So far Porsche has steered its own course on corporate governance. But with an expensive SUV launch in a jittery market, could its philosophy backfire?

So far Porsche has steered its own course on corporate governance. But with an expensive SUV launch in a jittery market, could its philosophy backfire?

By David Lanchner
February 2003
Institutional Investor Magazine

Porsche chief executive Wendelin Wiedeking likes driving to the beat of a different drummer.

Companies around the world may be racing to reassure nervous investors by adopting a raft of shareholder-friendly measures, but the Stuttgart-based luxury carmaker is defiantly pursuing its own approach to corporate governance. Alone among Germany’s 200 largest companies, it refuses to release quarterly results. Its bean counters still report numbers under opaque German rules rather than international accounting standards or U.S. generally accepted accounting principles.

Wiedeking sneers at the postEnron Corp. mania for greater disclosure. As far as he’s concerned, frequent, exhaustive reporting is simply a response to the tyranny of U.S. capital markets and the bankers and brokers who serve them (see Interview below). In Wiedeking’s opinion quarterly numbers don’t reveal much about a company’s fitness. Porsche isn’t alone -- many non-U.S. companies, HSBC Holdings, for example, continue to resist quarterly reporting. But Wiedeking is among the most vocal opponents of Anglo-Saxon-style accounting and relishes any opportunity to air his views. “As we have regrettably seen, figures can be manipulated upward temporarily and without any real hard work,” he declares. “Everything doesn’t have to be done as the Americans do it.”

Since rival auto companies are eating his dust, he can afford to be contrarian. With only two models, the 911 and the seven-year-old Boxster, Porsche’s annual sales have risen more than fourfold, from 12,500 cars to 54,234, since Wiedeking became CEO in 1993. The carmaker upshifted from a record net loss of 262 million deutsche marks ($150 million) that year to a record net profit of E462 million ($413 million) in the fiscal year ended August 2002, on sales of E4.86 billion.

During Wiedeking’s tenure Porsche has twice been named the company with “the best reputation in Germany” in the well-regarded poll taken every two years by Manager Magazin. In fact, within Germany the 50-year-old Wiedeking is lauded as a Teutonic Lee Iacocca, after the man who engineered Chrysler Corp.'s turnaround in the 1980s and rescued an icon of the U.S. auto industry. Like Iacocca, he has published an inspirational bestseller -- The David Principle (as in David and Goliath). The series of essays includes first-person stories by Wiedeking, German Chancellor Gerhard Schröder, tennis star Steffi Graf and others, who discuss how they overcame formidable odds to reach success.

Today Porsche is the world’s most profitable carmaker, with an operating margin of 18.5 percent, versus a global industry average of 11 percent. Its shares trade at 12 times estimated 2003 earnings, while the average price-earnings multiple for global auto companies is 9.3. And that’s even though the financially conservative Wiedeking is sitting on E1.72 billion in cash reserves earning 4 percent a year.

The fine performance -- and the crucial fact that Porsche is a family-controlled company -- gives him license to veer from today’s conventional wisdom on investor relations. In October he declined a pending invitation to list Porsche’s shares on the New York Stock Exchange. The company would have had to restate its books to comply with NYSE rules. But what really turned Wiedeking off was the Sarbanes-Oxley Act of 2002, which makes CEOs and chief financial officers criminally liable for misrepresentations in their companies’ accounts. “German companies already have a better system of checks and balances to ensure objective accounting standards than what is provided by the new U.S. rules,” he scoffs.

The previous year the Deutsche Börse had kicked Porsche out of Germany’s midcap MDAX equity index for its refusal to report quarterly. Wiedeking just shrugged. Last May he took the opportunity to demonstrate that he didn’t need the Frankfurt exchange, issuing E300 million worth of unrated Eurobonds to U.S. and European institutional and retail investors. The offer sold in 90 minutes, carrying an interest rate of only 4.92 percent -- lower than the yield on A-rated bonds with the same five-year maturity from BMW, Porsche’s most creditworthy competitor (and, incidentally, a company that reports quarterly). Adding a fillip, Wiedeking had the bonds listed on the tiny Baden-Württemberg Stock Exchange in Stuttgart, Porsche’s hometown, rather than on the Deutsche Börse. “You see, we don’t forget,” says Wiedeking. “The Frankfurters earned nothing.”

The success of the bond sale, Wiedeking insists, proves that investors don’t really care about quarterly reporting, debt ratings or other American-style standards of disclosure and transparency. What they care about is consistent, long-term performance. He points out that Porsche’s stock has soared from E26.74 in mid-1992, just before he became CEO, to about E370 today. “Both bond and equity investors are more than satisfied with how we protect and build value,” he says.

Many analysts and investors agree. “What you can say for the company these days is that everything Porsche does gives it a long-term perspective. Nothing about the way it is structured gears it to chasing short-term profits,” observes Harald Hendrikse, an auto and aerospace analyst at Credit Suisse First Boston in London. “In the past year we’ve clearly seen that chasing quarterly results and specific profit targets is not necessarily a good thing.”

The company deliberately lowballs when it gives investor guidance, and executives admit they do so out of a basic distrust of market psychology. “If analysts are generating expectations based on the information you provide, and your final results are a little bit below their expectations, it will have an impact on your share price, even if you are reporting a strong improvement,” says Porsche CFO Holger Härter. “That is absolutely crazy. So we give a guideline for what we expect, but it is very conservative.”

Still, Wiedeking could be accelerating into a tight curve. In December the company began selling the Cayenne, a racy and luxurious sport utility vehicle that can hit 100 kilometers (62 miles) per hour in 5.6 seconds. Although Wiedeking has sold out the entire first year’s worth of production, 25,000 vehicles, even he admits that the Cayenne represents “the biggest challenge the company has ever faced.” The reason: Porsche has invested roughly E600 million to design and develop the vehicle, its first-ever non-sports car. And the company is a late entrant to the SUV market.

“If Wiedeking has a production problem, it will hit his company harder than otherwise because of the dearth of information that comes out of Porsche,” says Jürgen Pieper, an auto analyst at Frankfurt investment bank Bankhaus Metzler. “When times turn bad, they can’t expect to keep the stock price buoyant on just good faith and trust.”

Moreover, the global economic slump has started to hit sales of Porsche’s older models. Among the few figures Porsche does release regularly are monthly numbers for the U.S., which accounts for nearly half of the company’s turnover. In December U.S. sales of the 911 were down 15 percent from December 2001 (to 811 cars), and Boxster sales were down 29 percent (to 576). After rising about 11 percent in the 11 months through early December, Porsche shares are roughly 14 percent below their levels of early 2002 -- though they outperformed the average German auto stock by 17 percent and the average European auto stock by 10 percent over the past year.

Many investors are happy with the company’s huge cash cushion, especially in the face of an iffy vehicle launch and global economic uncertainty. “Porsche’s conservative balance sheet is more of a comfort than it once was,” says Pia Hellbach, a fund manager at Frankfurt-based Union Investment, which oversees E100 billion in assets and has a 0.8 percent stake in Porsche, worth about E53 million. “At least if you own the stock, you can sleep at night, which is not necessarily the case with many companies that leveraged their books in an aggressive pursuit of shareholder value.”

But critics question the wisdom of Porsche’s setting aside large sums to cover vague future risks. Some even suggest that Wiedeking could use (perfectly legally) the company’s risk provisions to inflate future profits. “A responsible investor has to ask if the existence of sumptuous reserves and accruals potentially offers Porsche the means to engage in balance-sheet cosmetics,” says Bankhaus Metzler’s Pieper. Porsche increased provisions by a stunning E404 million last year, 87 percent of its annual profit. “The danger is that by reducing provisions in some future year, they could show profits that are 20 or 30 percent higher, when they might actually be weakening year on year,” explains Pieper.

Porsche CFO Härter replies that the company never uses provisioning to obscure profit performance. By setting aside large amounts of money, he says, “we are simply being prudent when it comes to the future risks a small company like ours could face. Porsche as a small manufacturer has to have a liquidity position that ensures its independence. In our view that should help the confidence of shareholders, not hurt it.”

Earnings projections for the current fiscal year, ending in August, are positive. Porsche executives are confident about the Cayenne, which was rolled out in Austria, Germany and Switzerland in early December and will hit the U.S. in mid-March. Some analysts estimate that the new SUV could boost earnings by as much as 40 percent in fiscal 2003.

Of course, Wiedeking is in a fairly protected position when it comes to investor relations. Half of Porsche’s 17.5 million shares -- and all voting rights -- are held by its founding families, the Porsches and Piëches. Its listed shares are evenly split between institutional investors, mostly in Germany, the U.K. and the U.S., and German individuals, because the shares trade only on German exchanges. Porsche has clung to independence, unlike other sexy sports car brands, including Jaguar (owned by Ford Motor Co.) and Ferrari (owned by Fiat). Having brought the company out of a tailspin, Wiedeking is keen to keep that independence.

THE SMALLEST INDEPENDENT car company in the world was born in 1931 as a design firm, and the letters at the start of it official name, Dr. Ing. h.c.F. Porsche, are the German abbreviation for Doctor of Engineering. Its founder, Ferdinand Porsche Sr., was a talented engineer and friend of Hitler’s who used his connections to win lucrative government contracts. (The firm’s staff included Anton Piëch, Porsche’s son-in-law and father of Volkswagen’s former CEO and current nonexecutive chairman, Ferdinand Piëch.) Porsche designed the first Volkswagen bug as well as tanks, jeeps and even part of the V1 rocket during World War II. In 1945 Porsche and Piëch were arrested by the French, who threatened to try them as war criminals; Ferdinand (Ferry) Porsche Jr. used the fees he earned by designing a new Grand Prix race car for a wealthy Italian industrialist to bail his father and Piëch out of prison in Dijon, France, in 1947.

Ferry believed that race cars and sports cars shouldn’t be all that different. In 1948, with his father ailing, the then-38-year-old produced the 356, an elegant roadster that he successfully promoted as fast enough for the racetrack but tame enough for city streets. To add snob appeal Ferry paid some German aristocrats to race the 356, which scored its first victory in its car class at Le Mans in 1951.

The 356 was followed in 1964 by the 911, a rear-engine sports car capable of a top speed of 205 kilometers an hour, which quickly became renowned for its handling and engineering. By 1986 Porsche was selling 50,000 sports cars a year, nearly half of them in the U.S.

Five years later, however, sales had plummeted to just 26,486 vehicles, and the company was barely profitable. Although the cars were as good as ever, they were competing against Japanese rivals like Nissan’s 300ZX Turbo (introduced in 1989), which offered almost as much performance as a Porsche at a much lower sticker price. The reaction of Ferry Porsche, his sister Louise Piëch and then-CEO Arno Bohn was disastrous. They tried to bolster falling revenues by raising prices -- in the midst of a recession. Like his father, Ferry was passionate about auto engineering, once famously proclaiming that at his company “quality would never be sacrificed for price.” But as revenues continued to plunge, Ferry finally decided that he needed to bring a cost specialist on board and asked Wiedeking to take over production and material management in 1991.

Wiedeking, a native of Ahlen in North RhineWestphalia, graduated from Aachen University of Technology in 1983 with a Ph.D. in mechanical engineering. A ruthless seeker of efficiency, he also had a touch of the entrepreneur, having financed his university studies by starting a small real estate brokerage business. After graduation he worked for Porsche for five years as assistant to the head of production and materials management but left when he was offered the chance to turn around a small, faltering auto-parts supplier, Glyco Metalwerke in Wiesbaden. As chief executive he put Glyco back in the black by adopting both just-in-time and just-in-sequence inventory, as well as by outsourcing.

When he returned to Porsche, Wiedeking quickly deployed similar money-saving tools. As a result, in 1992 Porsche rolled out its first sports car in three years priced under $54,000. With the company nevertheless poised to post a loss, Ferry Porsche and his relatives took a chance and promoted the ambitious young cost-cutter to CEO.

In his first year Wiedeking laid off nearly one quarter of the workforce, or 1,850 people, while at the same time winning the grudging trust of the powerful IG Metall industrial workers’ union by axing proportionally more managers (38 percent) than assembly line employees. He also brought in a tough Japanese consulting firm, Shingijutsu Co., whose founders had pioneered “lean manufacturing” at Toyota Motor Corp. in the 1960s. Soon Porsche was producing all of its models on a single assembly line, with one set of robotic tools. Relations with suppliers were renegotiated so that parts for different cars arrived at the factory two hours before they were needed and arranged in the sequence in which they would be used, instead of piling up for weeks in the company warehouse.

Wiedeking also narrowed down the product line from three to two models. He kept the 911 but in 1996 replaced two relatively costly sports cars with the Boxster, a roadster that used many of the same nonmechanical components as the 911. Selling for less than $50,000, the Boxster proved to be immensely popular -- and efficiently produced. Although all Porsche engines are still put together in Zuffenhausen, the Stuttgart suburb where Porsche is headquartered, Wiedeking outsources 90 percent of Boxster assembly to Valmet Automotive, an independent Finnish contractor that also works for Saab. That meant Porsche would not have to hire a lot of new workers as Boxster sales rose. “It was an ingenious way to avoid being stuck with unnecessary fixed costs if sales turned down,” says CSFB analyst Hendrikse.

It now takes approximately 35 hours to assemble a Porsche sports car, down from about 79 hours in 1990. Analysts estimate that the average cost to build one has been at least halved since 1990, to about E20,000. Moreover, Wiedeking insists that the moves have in no way affected the cars’ quality or cachet. With a few reservations, experts tend to agree. “For real aficionados the cars have lost some of their raw charisma in the Wiedeking era,” says Stephen Winter, who runs Jaz Motorsport, a Porsche dealership in London. “But the engineering and technology of the car are better.”

Porsche cars sell for between E42,108, the price of a low-end Boxster, and E180,650, the price of a high-end 911 GT 2. “Rich people tend to stay rich, so the luxury car segment tends be more resilient in times of economic downturn,” says Union Investments’ Hellbach. That may be one reason Porsche’s sales were up by 9.4 percent in its fiscal year ended August 2002, before dipping in December. Operating profits rose 40 percent, to E830 million.

The results took analysts by surprise, largely because of the limited guidance the company provides (its half-year announcement said only that pretax profits were expected to be at least equal to the previous year’s figure of E592.4 million). Instead, the pretax profit figure, announced in October, was more than 25 percent better than consensus forecasts, according to data firm I/B/E/S. That led to a wave of earnings revisions for fiscal 2003, which helped support the stock price in a difficult market.

But the Cayenne launch raises the risk that even superprudent earnings estimates could be too high. Its production logistics are complex. Glitches and potential cost surges are always a danger with a new car model, and Wiedeking has made this launch even riskier than most. In a joint venture with Volkswagen, he has set up a brand-new, state-of-the-art assembly plant in Leipzig. Volkswagen is supplying the Cayenne’s chassis and body, while Porsche’s Zuffenhausen plant manufactures the engine. An army of other companies will supply everything from seats to mirrors. “You’ve got a whole new plant, a new workforce and new relationships with suppliers, which only increases the risk that something will go wrong,” says analyst Pieper. “I’d say the risk of Porsche’s falling short of analyst targets this year, given the standard information vacuum, is about 50 percent.”

But while Wiedeking admits that his production plans for the Cayenne are far from foolproof, he defends his approach to investor guidance. And he believes that Porsche’s management structure should reassure shareholders. Four members of the controlling families sit on the supervisory board, along with two independent members and six employee representatives. “The family shareholders on the board know that you are responsible for their money,” says Wiedeking. “I can tell you, the discussions in our supervisory board meetings are much tougher than those that take place in [purely] public companies.”

Predictably for a man who seems to think of the equity market as a necessary annoyance, during his ten years as CEO, Wiedeking has never used stock options as a management incentive. He pays bonuses -- generous ones, by German standards -- but they are tied to annual profit goals, not to Porsche’s share price. Investors who are curious about those benchmarks shouldn’t bother asking. They’re confidential.


An interview with Wedelin Wiedeking: ‘Who looks the fool now?’

Ebullient after announcing record sales and profits at Porsche’s annual results press conference in December, CEO Wedelin Wiedeking talked to Institutional Investor Staff Writer David Lanchner at Stuttgart’s Intercontinental Hotel. Exhausted after the meeting, Wiedeking was nevertheless as enthusiastic as ever when it came to defending his maverick approach to investor guidance. The recent scandals at Enron Corp. and WorldCom seemed to give him a sense of vindication bordering on glee.

Institutional Investor: In 2001 Porsche was booted off Germany’s MDAX index. Has that hurt your company?

Wiedeking: Certainly not. We believe doing quarterly reports, as Deutsche Börse demands, and trying to meet the expectations of analysts does not help the business. Porsche must be focused on the long term. An investment decided on today won’t pay off for three and a half to four years. Moreover, Porsche outperformed the MDAX last year. So who looks the fool now? Deutsche Börse or us?

You decided against a New York Stock Exchange quotation because of the Sarbanes-Oxley Act, which makes CEOs liable for the veracity of their accounts. Wouldn’t a Big Board listing have helped your stock price? After all, nearly half of your sales are in the U.S.

It would have been nice to give individuals in the U.S. an easier means to buy our shares. But even today we have a lot of U.S. institutional investors among our shareholders. You know, the world is so small, at least if you are an institutional investor, whether you buy your shares in Stuttgart, Frankfurt or New York, it does not really matter. Quite apart from our objections to Sarbanes-Oxley, listing in New York would divide the liquidity between Germany and the U.S., which would actually increase the volatility of our shares.

Why is Porsche so keen to remain independent and family-controlled?

In non-family-controlled companies the board members are often not very aggressive. It is not their money at risk. If we want to make an investment, the family members on our board ask exactly why it makes sense.

You don’t believe that lax corporate governance is behind the crisis of confidence in global stock markets. So who’s to blame?

The bankers and brokers who pushed for a more Anglo-Saxon-style corporate system focused on quick growth and short-term gains. They were interested in generating stock trading commissions and little else. In addition to the wrongheaded push to force companies to report quarterly, they were behind the craze for New Economy stocks. That was the biggest mistake they made, in my point of view. The excesses of the New Economy have nearly destroyed belief in the shareholder system. No political party, green or red, could have ever destroyed as much money as the bankers and brokers did who pushed the New Economy.

Many European companies have started awarding stock options as part of executive compensation. What do you have against them?

The manager who wants to generate money out of stock options can increase the stock price without any work. He can do it just by talking about what should happen. WorldCom and Enron disseminated information designed to boost stock options in the short term, and all it did was hurt shareholders. Companies should provide real performance, not a worthless flow of information.