest of the auto industry is rapidly consolidating, convinced that it takes size and global reach to compete today. Porsche made only 55,782 cars last year, compared with industry leader General Motors Corp.'s 8.56 million.

    But stubborn independence has been very good to Porsche. As a percent of revenue, its pretax profit was 13.2% at the end of the fiscal year ended last July, the best in the industry and well ahead of No. 2 BMW AG's 8%. GM's comparable figure was a mere 0.77%. Porsche's stock has soared more than 1,000% in the past 10 years. GM shares are up only 35% over the period.

    "We are a conservative company and do things our own way," says Mr. Wiedeking, 49 years old. "And we have the results to show for it."

    Now Porsche is about to put its results at risk, uncharacteristically succumbing to the lure of the most conventional of all auto-industry trends: the SUV. This week the maker of the legendary 911 and the sleek Boxster convertible will roll out the Cayenne, the first non-sports car in Porsche's 54-year history.

    The timing is puzzling. The stock-market plunge and the weak global economy are casting a big shadow over luxury-car sales. Porsche is offering special leasing deals in the U.S. on the two-seat Boxster for those who can't afford to buy one.

    At the same time, the already-full market for SUVs is getting more crowded. This autumn, Volkswagen AG and Volvo both plan luxury sport-utility vehicles.

    The Cayenne, which starts at $55,900, is a crucial launch. The company is counting on it to boost unit sales by 50% and acknowledges that a dud would be financially devastating.

    But the way Porsche sees it, an SUV will help ensure its independence, something that the company never takes for granted.

    At Porsche, the corporate philosophy -- always prepare for the worst -- dates back to the early 1990s, when the company nearly went out of business. The sports-car market had just collapsed and costs had ballooned. Mr. Wiedeking, borrowing Japanese production techniques and slashing the model lineup to the bone, quickly put an end to the bleeding.

    Porsche's new SUV, the Cayenne

    Today Porsche's financial success is built on a simple formula: Keep costs down and maintain an exclusive brand image that commands top dollar. Like other makers of luxury cars, Porsche benefits from the generally wider profit margins on higher-priced cars.

    Porsche has kept its main factory here outside Stuttgart operating at maximum output for years by refusing to expand its capacity every time demand surges. Instead, the company has farmed out assembly. The Boxster, for instance, is assembled in Finland from mostly German components by an engineering and production company called Valmet.

    At the same time, Mr. Wiedeking has focused Porsche on the upper end of the market, where people don't mind paying more than $100,000 for a 911 that they know only a limited number of other people will own.

    Porsche is insulated to a great degree from stock-market pressures because more than half of its shares and all of its voting stock are controlled by the descendents of Ferdinand Porsche, the designer of the Volkswagen Beetle. Mr. Porsche's son, Ferry, designed the forerunner to Porsche sports cars, a racer that brought in enough money to bail his father out of a French prison where he was held as a suspected [censored] collaborator after World War II.

    The father and son team developed and built a line of sports cars that served as the company's backbone until the early 1960s when the 911, which has retained the same sleek profile ever since, first hit the market.

    Family Cars

    Throughout much of the company's history Porsche was owned by the families of Ferdinand Porsche's two children, Ferry and his sister, Louise Piech. Together the two clans have ruled the company, staying far from the public eye on private estates near the Austrian alpine resort town of Zell am See. Family members hold four seats on the 12-person supervisory board. Among them is the recently retired chairman of VW, Ferdinand Piech, the son of Louise Piech. Porsche now has about 42,000 shareholders outside the families, about evenly split between small retail and institutional investors.

    "Porsche belongs to the families. They are in it for the long haul so things like share prices are not what the company is about," says former Chairman Peter Schutz, from his home in Florida.

    Last fall, Porsche got into a tussle with German stock-exchange authorities for its refusal to publish quarterly results. Rather than change its ways, Porsche got kicked off the exchange's index for medium-size companies. Chairman Wiedeking's reaction? "It turned out to be very good advertising for us," he says. "It helped the share price."

    Porsche has no executive stock options. While most German companies are moving toward adopting international accounting rules, Porsche prefers to figure its books according to German methods, which give more room for reducing current profits to build up a reserve for the future. Porsche now sits on Euro 1 billion ($980 million) in cash. That's a substantial hoard for a company with annual sales in the last fiscal year of Euro 4.44 billion.

    It expenses costs as quickly as possible so that future profits are ensured at the expense of current ones. Over the last three years, Porsche has absorbed the full Euro 300 million of research and development cost for the new Cayenne. It could have spread out the impact over a much longer period to match income from the new car, the normal practice in the industry.

    "We have to be more conservative than other car makers so if there is a temporary decline in the market, we can cover it," says Chief Financial Officer Holger Haerter. "In the U.S., corporate management doesn't have the kind of flexibility we have."

    A lot of what Porsche does could be considered unfriendly to its shareholders. The German stock exchange says Porsche's refusal to publish profit figures more regularly amounts to unfair dissemination of financial information.

    "It's surprising that American investors in particular don't put more pressure on them to keep them informed on a quarterly basis," says Frank Hartmann, a spokesman for the Deutsche Boerse in Frankfurt. Still, the company's stand doesn't prevent it from trading on the Frankfurt Stock Exchange -- it simply can't be part of the exchange's midcap index.

    Porsche also opposes new U.S. legislation demanding that chief executives swear to the accuracy of their accounting statements, a development that could complicate the company's discussions about seeking a U.S. listing. Mr. Wiedeking Tuesday told journalists that he had "no sympathy" for the requirement because CEOs can't realistically vouch for something in which numerous employees were involved.

    Mr. Haerter bristles at the suggestion that Porsche should be more forthcoming. "I have the feeling that people who say we aren't transparent don't know how to read a balance sheet," he says.

    Some Porsche investors agree. "Nontransparency in a conservative way is a good thing, nontransparency in an aggressive way is a bad thing," says Corydon Gilchrist, a fund manager at Marsico Capital Management in Denver, one of Porsche's largest institutional shareholders. "In an era of Enron and WorldCom, it's all about trust."

    For now, a lot of the trust in Porsche rests with Mr. Wiedeking. The son of a construction engineer, Mr. Wiedeking did various small factory jobs as a boy to supplement the family income. In college he founded real-estate and construction companies that are still run by his brothers. "Those companies are my retirement plan," he jokes. After earning a doctorate in mechanical engineering in 1983, he joined Porsche but left five years later to take on a more senior job at small engineering company, Glyco Metall Werke KG. In 1992, he came back to Porsche as the top boss.

    One of his favorite leisure activities is tending a tiny farm outside Stuttgart on an antique Porsche tractor his wife bought him for Christmas a few years ago. He grows potatoes, one of his favorite foods. "Potato farming has been like our share price," he says. "You plant one and get 20 back." Sometimes he and Mr. Haerter go to the farm and drag-race tractors.

    Hardly a top CEO job comes on the market in Germany without Mr. Wiedeking's name being mentioned, most recently as a replacement for former Deutsche Telekom Chairman Ron Sommer. Mr. Wiedeking says he plans to stay at Porsche.

    Mr. Wiedeking has a lot resting on the Cayenne, an SUV whose turbo version has a 450-horsepower engine and a top speed of 160 miles an hour. Many Porsche purists were shocked to hear that the company, so closely identified with sports cars, would try to stretch its brand so far.

    "Would you buy a Land Rover sports car?" asks automotive Web site "Sure the Porsche Cayenne will be the world's fastest and best handling 4X4. So what?" Eagerly awaited photos of the Cayenne -- which looks closer to a nimble sports car than a rough and ready Jeep -- did little to inspire confidence when they were unveiled at the Geneva car show in early March. The day after Porsche showed the world what the car looked like, its share price fell more than 4%.

    In order to keep costs down, Porsche is jointly producing the Cayenne with Volkswagen. Marriages of mass volume and luxury brands at other car companies have produced mixed results. Some customers worried about paying extra for a label. Porsche argues that's not the case with the Cayenne. Porsche did the development work while Volkswagen is only overseeing production of major components, not including the engine.

    Preparing for the Worst

    Porsche is banking on predictions that demand for high-end SUVs will keep growing. Market researcher J.D. Power & Associates forecasts that sales of luxury SUVs will double over the next five years to make up 4% of the total car and light-truck market.

    But as usual, Porsche is preparing itself for failure. Porsche's new plant in Leipzig, where the Cayenne will be made, can break even at around 5,000 units a year, about 20% of Porsche's stated goal of selling around 25,000. An auto factory at a mass-market brand such as Ford in Europe can't break even at much below 85% of capacity.

    Porsche has another hedge against the ups and downs of the car business. The company offers its highly skilled engineers for hire to what it claims has been virtually every auto maker in the world and even for some projects that have nothing to do with cars. Porsche engineers at the company's R&D labs, for example, are currently working on an artificial knee, drawing on their knowledge of how a car's suspension works. The operation now makes up only about 3% of group turnover but helps support 2,000 engineers at Porsche.

    "There are some customers who love the idea that an engineer working on their project in the afternoon was the same guy working on a 911 motor in the morning," says Ulrich Schiefer, managing director at the unit, Porsche Engineering Group GmbH.

    Very nice article and very well analyzed

    Only one short comment:

    In reply to:
    "There are some customers who love the idea that an engineer working on their project in the afternoon was the same guy working on a 911 motor in the morning," says Ulrich Schiefer, managing director at the unit, Porsche Engineering Group GmbH.

    There are indeed also some other customers who don't like the idea of an engineer working on a SUV in the morning and on a sports car in the afternoon.



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