Porsche is now the world's most profitable car maker. However, industry experts believe the marque may be heading for something of a fall in its latest target market. Madeline Chambers reports
Back from the brink of collapse, German sports car maker Porsche is now the world's most profitable auto company, and it's about to embark on one of the most important ventures in its history.
The creator of 911 and Boxster cars, which arouse envy in drivers around the world, launches what will be the world's fastest sports utility vehicle (SUV), the Cayenne, this autumn.
The long-awaited vehicle, expected to be shown in the metal for the first time this week at the opening of Porsche's new Leipzig factory in eastern Germany, is set to boost sales by 50 per cent, making it critical to the company's long-term success.
"The Cayenne's impact on Porsche's will be immense," said Merrill Lynch in a recent research note.
It is due to come in two versions: the Cayenne Turbo with a top speed of 165 mph that can reach 62 mph in 5.6 seconds, and the more modest Cayenne S, with a top speed of 150 mph.
Even in a weak market, Porsche's annual 25,000 unit sales goal is conservative, say analysts. But the departure into the competitive SUV segment may prove a challenge in the long run.
Chief executive Wendelin Wiedeking has steered the Stuttgart-based company to recovery from near bankruptcy in the mid-1990s.
He slashed the group's spiralling costs, which had led to prices even Porsche buyers would not countenance, and introduced leaner, more flexible production processes, partly by outsourcing - Finland's Valmet builds the Boxster, for example.
Wiedeking also retreated from the volume game and revived the Porsche brand.
"Under Wiedeking, Porsche has moved back to basics and reinforced its exclusiveness," says Garel Rhys, a professor specialising in the motor industry at Cardiff University.
Porsche currently sells about 50,000 cars a year, about half in the US, and posted a net profit of €270 million on sales of €4.4 billion in the fiscal year ending July 2001.
With operating margins of roughly 14 per cent, way over the industry average of 4 per cent, and 9 per cent at nearest rival BMW AG, investing in Porsche shares has been a safe bet.
For investors who can afford them, that is. Porsche shares, currently worth about €460 each, are the most expensive on the German stock exchange, and so tend to suffer from illiquidity.
This is partly due to the group's shareholder structure. Only preference shares are traded and its common stock - half of all its shares - is owned by the Porsche and Piech families.
Analysts argue that break even, believed to be reached at about 20 per cent of the Leipzig plant's likely output, compares favourably with most European plants which break even at 70-80 per cent capacity utilisation.
Porsche has also capped its roughly €600 million investment in the project by jointly developing the SUV with VW which launches its own version, the Touareg, later this year.
"I think the Cayenne is a natural extension of its product range and a company like Porsche does need to climb up the volume ladder to keep the overheads manageable," adds Rhys.
The segment's growth potential is also a boon. Forecaster JDPower LMC expects SUVs to account for about 5.5 per cent of the European market in 2006, up from 4 per cent now.
And in the US, the Cayenne's main market, some analysts predict a 40 per cent rise in market share for SUVs in the next five years.
But the project is not risk-free. Pictures of the Cayenne shown in the spring left some Porsche fans cold.
"It isn't fair to judge from a photo, but it did not look as good as people had hoped," comments a Frankfurt-based analyst.
And the segment is getting crowded. With Land Rover's Range Rover, Volvo's XC90 and VW's Touareg adding to BMW's hugely successful X5 and Mercedes's M-Class, Porsche is not alone.
"The power of Porsche has been the strength of its brand in relatively uncompetitive segments and with the Cayenne, the company is entering uncharted territory with the sub segment dominated by BMW's X5," says UBS Warburg analyst Xavier Gunner.
Despite the group's pledge to "put the sport back into the sport utility equation", some experts say the Cayenne may dilute Porsche's image as the maker of the ultimate driving machine.
"It should do well in the first two years but the question is how sustainable will it be," comments Jim Hall of US-based auto consultants AutoPacific.
"No one buys a Porsche to carry people around but that may change. They have to sell against their image for new custom. If the Cayenne does drive Porsche to higher ground, the group will have to decide on its next move. The high-performance Carrera GT, with a total production target of just 1,000, will not provide the volume to offset costs and boost profit growth.
"They are becoming an anachronism as the only independent carmaker trying to survive at this size. Eventually they will have to look to someone for security, as Ferrari did to Fiat, but not just yet," says Rhys.