History and Background of Porsche

Porsche, with over 12,000 employees in 2008, is the smallest German automobile builder, but the largest sports car specialist in the world. 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, Porsche’s 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.

History and Background of Porsche

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 in rented production space in Stuttgart for sales through Volkswagen’s 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 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.

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 company’s 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. Porsche’s R&D work flowed into its production cars, and was the basis for extensive sales of engineering capabilities to outside customers.

German counterparts such as Mercedes, BMW and Volkswagen dwarf Porsche’s 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. Porsche’s small production volumes, however, still have to accommodate great diversity. Each car is built to a customer’s 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 company’s technical development has been located in a large R&D 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 R&D, 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.

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 dynamo-meter chambers. There, testers run it through a demanding routine for approximately 20 minutes.

Charming and eccentric as Porsche’s 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.

Porsche’s Weissach R&D center is responsible not only for Porsche’s 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 Weissach’s 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 Porsche’s total head count. “Too expensive for us alone,” says Anton Hunger, Porsche spokesman. Yet other automakers are comfortable renting Porsche’s 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.

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.

The 911 Carrera is a case study in Porsche’s 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, it’s 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 Bank’s 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.”

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.

In 2005, Porsche added the Cayman to its roster positioned between the Boxster and the 911 and priced at around $60,000. 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 Porsche’s 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. 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. BMW, Mercedes Benz, and Maserati are the Panamera’s primary rivals catering to the high-performance, four-door sports sedan market, and the Porsche hopes to take some of this market share. The company’s 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.

Porsche’s financial situation represents its biggest challenge. Porsche and Volkwagen reached an agreement in 2009 to call off Porsche’s 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 $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 Porsche’s 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.

The most challenging aspect for Porsche is its debt, which Porsche wants to reduce by at least 5 billion. Qatar and Abu Dhabi were seen as top candidates to loan the money. However, Mr. Piëch, who owns 10% of Porsche, says he opposes selling a stake in Porsche to an outside investor. Instead, Volkswagen is likely to buy Porsche’s car business.

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