Porsche company changes and breakdown

Porsche company changes and breakdown Much has changed for Porsche over the past few years. Negative market forces combined with questionable strategic moves have the iconic sport car company fighting for its life. Markets forces such as escalating fuel prices during the summer of 2008 followed by the global financial crisis have significantly suppressed demand for gas-guzzling, high-end specialty vehicles. In concert, Porsche has overstretched itself with new product introductions and an attempted takeover of rival Volkswagen. Porsche has left itself with limited strategic options. This case describes the market conditions affecting the global auto industry, presents Porsches resources and poses options for the future. As of early 2008, Porsche was celebrating a JD Powers highest quality rating for the second year in a row and 7 years of strong financial performance after near-bankruptcy in the late 1990s (see Exhibit 1)  [1]  . Porsche was again seen as a leading, high-end car company. The rest of the industry had been consolidating into fewer than 10 large, multi-brand conglomerates. Against this backdrop, Porsche was defiant about not losing its independence. However, the road forward has been full of hazards. The global economy turned downward during the second half of 2008 and the slump has continued into 2010. Porsche almost went out of business the last time the US economy lagged for an extended period in the early 1990s. Porsche must formulate its strategy carefully. Their expansions into the sport utility and sports sedan segments and attempt to take over Volkswagen have been risky, even careless moves. What should be Porsches next move in light of the rapidly changing global auto industry and Porsches current internal challenges? Should Porsche hold pat and try to ride out the market downturn and industry shakeout with its current lineup of vehicles? Should Porsche continue to expand its product range in order to further leverage its brand and become a broader player to rival German competitor, BWM? Or, should Porsche retreat from expansion, return to its core product, the 911, and focus on its engineering expertise? The global auto industry has suffered greatly from the worst US financial downturn since the 1930s. Two US auto giants, General Motors (GM) and Chrysler, have filed for Chapter 11 bankruptcy protection and there has been a new wave of mergers and acquisitions. Industry growth and leadership are shifting to China and India, and environmental technologies are leading innovation in the global auto industry. Excess car making capacity worldwide has increased sharply in the past few years. Amid weak demand, Japanese automakers have frozen or delayed new capital investments and have stepped up such efforts as lifting productivity at factories, with the goal of boosting their profitability. Toyota Motor Corp. is struggling to remain profitable as its sales have fallen by around 20% from 2007s record tally of 9 million units. Honda Motor Co. has decided to delay new plant construction until 2012 or later from the originally planned 2010. These moves are also driven by anticipation that GM and Chrysler will emerge from their bankruptcies as meaner, leaner competitors. GM has announced plans to bolster its profitability by consolidating production to support global sales of around 6 million vehicles a year, a roughly 30% decline from its worldwide sales in 2008  [2]  . New rivals have appeared with Fiat, an Italian automaker that ranked 10th in global sales rankings in 2008, taking a stake in Chrysler. In addition, the Canadian auto parts maker Magna International Inc. entering into car manufacturing through its agreement to acquire Opel, a German unit of GM. In addition, as Americas auto companies lose market share due to declining demand, Chinese auto sales have increased steadily, China is likely to pass Japan soon as the worlds largest car maker. Chinese companies have focused on acquiring production expertise as well as brand cache by bidding on Fords Volvo and General Motors Saab and Hummer. China has a reputation as a copycat manufacturer. Therefore, acquisitions offer reputation to some of Chinas 100 car companies which unknown to most people outside of China  [3]  . For example, Ford sold Jaguar and Land Rover Indias Tata Motors Ltd. in 2008 for $1.7 billion. This positions an Asian company as a potential world leader at the low-end with the $2,500 Nano and at the high-end with two global icons in Jaguar and Rover, positioning it to compete with BMW, Mercedes-Benz and Audi  [4]  . 2008 was the worst year in a decade for the US auto industry as demand slowed because of tightening credit, higher gasoline prices, and rising unemployment. Continuing declines in sales are likely for the foreseeable future in North America and Europe, while growth is projected in India, China, and Brazil. The global auto industry has been consolidating because on high costs and low demand and profitability. There were 42 independent, global car companies in 1960, and this shrunk to only 17 by the year 2000. In the medium to long term, environmental technologies will likely be instrumental in carmakers success. Germanys Daimler AG has taken a stake in Tesla Motors Inc., a U.S. electric car venture firm. Another German company, Volkswagen, has tied up with Chinese battery maker BYD Co. to bolster its ability to develop electric vehicles. BYD announced in late 2008 that it had succeeded in developing a commercial model plug-in hybrid vehicle. The Chevrolet Volt and Nissan Leaf are due to hit the market in 2011  [5]  . Porsches Resources Porsche, with over 12,000 employees in 2008, is the smallest German automobile builder, but the largest sports car specialist in the world. Sales in the 2007/2008 reached nearly 99,000, including approximately 45,000 Cayennes and 31,000 911s. Net income climbed over $6.3 billion in 2007/2008  [6]  (See Exhibit 1). The company was founded in December 1930, when Dr. Ferdinand Porsche, with 12 close associates, established an office in Stuttgart for design and consultation on engines and vehicles. By 1932, Porsches design office had developed the torsion bar suspension element that is still in use in automobiles around the world. In 1934, the Porsche Company was commissioned by the manufacturers association to design a utilitarian car of normal dimensions but relatively low weight, to be achieved by new basic measures. Prototypes of this car were on the road by the end of 1935 but World War II postponed mass production of the vehicle. After the war, Volkswagen started production of the car, which came to be known as the VW Beetle. In 1972, when the 15,007,034th unit left the VW Wolfsburg assembly line, this Porsche-designed vehicle had displaced the Model T Ford as the all-time automobile production leader  [7]  . After World War II, Dr. Porsche was commissioned to build the most modern formula race car in the world. This car started to win international road races by 1948, and based on this car design, Porsche started building the 356 sports car (see Exhibit 2) in rented production space in Stuttgart for sales through Volkswagens international network of dealers and importers. While the original plan called for only a modest production of 500 cars, sales of the 356 Porsche eventually reached an overall total of 78,000 vehicles. The success of the 356 model was followed by design of the Porsche 911 (also shown in Exhibit 2) that initially went into production in 1964. The 911 had sales, through 2008, in excess of 600,000 vehicles and was the most successful rear-engine sports car in history  [8]  . In the 1970s internal car developments included the Porsche 928, with the first all-aluminum V-8 engine, that started production in 1977, and the Porsche 924, targeted as an introductory model below the 911 model. The 924 was originally developed for the Volkswagen, but they lost interest after the 1973 energy crisis. Porsche sold the car under its own name and, with sales of 100,000 units in only five years; it became the most successful Porsche of all time. Porsche continued its tradition of active involvement in racing competition. Dr. Ferry Porsche, chairman and son of the companys founder, claimed, competition entries in racing and rallying aided technology for our production cars. Designers felt that after only a few months, and often after only weeks or even days, racing provided answers to whether new technical measures were the right ones. Porsches RD work flowed into its production cars, and was the basis for extensive sales of engineering capabilities to outside customers  [9]  . German counterparts such as Mercedes, BMW and Volkswagen dwarf Porsches production volume of about 95,000 cars per year. In 2007/2008, Mercedes and BMW sold over 1,000,000 units and Volkswagen in excess of 1,500,000 cars  [10]  . Porsches small production volumes, however, still have to accommodate great diversity. Each car is built to a customers order, and has to conform to different national and state regulations. Choices included right-hand and left-hand steering, automatic and manual transmissions, and many other options. Porsche customers frequently traveled to the Zuffenhausen plant in the northern district of Stuttgart to watch their car actually being built. Since 1972, the companys technical development has been located in a large RD center outside of Weissach, a small town about 20 kilometers from Stuttgart. To maintain its technology leadership, Porsche has invested, at Weissach, in a minimum scale of expensive capacity, including a test track, crash center, wind tunnel, motor engine test facility, and pollution test equipment. A large number of designers, engineers, technicians, and mechanics are employed to support continual innovation. With its extensive commitment to advanced technology development and its small production base, Porsche spent 15 percent of its car sales revenue on RD, a much higher figure than the 4-6 percent typically spent by other car companies. The large investment in technology development capabilities required that Porsche sell some of its equipment, design, and engineering capabilities to other car companies  [11]  . Porsche still assembles a large proportion of its cars by hand on the same site where company patriarch Ferdinand Porsche built and delivered the Volkswagen Beetle in 1937. There have been modifications, of course, especially since 1991 when Wiedeking was hired to oversee production and materials management. One shocker: He forced the company to choke down nationalist and institutional pride and bring in Japanese consultants to teach Porsche not only how to build cars better, but also how to build better cars. In the upholstery shop, craft workers soften leather with heat guns and use hand tools of their own making to caress the hide smoothly onto curving dashboards and door panels. They get the leather from workers at sewing tables. In a nearby building, a technician uses a hand wrench to apply what he suspects his power wrench or a robot might not just the right amount of force on bolts that will hold an exotic, six-cylinder Porsche engine together when some over-enthusiastic driver revs it into the danger zone. When the wrench wielder and co-workers complete the engine, it gets hauled off to one of a dozen dynamometer chambers. There, testers run it through a demanding routine for approximately 20 minutes. Charming and eccentric as Porsches factory is, it is perhaps no more than a curiosity next to less-visible enterprises that the automaker relies on for independence: Weissach, restructuring, and partnerships. Porsches Weissach RD center is responsible not only for Porsches own auto technology and innovation, but also additional profits from work it does for others. Weissach developed, for instance, a cockpit for the Airbus jetliner, a minivan for General Motors, the guttural sound of modern Harley-Davidson motorcycle engines and their low-emission performance. Porsche does not report Weissach earnings separately. Some industry analysts suppose they account for most of what the financial reports call other operating income about 12 percent of total operating income. But Weissachs biggest contribution is not on the financial statement. Weissach is staffed by 2,200 engineers and technicians, meaning that highly paid professionals are one-quarter of Porsches total head count. Too expensive for us alone, says Anton Hunger, Porsche spokesman. Yet other automakers are comfortable renting Porsches engineering brains because the tiny sports-car maker is unlikely to be a rival. Restructuring in the late 1990s was painful as Porsche has cut 25 percent of its workers. And though much handwork remains, Porsche has halved the worker-hours necessary to build the 911 Carrera, and relies more on Japanese-style, just-in-time parts delivery. About one-third to total parts is the same on Boxster and 911 Carrera. And the Boxster S gets its upgraded handling and performance from 911 Carrera parts. In 1992, Porsche was selling three dramatically dissimilar models: rear-engine, six-cylinder, air-cooled 911; front-engine, V-8, water-cooled 928; front-engine, water-cooled, V-6 968. Literally not one common part. Incredible. Not even the lock system, says Manfred Ayasse, financial spokesman  [12]  . As of 2009, Porsche sold only 5 vehicles, Boxster, 911 Carrera, Cayenne, Cayman, and Panamera. The 4 automobiles are six-cylinder, high-performance, high-priced sports cars. In an industry bent on more and more segments, this is an anomalous approach. However, Porsche is an expert at bringing out ever-more-desirable iterations, raising prices for the upgraded versions and earning much higher profits. The enhanced models do not cost much more to manufacture than the base models. Boxster made its debut late in 1996, its $41,000 price putting a new Porsche within reach of more buyers than can afford a $66,000 Carrera. The Boxster S joined the lineup in 1999, starting at around $49,000. Its appeal is chiefly a bigger engine. At the same time, the standard 2000 Boxster received enhancements that could support a price increase. Its engine grows to 2.7 liters from 2.5, and horsepower rises to 214 from 204  [13]  . The 911 Carrera is a case study in Porsches genius. The current generation was launched in late 1997, as a coupe. A pricier convertible came in early 1998. Even more-expensive all-wheel-drive versions, called Carrera 4, were added in late 1998. In 2000, Porsche offered a turbo-charged 911 Carrera. Turbo Porsche models have the brilliant high-performance credentials and legacy to command six-figure prices. Also possible is a targa-top 911, which would have a removable, hard-roof panel for those who like the breeze but dislike folding convertible tops. Porsche has recently added an S version to the 911 Carrera line-up, just as it did with Boxster. Even though Porsche says it will never merge, its not above partnerships. For example, it co-owns, with Daimler-Chrysler, Car Top Systems, the company responsible for the folding tops on Porsche, Mercedes-Benz, and Saab convertibles. And Audi manufactured the now-discontinued 924 and 944 sports cars for Porsche. The automaker has decided to outsource more manufacturing so it can boost sales, and enjoy the extra earnings that it should bring, without investing in expensive expansion. Porsche calls it the virtual factory approach. The factory in Stuttgart can manufacture only 30,000 cars a year. It is surrounded tightly by the city, limiting sprawl room. But Porsche considers the original brick factory historic and could not bring itself to replace it with a modern facility. Thus, playing well with others becomes a survival tactic. Since late 1997, most Boxster sports cars sold in the US have been made at Valmet Automotive, a car factory in Finland that also builds Saabs. The automaker helped Valmet modify its tooling and production system to accommodate the Boxster, and Porsche has quality auditors there to ensure Valmet Boxsters match Stuttgart Boxsters. The logic is impressive, says Deutsche Banks research report on Porsche: It is the design, the technology, and the brand that make a Porsche stand out. These are core competencies for Porsche. The production itself, which is more or less a commodity competency, may as well be outsourced to Valmet or VW at a lower cost than Porsche could achieve with its highly paid workforce.  [14]   In 2002, Porsche began selling Cayenne, which it developed in collaboration with Volkswagen. Porsche sells the Cayenne for around $60,000, and VW sells its version, the Touareg, for around $35,000. The two companies shared the development costs and VW manufactures both vehicles. This allows Porsche to get some of the development costs paid by VW, and Porsche does not have to invest in more factory capacity to build the vehicle (See Exhibit 3). In 2005, Porsche added the Cayman to its roster positioned between the Boxster and the 911 and priced at around $60,000 (Exhibit 4). The Cayman matches the weight and styling of the Boxster with nearly the power of the 911. This makes the Cayman lightning fast, with a 0-to-60 time around 4.5 seconds. This performance and price has made the Cayman the most sought after vehicle in Porsches lineup in 2005. In September of 2005, Porsche acquired 18.5 percent stake in Volkswagen. Porsche claimed it was attempting to secure its supply chain as Volkswagen makes much of the Cayenne, the Porsche sport utility vehicle  [15]  . Volkswagen has not performed recently and has been seen as a potential takeover target. Porsche increased its ownership of Volkswagen to 31 per cent and majority ownership in 2008. Porsche introduced its first four-door sedan in 2009 when it offered the Panamera (Exhibit 5). BMW, Mercedes Benz, and Maserati are the Panameras primary rivals catering to the high-performance, four-door sports sedan market, and the Porsche hopes to take some of this market share. The companys association with Volkswagen is leveraged as the Panamera uses the Volkswagen Phaeton platform. The Panamera is powered by the same engines that are currently available in the Cayenne, the Porsche SUV. Porsches financial situation represents its biggest challenge. Porsche and Volkwagen reached an agreement in 2009 to call off Porsches efforts to take over Volkswagen. The final shape of the two companies has yet to be fixed, but Porsche is now likely to be fully integrated into the Volkswagen Group, joining its seven other car brands-VW, Audi, Skoda, Seat, Bentley, Lamborghini and Bugatti. Porsche got into this challenging situation when it took on à ¢Ã¢â‚¬Å¡Ã‚ ¬9 billion ($12.2 billion) of debt acquiring its 50.8% in Volkswagen with its sights on taking over Volkswagen. Three things prevented Porsche from this goal. First, acquiring 50.8% of Volkwagen tripled Porsches debt. Second, the credit crisis beginning in 2007 made it more difficult and expensive to borrow money. Third, Porsche was blocked by the German government from acquiring a larger share of Volkwagen so it could access its cash reserves  [16]  . The most challenging aspect for Porsche is its debt, which Porsche wants to reduce by at least à ¢Ã¢â‚¬Å¡Ã‚ ¬5 billion. Qatar and Abu Dhabi were seen as top candidates to loan the money. However, Mr. Pià «ch, who owns 10% of Porsche, says he opposes selling a stake in Porsche to an outside investor. Instead, Volkswagen is likely to buy Porsches car business. The Future of Porsche Based on the current conditions in the global auto industry, the economy and the natural environment, what should be Porsches strategy for 2010 and beyond? Should Porsche hold pat and try to ride out the market downturn and industry shakeout with its current lineup of vehicles? Should Porsche continue to expand its product range in order to further leverage its brand and rival German competitor, BWM? Or, should Porsche retreat from expansion, return to its core product the 911 and focus on its engineering expertise? These options are influenced by and could influence Porsches current financial challenges. Porsches strategic moves are critical to its future success and existence. Exhibit 1 Porsche Financials Exhibit 2 Exhibit 3 Cayenne Exhibit 4 Cayman Exhibit 5 Panamera