Porsche Changes Tack

1. Porsche Changes Tack Jonathan Baetens Ann-Sofie Slots May 8th, 2014

2. Contents • Historyof the company • FinancialStatistics • Product Portfolio • Question 1 • Question 2 • Question 3

3. Porsche´sHistory • 1931: Ferdinand Porsche founds ”Dr.Ing.h.cF.Porsche GmbH” in Stuttgart, Deutschland. Focus on motor vehicledevelopment and consulting • Firstassignmentconcernedcreating a ”Volkswagen”, a car for the people. Leadto the creationof Volkswagen Beetle. • WOII: Porsche producesmilitary versions of the beetle and designs heavy tanks. • End ofWOII:Ferdinandwas arrested for warcrimes, Ferry Porsche takes over. • Post war, parts in short supply, the porsche 356 usedmany parts from the Volkswagen Beetle. In the followingyears, many Volkswagen parts werereplaced by Porsche-made parts.

4. 1964: introductionof the Porsche 911 • 1972: Kommanditgesellschaft (limited partnership) toAktiengesellschaft (public limitedcompany) • FirstExecutive board withmembers from outside the Porsche family • Supervisory board, consistingoffamilymembers • Ferdinand PiechleavescoPorsche AG, later becomeschairmanof Volkswagen Group • 1993:Wendelin WiedekingbecomesCEO • publiclytraded, familycontrolledcompany

5. FinancialStatistics

6. Product Portfolio (2005) Three existing and onenewlyproposedproduct: • 911 • Only model produced and assembled entirely in-house • Aging, in needofreplacement • 2001/02:sales peak • 2002/2003: salesfell by15% • Prices high; highestmargin • Not priceelastic • Boxster • 1996: Introduced as low-price sports car • Licensedmanufacturing with Valmet of Finland • Lesssensitive forbusinesscycle • 2000/01: Salespeak • 2003/04: Sales fall tolessthan half thepeak • Competitivemarket: BMW • Panamera • To be completely in-house • Premium class, fourdoor, four-seatscoupsportscar • Price between $125.000 – $175.000 • Premium productmarketsegment • Cayenne • co-manufactured with Volkswagen of Germany • Enteringsportsutilityvehicle (SUV) • Very quick success • Criticism; Comparableto VW Touareg

7. Question 1 ROIC (return on invested capital)= operating margin*velocity What strategic decisions made by Porsche over recent years had given rise to its extremely high return on invested capital? • High operating margins • low competition and premium value pricing • Critics: 40 percent of earnings by hedging • Porsche produces only in two countries, Finland and Germany • Heavily exposed to fluctuations euro/dollar. • High velocity or capital turnover ratio • licensing and outsourcing (“Using other people´s money”) • Boxster: manufactured by Valmet of Finland, which owns own factory and tools. • Cayenne: co-manufactured with Volkswagen. • Very big liquidity • Recent years: invested capital rises faster than sales. • Porsche did not add fixed assets to its invested capital basis, but cash (retained profits and debt issuances). • Policy of minimal fixed-asset capital base.

8. Question 2 Porsche´scontradictions: Vesi wondered if her position on Porsche might have to distinguish between the company’s ability to generate results for stockholders versus its willingness to do so. What do you think?

9. Question 2 • Management needs to share the same motivations, rewards, and risks as stockholders do, to overcome problems like moral hazard or conflicts of interests (agency theory) • Porsche tries to achieve family objectives. These objectives, however, are strongly aligned with shareholders goals. (see question 3) • Porsche rewards management on financial and operational results rather than market valuation (share price) • Porsche has seemingly focused on executing the business with the highest of regard for the company’s long-term performance and profitability (much like a family owned business)

10. Question 2 • Big question: The use of 3 billion euros to purchase a growing position in VW was motivated by business needs or due to nepotism?

11. Question 3 Is pursuing the interests of Porsche’s controlling families different from maximizing the returns to its public share owners? Conclusion: Focus on growth is different, the managers and the owners of the company have different interests. However, as the Porsch-Piech family owns 100% of the voting shares (ordinary shares), the family´s interests are followed.

12. Thankyou for your attention Questions?