[JR_NYC]

In 10 years, will Pelican have a Porsche Minivan Technical Forum? Maybe they'll drop a turbocharged V-10 in a Vanagon and put a Carrera nose on it.


Porsche's Road To Growth Has Real Hazards

By Stephen Power
1,048 words
8 December 2005
The Wall Street Journal
B1
English
(Copyright (c) 2005, Dow Jones & Company, Inc.)

Stuttgart, Germany -- PORSCHE IS no longer content just being a little car company that makes big profits.

For years, Porsche AG made nothing but powerful, high-priced sports cars, a simple formula that made the company one of the world's premier marketers of luxury goods and its brand name one of the most desired in any industry.

Now, three years after branching out into sport-utility vehicles, the Stuttgart-based company is setting its sights on grander ambitions, with plans to produce a whole range of sporty vehicles, including a forthcoming four-door coupe. Yet this new direction presents a serious challenge: Can Porsche maintain its cachet, and its hefty profits, as it reaches out to a broader class of customers?

European investors expressed doubt yesterday. At a news conference, the company said vehicle sales have risen 6.7% in the first four months of the fiscal year ending July 31, fueled by strong demand for revamped versions of its 911 and Boxster models. But Chief Executive Officer Wendelin Wiedeking also acknowledged Porsche will incur "enormous development costs" for the new four-door coupe and another key piece of future technology -- a hybrid engine for Porsche's Cayenne sport-utility vehicle. That prompted investors to dump Porsche shares, which yesterday closed in Frankfurt down 4.65%.

In an interview with The Wall Street Journal, Mr. Wiedeking said Porsche needs to look beyond sports cars to grow. "It's not enough to cook in your own customer base," he said yesterday.

The company's expansion began last month when it started selling a new two-door sports car called the Cayman S. With a starting price of $59,800, the car is designed to appeal to "relatively young, sports-minded" customers, Mr. Wiedeking says. It also plugs a pricing gap between the $45,000 Boxster and Porsche's franchise product, the 911, which starts at $81,400.

Analysts speculate that Porsche could add a compact SUV. Mr. Wiedeking also declined to rule out entering new segments that might strike Porsche purists as unthinkable. Asked about the possibility of developing a minivan -- something DaimlerChrysler AG's Mercedes now offers -- Mr. Wiedeking said that "today it doesn't make any sense" but added that "you never say never in our business."

The four-door coupe, called the Panamera, is due in 2009 and will compete with rivals who are more established in the segment and already produce some of the most desirable cars on the road. They include BMW AG's BMW 6 Series, the Mercedes-Benz CLS and the Maserati Quattroporte -- cars that range in price from $70,000 to $120,000. Their buyers are typically middle-aged high achievers such as entrepreneurs, doctors and artists whose views have been shaped by the 1960s -- a group sometimes known in the auto industry as "upper liberals."

Despite the stiff competition in this segment, Mr. Wiedeking said Porsche's brand is strong enough to win customers. Potential buyers of a Porsche four-door "believe in the brand," he said, noting that Porsche successfully moved from sports cars to SUVs with the launch of the Cayenne in 2002. Luxury-car buyers "know that we can build sports cars, and now they know we can develop an excellent sport-utility vehicle, and they trust [we can] build an excellent sports coupe," Mr. Wiedeking said.

The launch of the Cayenne, however, revealed some challenges that Porsche will face again in developing the Panamera. "Every screw was new on the Cayenne," Mr. Wiedeking said. "We went into a completely new segment, having no learning curve before this."

In May, the J.D. Power Initial Quality Study, a widely watched industry survey of consumer sentiment, placed Porsche well below average -- a surprising outcome for Porsche that officials at J.D. Power say was heavily influenced by complaints about the Cayenne.

Industry analysts say addressing such complaints quickly is critical for Porsche's expansion into new segments. "Porsche must always be in control of quality much more than everyone else," said Christoph Sturmer, an analyst with the Frankfurt office of Global Insight, an industry-forecasting firm. "They position their products as the most sporty, the fastest, and the most aggressive. If they lose control of quality, everyone's going to yell at them and say, `Why am I paying so much for this car?' "

Mr. Wiedeking, echoing J.D. Power officials, says many customers' complaints about the Cayenne have centered on the vehicle's almost silent electronic door locks.

"The customers' problem was they weren't sure -- is it closed or not?" Mr. Wiedeking said. He said the company has begun to address the problem by instructing Porsche sales representatives to explain to customers how the door locks work, and said the company might tweak the locks in the future to generate a sharp noise.

Although Cayenne sales have been strong so far, they have begun falling as gasoline prices have risen. In the first four months of Porsche's fiscal year, Cayenne sales fell nearly 17%.

In September, Mr. Wiedeking shocked the automotive world by announcing Porsche's intention to boost its stake in Volkswagen AG to approximately 20%, from less than 5%, in a friendly bid that Porsche officials said was intended to prevent a possible hostile takeover of Volkswagen, which provides the body structure for Porsche's Cayenne SUV.

Industry analysts and some Porsche investors have attacked the pending deal as running counter to Porsche's tradition of hoarding cash, but Mr. Wiedeking -- known for unusually colorful rhetoric among corporate CEOs -- struck back yesterday, calling them "self-appointed guardians of corporate governance" and saying the deal will benefit Porsche by allowing it to pool purchasing volumes with Volkswagen, which sells around five million cars annually, compared with fewer than 100,000 at Porsche.

Mr. Wiedeking said Porsche could also cut production costs through jointly developing more new cars with Volkswagen, though he declined to give specific examples of potential new projects.

In the process, Mr. Wiedeking said, the deal will help the company remain independent and avoid the fate of other European luxury brands, like England's Jaguar and Sweden's Saab, now units of Ford Motor Co. and General Motors Corp., respectively.