By William Boston
STUTTGART, Germany-- Porsche AG has found a new weapon, beside
its mojo as an iconic sports-car brand, to help it race ahead of
rivals in global markets: the swooning euro.
When Lutz Meschke, Porsche's chief finance officer, issued
guidance for the company's earnings earlier this year, he was
cautious about whether the Stuttgart-based car maker would be able
to deliver. With slowing growth in China, economic turmoil in
emerging markets and a consumer shift toward cheaper versions of
expensive cars, he said Porsche would have to work "damn hard" to
achieve a pretax profit margin of 15%.
Luckily for Porsche, foreign exchange markets did some of the
heavy lifting for the company. "We will achieve our strategic
target," Mr. Meschke told The Wall Street Journal in an
interview.
Because Porsche only manufactures in Europe, the weak euro makes
its cars cheaper in many foreign markets. Mr. Meschke has used
flexible hedging contracts to tweak earnings this year and the
strategy has paid off. Porsche hedges against about 20
currencies.
But the portion of revenue that isn't hedged is fully exposed to
the euro and is translating into higher profits from the U.S. and
China. "It's a short-term effect," said Mr. Meschke. "But we're
talking about significant three-digit million-euro sums that are
flowing in through foreign exchange--through the weak euro in
relation to the dollar and Chinese Renminbi."
Porsche's foreign exchange strategy has also helped the company
weather Russia's economic implosion. At the beginning of 2014, the
ruble was trading at about 45 to the euro and weakened to 72 by the
end of the year. The impact on foreign-car makers there was that as
the ruble loses value, car makers must raise prices to make up for
the foreign-exchange loss. In 2014, Porsche hedged at an exchange
rate of "well below 60", which allowed the company to keep price
increases to about 10%, Mr. Meschke said, much less than the
inflation caused by the collapse of the ruble.
Though very profitable, however, Porsche's margins have come
under pressure, falling from 19% just a few years ago. In 2014, the
company's operating margin was 15.8%, down from 18% the year
before.
The main reason for the decline is what Mr. Meschke calls
"downsizing," namely the reduction of profit per car after Porsche
introduced sport-utility vehicles into its lineup, and customer
preference in some markets, especially China, for smaller engines
and fewer features to lower the price of a car.
The introduction of the Cayenne SUV several years ago and the
Macan last year has transformed Porsche. The Cayenne and the Macan
accounted for 58% of the company's total sales of 189,949 new cars
last year. So far this year, Porsche's new car sales are up 30% to
113,984 vehicles worldwide, driven by strong sales of the 911
sports car and the company's Cayenne and Macan sport-utility
vehicles.
The Macan, a compact SUV with much lower margins than Porsche's
top flight 911, Boxter, and Panamera sports cars, was launched in
global car markets beginning in early summer last year. This year
is the first full year of Macan sales and as a result the share of
SUVs will grow significantly and water down earnings. "We have a
clear downsizing because of the Macan," Mr. Meschke said.
He dismissed analyst suggestions that Porsche has become an SUV
company that also makes sports cars. "We have to go down this path
because otherwise, we wouldn't even be present in many growth
markets and would not be able to develop our brand," he said. "But
it is really important to keep a clear focus on the sports
car."
Some customers are also balking at the high price tag of a
luxury vehicle. As a result, Porsche is offering tuned-down
versions of its cars. The Macan was offered in China with a
four-cylinder engine, for example, just to make the car cheaper for
price-sensitive Chinese buyers.
"There is a clear trend in China that affects all premium
manufacturers, " said Meschke. "They want the brand, but they want
to pay as little as possible. And as a result, average earnings
(per car) are falling in China."
Porsche is worried about China and is looking for alternative
markets in Asia. Recently, the company pulled forward plans to
expand dealerships in South Korea and Taiwan and is studying
further expansion in Southeast Asia, Mr. Meschke said. "If you just
rely on China for growth it's going to go wrong."
Mr. Meschke is also responsible for the company's information
technology and realizes Porsche has to develop new digital
businesses. Mostly these will focus on services close to the
behavior of car drivers, such as a plan to develop first-class
parking for Porsche drivers with a digital payment process. Porsche
is also developing premium customer services together with Bentley,
another of parent Volkswagen group's brands.
Recently, he has begun accelerating development of digital
businesses and said he expects the company to make acquisitions of
technology startups in the future to acquire digital expertise or
technology.
At the Frankfurt Motor Show in September, Porsche will unveil an
exclusive arrangement with Apple Inc. to launch an updated version
of its 911 sports car, with new engines and a new communication
system. The new 911 will come with Apple's CarPlay
preinstalled.
CarPlay is an in-car information and entertainment system that
allows drivers to use their favorite iPhone apps such as iTunes and
iPhone contacts on their car's dashboard computer. "We've realized
that 80% of Porsche customers are Apple iPhone users," said Mr.
Meschke, adding that Porsche currently has no plans to install
Google's rival system Android Auto.
Write to William Boston at william.boston@wsj.com
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