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

Contents History of the company Financial Statistics Product Portfolio Question 1 Question 2 Question 3

Porsche´s History 1931: Ferdinand Porsche founds ”Dr.Ing.h.cF.Porsche GmbH” in Stuttgart, Deutschland. Focus on motor vehicle development and consulting First assignment concerned creating a ”Volkswagen”, a car for the people. Lead to the creation of Volkswagen Beetle. WOII: Porsche produces military versions of the beetle and designs heavy tanks. End of WOII:Ferdinand was arrested for war crimes, Ferry Porsche takes over. Post war, parts in short supply, the porsche 356 used many parts from the Volkswagen Beetle. In the following years, many Volkswagen parts were replaced by Porsche-made parts.

1964: introduction of the Porsche 911 1972: Kommanditgesellschaft (limited partnership) to Aktiengesellschaft (public limited company) First Executive board with members from outside the Porsche family Supervisory board, consisting of family members Ferdinand Piech leaves coPorsche AG, later becomes chairman of Volkswagen Group 1993:Wendelin Wiedeking becomes CEO publicly traded, family controlled company

Financial Statistics The operating margin is growing. Record profits for the tenth consecutive year.

Product Portfolio (2005) Three existing and one newly proposed product: 911 Only model produced and assembled entirely in-house Aging, in need of replacement 2001/02:sales peak 2002/2003: sales fell by15% Prices high; highest margin Not price elastic Boxster 1996: Introduced as low-price sports car Licensed manufacturing with Valmet of Finland Less sensitive for business cycle 2000/01: Sales peak 2003/04: Sales fall to less than half the peak Competitive market: BMW Cayenne co-manufactured with Volkswagen of Germany Entering sports utility vehicle (SUV) Very quick success Criticism; Comparable to VW Touareg Panamera To be completely in-house Premium class, four door, four-seats coup sportscar Price between $125.000 – $175.000 Premium product market segment

Question 1 High velocity or capital turnover ratio What strategic decisions made by Porsche over recent years had given rise to its extremely high return on invested capital? ROIC (return on invested capital)= operating margin*velocity 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. High operating margins for all the Porsche product lines compared to other European manufacturers = big revenues per car thanks to low competition (911: almost exclusive ownership of the market, Cayenne at the top end of the market) and premium value pricing (aiming for highest market segment) Very high average revenues per car: Very aggressive currency. Hedging, produces only in two countries, Finland and Germany -> High risk when devaluation euro. When at record low, very easy to do export. Heavily exposed to fluctuations euro/dollar. High velocity or capital turnover ratio thanks to a lot of licensing and outsourcing: The Boxster and Cayenne, two newer product lines, had both been launched with the capital and technology embedded within other companies. (low invested capital) The Porsche Boxster was manufactured by Valmet of Finland under a licensed manufacturing agreement allowed Porsche to effectively use "other people’s money." Valmet owns its own factory and tools, and builds the Boxster for Porsche. This reduces the capital Porsche needs to support its own business significantly. The Porsche Cayenne was co-manufactured with Volkswagen. The Cayenne chassis was assembled on the same production line as the Volkswagen Touareg in Bratislava in the Slovak Republic, again greatly reducing the required capital to support Porsche’s business. Return on invested capital (ROIC) combines operating margins, found on the income statement, with greater capital utilization, which is derived from the balance sheet. Very big liquidity In recent years, invested capital rose faster than sales. Porsche, however, did not add fixed assets to its invested capital basis, but cash (retained profits and debt issuances). They pursue a policy that exists out of a minimal fixed-asset capital base.

Question 2 Porsche´s contradictions: Market Performance 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? Porsche´s contradictions: stakeholder wealth maximization stockholder wealth maximization Corporate Performance Market Performance German Reporting standards International Reporting standards Porsche’s focus is on stakeholder wealth It has followed what is generically referred to as stakeholder wealth maximization over its history, rather than the increasingly common focus on stockholder wealth maximization common in the Anglo-American markets Stakeholder wealth maximization attempts to balance in theory the needs and returns to the multitude of corporate stakeholders – stockholders, creditors, management, employees, suppliers, customers, community – rather than focus solely on stockholders Porsche’s focus may be one of self-interest Porsche has frequently been accused of operating the company for the primary benefit of the Porsche and Piëch families, and management, over all other stakeholder groups Rewards management in the company primarily on the basis of sales, profits, margins, and other financial measures of corporate performance rather than stock or stock options based on market performance Porsche has continued to fight industry standards for reporting and disclosure It has continued to report according to German accounting standards long after most other German companies, publicly traded companies, have moved to international standards It has continued to report only semi-annually, not quarterly, arguing that it does not see its business quarterly, and does not want to add to the short-term thinking common among equity investors in today’s equity markets

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) It should be clear that the company tries to achieve the best family objectives. These objectives, however, are strongly aligned with the shareholders goals. Like already explained in last lecture, big family owners have in average a higher profitability than managerial firms. But on the other hand, the market capitalization valuation is lower. The market asks a price for the fact that the family can strive for its own goalsm can have lower managerial skills and being less transparency. Porsche rewards management on business financial performance – the numbers found on the three major financial statements – and not on the market’s opinion of the company’s value (share price). Porsche focused on own financial and operational results, rather than market valuation This is considered as highly controversial because for the better part of the last 40 years, academics argue that management needs to share the same motivations, rewards, and risks as stockholders do (agency theory) – the share price as core to investor and management returns. But 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), the result of which has been obviously appreciated by the market. For example, they

Question 2 Pro Contra Avoid hostile takeover Big question: The use of 3 billion euros to purchase a growing position in VW was motivated by business needs or due to nepotism? Pro Contra Avoid hostile takeover Conflicts of interest with Piëch, Cronyism Opportunity to expand product category Strategic conflicts: competition, wages policy Officially: planned acquisition to avoid a hostile takeover. They see VW as a very important supplier that they cannot lose. Furthermore, Porsche understood that it could no longer expand into new product categories without significantly larger capital and technical resources. This move can be seen as one to create broader product categories, because they have not the know-how to enter those markets by themselves. Critics: Piech, member of the Piech family that controls Porsch, is former CEO and Chairman of Volkswagen. Conflicts of interest. Cronyism: the situation in which someone important gives jobs to friends rather than to independent people who have the necessary skills and experience. CEO defends himself by saying that German solution was essential to secure VW. Strategic conflicts: between Audi and Porsche and wages policy. It was an investment in a non-performing asset.

Question 3 Family ownership Public ownership Is pursuing the interests of Porsche’s controlling families different from maximizing the returns to its public share owners? Family ownership aligned interest between sustainability and control; and in rapid growth the returns for the family are derived from distributed profits (dividends) salary and compensation financial support (family members often enjoy company - owned assets and expenditures) Public ownership profitable growth in bottom- and top-line of income statement returns for the shareholder are derived from dividends share price appreciation (capital gains) 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.

Thank you for your attention Questions?