Sunday, June 26, 2005

The goal of business is not just to create a customer. It is to create an addict.

The World's Best Car Company

Jerry Flint
865 words
4 July 2005
Volume 176 Issue 1
(c) 2005 Forbes Inc.

Whats's the best car, the one you want if you can have only one? Related questions: What's the best car company in the world? The best auto executive? The runner-up in this competition might be Toyota, with its super-reliability and a great profit machine. BMW? It's the ultimate driving experience. Honda is more fun than Toyota. Nissan is great because it's a great comeback story. Chrysler is a dark horse. All five are very profitable.

But my answer is Porsche. Are there any of you out there who wouldn't want to own a Porsche or Porsche stock? Over ten years Porsche's stock is up 1,700%, which comes to 35% annualized if you include dividends. No big auto company comes close to that.

No, Porsche is not small. Any company making a billion euros a year counts for me. Porsche Group's pretax profit in its last fiscal year (ended July 31, 2004) was the equivalent (at today's exchange rate) of $1.3 billion. That came to 17% of revenues, the best profit margin in the auto world.

For the six months through Jan. 31 pretax profit at Porsche was $272 million, up 7%, on revenue of $3.6 billion, up 3.9%. Porsche predicts a record year in unit sales for fiscal2005, at least 80,000. Toyota profit in the latest quarter was down 17%.

Nobody's perfect. Porsches are so expensive that the mere mention of the brand conjures up an image of an arrogant owner, probably someone on Wall Street. (Q: What's the difference between a porcupine and a Porsche? A: A porcupine has the pricks on the outside.) Porsche ranks 32nd on the new J.D. Power Initial Quality Study, ahead of only VW, Land Rover, Mazda and Suzuki (note that foreign nameplates dominate the bottom of the list).

But Porsche owners love their cars, and love is deaf to a few squeaks. I recall a review of the Carrera GT in AutoWeek, which read: "I am stunned by the realization that it is merely the greatest car ever made. Earlier I had assumed it was the single greatest item in the history of the known and knowable universe." The Carrera price was $449,000 as tested: "It's the best bang for the buck ever made. It just takes more bucks. Go buy one." That's love.

Porsche ignores rules. No globalism. This is a German company building German Porsches. It doesn't pay homage to anyone. The company even got kicked out of a German exchange index because it doesn't want to report quarterly.

The strategy revolves around the famous 911 and variations on the theme: 911 Carrera, 911 Carrera S, 911 Turbo S coupe, 911 Turbo S cab. But when its customers go someplace else, Porsche is willing to take the risk to follow. The Cayenne SUV made the point. It may be an SUV, but it's still a Porsche, 450hp for the Turbo (and $90,200 list).

In the U.S. Porsche sells four 911 models running from list prices of $69,300 to $141,200; two Boxsters from $43,800; three Carreras from $69,300 and the GT at $440,000; and three Cayennes running from $42,200 to $90,200. Coming: the Cayman, which starts with a Boxster cabriolet and adds a roof and power. Another vehicle, maybe even a four-door sports sedan, is under study. Expect howls of indignation from Porsche traditionalists, but believe me, if it comes, it will be something wicked.

The history of the company is instructive. Ferdinand Porsche, designer of the VW Beetle, and son Ferry started the company in 1948, and it is still controlled by the descendants. Porsche nearly died after the 1986 boom year, when 54,000 were built. Business collapsed to 14,000 in 1993 as the muscular deutsche mark crippled U.S. sales.

In those desperate days Porsche hired a string-bean engineer as chief executive, 38-year-old Wendelin Wiedeking. He had managed the paint-and-body shop at Porsche and gone on to head a German auto parts maker. I think he's the best auto executive in the world.

Wiedeking, now 52, hired Japanese experts and took their advice. He rebuilt the entire Porsche production system, slashing costs and raising quality. He got the unions and suppliers to join in. He was willing to take risks and expand the line with new products, and he is still taking risks.

Now for the point of all this: When Porsche hit bottom, the directors hired someone who knew something about building a better company, not just juggling a balance sheet. He understood change had to come from inside, not by squeezing down the prices of partsmakers. The key people are product engineers who want to build the best product in the world, not just M.B.A.s. It's not easy to remake an auto company, but Wiedeking did it.

Jerry Flint, a former Forbes Senior Editor, has covered the automobile industry since 1958. Visit his homepage at .


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