Why Porsche would be mad to bid for Volkswagen
Matthew Lynn says Porsche is supremely successful in its own niche, but that does not qualify it to run Europe’s largest mass-market car maker There are only three hard and fast rules in the motor industry, if you want to make money. Never build an orange car; steer clear of Formula 1; and never bet against Porsche.
For the last decade the Stuttgart-based manufacturer of high-performance sports cars has existed in its own parallel universe. While the rest of the European industry battles with intransigent unions, soaring costs and vicious global competition, Porsche just taps the accelerator and flashes away into the distance. But now the moment of hubris seems to have arrived. At its apogee, Porsche seems intent upon taking control of Europe’s largest car manufacturer, the mighty Volkswagen. It clearly believes it can save VW, but it is almost certainly wrong. For German luxurycar makers, moving into the mass market has invariably proved disastrous. Daimler made a hash of buying Chrysler; if it could give the ailing US company away, it would. BMW, usually the most dependable of companies, made an even worse mess of Rover. It’s hard to see Porsche doing any better with Volkswagen.
Still, it looks determined to try. It has already bought 27 per cent of VW and has said it may soon take that up to a level at which it would have to launch a full bid. Announcing its latest results last month, Porsche said it planned to raise an extra eight billion euros to fund acquisitions: money clearly earmarked for VW. And the complex series of trusts through which the Porsche family controls the business has just been reshuffled, a move which, as the investment bank UBS put it, would ‘allow the family to move quickly and unanimously’ if it wanted to make a bid.
Maybe it doesn’t even need to do so. Right now Volkswagen looks about as independent as, say, BSkyB is from Rupert Murdoch. Porsche is already moving in and measuring up. In November, VW chairman Ferdinand Piëch ousted chief executive Bernd Pischetsrieder, who was not seen as sufficiently compliant with Porsche’s plans. Piëch is, as it happens, a Porsche himself: his uncle Ferry Porsche founded the sports car company. The German press thinks Piëch is already lining up Porsche chief executive Wendelin Wiedeking as his successor at VW.
‘I don’t think they’re interested in taking control of Volkswagen itself. They’re interested in locking in the relationship between the two companies,’ said Michael WynnWilliams, an analyst at automotive consulting firm Trend Tracker. ‘They would probably only take on the whole thing if there was another bidder.’ But in truth, whether Porsche launches a full bid may not turn out to matter. Porsche’s managers are already calling the shots. The interesting questions are: why do they want it? And can the combination possibly be made to work?
It’s not hard to see why Porsche is in expansionary mood. A decade that has been kind to the world’s mega-rich has, unsurprisingly, been kind to Porsche too. It has brilliantly exploited its niche in the sports-car market, as well as launching the Cayenne, an expensive SUV for loyal customers who, having acquired a couple of kids and a dog, can no longer squeeze them into the back of a 911. The company has racked up profits while most of the industry has seen them vanish. If you bought a Porsche share in November 1996, it would have cost the equivalent of 50 euros. Now it would be worth 900 euros. For comparison, a share in Ford would have cost you $11 in 1996, and now sells for $8.50.
The same decade has been less kind to VW. The company that once epitomised German postwar success now just as accurately reflects Germany’s postmodern malaise: dated, too expensive, a bit clueless. With the Beetle, VW virtually invented the small, practical car. With the Golf, it invented the hatchback, the most popular innovation in car design of the last 30 years. But after that it ran out of ideas. It became a confused mess of different brands. Apart from keeping ad agencies in business, it is hard to see why it needs Audi, Skoda and Seat competing in the mass market alongside VW itself. Audi has nice designs, but they are basically re-badged VWs. Skoda, the Czech arm of the group, has carved a niche in budget motoring. But as for Seat, the Spanish unit, no one seems to know what the point of it is. Meanwhile the VW brand itself chugs away making decent, reliable cars — but making most of them at Wolfsburg in Germany where labour costs are crippling. Being the highest-cost producer in a fiercely competitive market is not the kind of strategy that gets you into the textbooks at Harvard Business School.
Which explains why, in the last couple of years, VW has been the dog of the European industry. Its shares are stuck at 80 euros, a long way short of the 100 euros they hit in 1998. Worse, for the first time in its history, VW may really be vulnerable to takeover. The European Commission is gunning for the so-called Volkswagen law, which allows the state of Lower Saxony to keep VW immune from takeover through its blocking stake. Blatantly illegal under EU law, this device is not expected to survive. At some point soon VW will be accessible to predators for the first time in its history.
If VW is on the market, there is in some ways no more natural buyer than Porsche. The two companies have an intertwined history. Ferdinand Porsche was the designer of the original Beetle — as well as other memorable vehicles such as the Tiger Tank that made its début on the Eastern Front in 1942. When he started his own company after the war, he used VW parts, and Porsches still have a lot of VW bits in them. The Cayenne, which now accounts for half of Porsche sales, is essentially a souped-up VW Touareg. Indeed, one of the reasons Porsche is so profitable is its ability to piggy-back on Volkswagen.
A Porsche takeover would reunite two of the finest names in German industrial history. The Porsche family’s sentimental interest in bringing that about is understandable. That wouldn’t make it a good business decision, however. There seems to be some fatal gene in the DNA of German upmarket auto manufacturers that compels them towards the mass market. But just because both companies are German doesn’t mean Porsche would do any better with Volkswagen than BMW did with Britishdisease-ridden Rover, for example.
The markets are very different. Luxury buyers care about style and performance. Mass-market buyers are more interested in reliability and price. Europe is awash with capacity and, as the Japanese and Korean manufacturers build plants in Eastern Europe, that problem just gets worse and worse. Most industry watchers had expected at least one of the big manufacturers to go under — probably Fiat — so relieving pressure on the rest. There is no sign of that happening yet, however. Instead, the industry is engaged in grinding price competition. But Porsche’s cheapest model sells for £35,000 and carries, according to some industry estimates, a 30 per cent profit margin, so don’t expect Porsche managers to know very much about beating down costs.
Their theory, perhaps, is that they can make cars with the flair of a Porsche at the cost of a VW. The reality, as Daimler and BMW found out, is likely to be the other way round. They’ll end up making cars with the flair of a VW at the cost of a Porsche. For the last decade, betting against Porsche has been for losers, but if it takes any more bites at Volkswagen, this might be just the moment to put down that wager.
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