Porsche Cayenne SUV - Success In A $90,000 Package

Stuttgart December 15, 2003; Business Week reported that Porsche Chief Executive Wendelin Wiedeking took a risky bet in 1998 when he decided to steer the German sports-car icon into the market for big, bruising sport-utility vehicles. Porsche aficionados cringed. Even the Porsche family shareholders balked, fearing the company's sports-car tradition and exclusive brand name didn't befit bulky off-roaders. But a determined Wiedeking prevailed -- and after one year on the market, the Cayenne SUV, which sells for $56,000 to $110,000, is powering record sales and profits at the Stuttgart auto maker. On Dec. 3, Porsche announced a 22% increase in net profit, to $684 million for the year ending July 31, a period during which the global auto industry retracted.

But Wiedeking had about as much time to enjoy Cayenne's success as a driver gets in a Formula One pit stop. Sales of Porsche's aging hit model, the Boxster, which starts at $43,000, slumped 40% from August through November compared with the same period last year, while sales of the pricier 911 model fell 14%. As rivals target Porsche with a slew of hot new products, from BMW's Z4 roadster to Honda's Acura NSX, pressure is rising on Wiedeking to speed Porsche's next big model launch.

Wiedeking, who has spent most of his career at Porsche, is cagey about his next move. "Rest assured we have something up our sleeves," he says, declining to give any details. But analysts and market experts believe Porsche will launch a new-generation 911 next September to revitalize the company's seven-year-old core product, followed by a second-generation Boxster in 2005. Luckily, the perfectly timed launch of the Cayenne has more than compensated for declining sales of Porsche's two sports-car lines. "It's the toughest year for Porsche in this (model) cycle, but it's still going to be a good year," says Jurgen Pieper, auto analyst at Metzler Bank in Frankfurt. Porsche expects to sell at least 30,000 Cayennes next year, boosting total sales by 9% to a record 70,000 to 75,000.

But with only three model lines, the $6.7 billion company remains vulnerable to market vagaries. Wiedeking's biggest challenge comes down to one looming decision: whether to step on the accelerator for a fourth model. Many expect it to be a four-seater sport coupe coming out in 2006. "It's really hedging their bets. The sports-car market is very fickle, very cyclical, and fashion-driven," says George C. Peterson, president of AutoPacific Inc. in Tustin, Calif. In seeking higher volumes, Wiedeking must tread carefully to avoid diluting Porsche's exclusive image. "There are some prototypes, but not even I am allowed to drive them yet," he says.

Wiedeking's track record at Porsche has expectations running high. Over the past decade, the 51-year-old engineer has transformed an ailing icon into the world's most profitable auto maker. With a net profit margin of 10.1%, Porsche outpaces even the Japanese. Nissan and Toyota have net margins of 7.25% and 6% respectively. Porsche also easily beats homegrown rivals BMW and DaimlerChrysler . "It's bottom-line results that count," says Wiedeking, insisting it is net profit, not operating results, that separate strong auto makers from the weak. "The biggest challenge is to make sure there is enough cash in the pipeline to develop new products," he says.

No problem there. Thanks to surging sales of the Cayenne, Porsche generated $1.6 billion in cash flow in the fiscal year ending July 31. Wiedeking, who is also sitting on a cash horde of $2.1 billion, insists he won't borrow a pfennig for the next new model. Porsche's total debt stands at only $128 million. That's a far cry from the liquidity crisis that catapulted Wiedeking to the CEO's office in 1993, a year when Porsche's sales plunged to a nail-biting 14,263 cars. Mounting losses, product problems, and a sharp decline in the dollar nearly forced Porsche to cede its independence.

To save the company, Wiedeking, the former head of production, overhauled everything from products and manufacturing to marketing. He adopted methods from Japanese auto makers to streamline production and cut costs. The new approach helped slash production time on various models by 30% to 50% and boosted Porsche's productivity by 15% a year for four years running. "The Japanese showed me I had no idea what I was doing," says Wolfgang Strauss, a former production manager who is now part of a Porsche squad of 30 that uses these techniques at Porsche's Zuffenhausen factory outside Stuttgart.

Speed Racer Wiedeking's legacy is an efficient manufacturing base that outsources all but 15% to 20% of production. With the Cayenne, for example, he gained a huge increase in capacity with minimum capital expenditure by handing off 90% of basic manufacturing -- from metal stamping to chassis assembly -- to Volkswagen's new SUV plant in Slovakia. Porsche kept high-value processes such as engine production, transmissions, and final assembly in-house. Wiedeking also outsourced up to 90% of the production of the Boxster model to Finland's Valmet Automotive Inc. "We are able to develop new sports cars at prices larger companies can't achieve," says Wiedeking. A hands-on CEO who delights in speeding around the company's racetracks, Wiedeking also has proven skillful in product development and marketing. He has added 14 versions of the 911 since the late 1990s. Sales of new higher-margin models, including the $128,000 Turbo convertible and $93,000 Carrera 4S convertible, are buoying sales and profits.

To give sales of its aging sports cars an extra kick this year, Porsche has created a loyalty program for existing owners, handing them up to $3000 in free options when they buy a 2003 model 911 or Boxster. "It keeps resale values artificially high. It's a completely innovative incentive program," says Philipp Rosengarten, senior market analyst at Global Insight Inc. in Frankfurt.

Wiedeking also must make sure Porsche can continue to sell 30,000 or more Cayennes a year after the novelty of the new model -- the fastest SUV in the world -- has subsided. So far, so good. Only 18% of Cayenne buyers are Porsche clients, helping the sports-car maker broaden its customer base. And demand is surging for the highest-margin model, the 450-horsepower Cayenne Turbo, which starts at $90,000. A less costly six-cylinder Cayenne is hitting the market in Europe now and will arrive in U.S. showrooms in the spring.

The wild card going forward is the value of the U.S. dollar. Porsche depends on the North American market for nearly 50% of its sales. But Wiedeking's iron grip on costs and product savvy are likely to help Porsche keep its momentum.

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