Sunday, April 16, 2006

Sunday Porsche Blogging: Old News, Porsche Buys 20% of VW

Porsche, a publicly traded German company recently bought 20% of Volkswagen Group in what some thought a surprise. Many wrote how the purchase helped to ensure further chassis work and R&D cooperation. The purchase may also the influence the statist ideas of the Lower Saxony government, a sizable shareholder. There was also the threat of Stuttgart neighbor Mercedes buying into VW. Additional threats come from opening up the company. The family firm founded by former VW CEO Ferdinand Piech’s mother, Porsche Salzburg, still is the VW importer to Austria and points east. That arrangement would be less likely to continue with outside involvement.

The Mercedes threat is one that is almost genetic, Mercedes fired Porsche founder Ferdinand Porsche in the ‘20s and blamed him for some manufacturing problems that they were experiencing at the time. It is said that the Porsche family has held a grudge ever since. When Porsche was looking for a partner to share the development costs of a new SUV they negotiated with Mercedes until Mercedes suggested that they take a share of Porsche in order to consummate the deal. Porsche Chairman Wendell Weideking walked out of the room. He knew that the Porsche and Piech families would never agree to such an arrangement.

A further Porsche genetic issue is the fact that Volkswagen was formed to build the car that we’ve come to know as the Beetle, a car entirely designed by Ferdinand Porsche and his engineering firm. In negotiations after WWII between Porsche and the Occupying Allies, the Porsche engineering firm received 1 German Deutschmark for every Beetle to be sold world-wide. This was payment for the prewar design work on the Beetle. Porsche has continued to do extensive amounts of design work for VW over the years. Porsche also shared design and manufacturing work with VW on the ill fated 914, a car whose unibody price was increased after a change in VW leadership, leaving Porsche without price control for a large portion of their product. That quickly doomed the wonderful but high priced 914-6; the standard 914 used a Porsche-breathed-on VW engine, as did a succession of the lowest priced Porsches. Porsche did not want to face this again with their very successful Cayenne line. The Cayenne shares its unibody with the VW Touareg. There were such rumblings last year concerning the VW engine used in the base model Cayenne, VW insinuated that it would stop building the engine that Porsche buys from them. For some family members it was 1968 all over again.

Since the early nineties when it looked like Porsche would go bankrupt or be swallowed up by another car company Porsche has radically changed their manufacturing processes. The company eagerly took the best of Japanese manufacturing prowess and added their own Germanic touches. They have also become very adept at exploiting the markets that they sell to. The cost of designing a new car has become so enormous that one failed vehicle could’ve put a small company like Porsche out of business. Since those dark days of the early ‘90s Porsche has successfully launched 3 new 911 Carrera models (1 air-cooled, 2 water-cooled, each having as many as 20+ variations), 2 models each of the Boxster and the Boxster S, the SUV Cayene (currently 4 variations), the new Cayman (a Boxster derivative) and in 2 years they plan to release a 4-door sedan named the Panamera. Add to that a very successful customer racing program. It is too early to judge the success of the Cayman but all of the other vehicles have been financial successes.

The Porsche management has struck me as prudent in the extreme; I doubt that they would take such a big risk if they didn’t believe in the future of VW. As the share prices for many auto companies are taking a beating Porsche likely sees value in VW at these price levels. They have also greatly aided their own business.


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