Porsche AG - Research Report - Part 1
An in-depth look at Porsche AG's business and legacy
“I couldn't find the sports car of my dreams, so I built it myself”
Porsche AG
This research report is divided into three sections. This is Part 1 of 3. In this segment, we will explore:
Introduction of the company
History
The company
The business model
The sector and industry
1) Introduction of Porsche AG
From the circuit to the public road
1.1 Introduction
Ferdinand Porsche, who founded Porsche, talked about how special the car was. Porsche cars are known for being sporty, comfortable, luxurious, and high-class, and they can be used in a variety of situations. How different is Porsche these days? And is the company more like pure luxury, like Ferrari, or more like high-end cars, like Mercedes and BMW?
This study looks at Porsche AG. This business only has the Porsche car brand and a stake in Bugatti/Rimac. It will be known as "Porsche" from now on.'Porsche SE' refers to a holding company that owns a lot of Volkswagen and Porsche AG. You can read more about this building later.
1.2 The history
The history of Porsche is fascinating and includes both deep valleys and high peaks. We'll start at the beginning. Ferdinand Porsche started his career in the automotive industry at Mercedes-Benz. Here, he mainly worked on the design of cars. He founded Porsche in 1931, without building any cars himself.Initially, the company mainly focused on advising companies in the automotive, aerospace and defense industries. A large part of his work consisted of making designs.
This results in a somewhat surprising assignment.Porsche was commissioned by Adolf Hitler, who, with his party, had founded the Volkswagen brand, to develop and manufacture an affordable, solid car for the German people.. Ferdinand Porsche, together with his son Ferry, created the design, which was often based on previous work at Mercedes-Benz, for the Volkswagen Beetle. The Porsche family was the founder of the Volkswagen brand.
Immediately after the war, Ferdinand Porsche was arrested and imprisoned as a war criminal; In the Volkswagen factories, Jews had to work for years under poor conditions for the production of the VW Beetle. Not much later, his son, Ferry Porsche, decided to make a new start in Austria. The main activity was the refurbishment of agricultural vehicles and tanks. There was relatively little work involved, which led to Ferry's idea to develop a sports car. The car had to be about the same size as the Beetle but a lot sportier, with a better engine and better steering. This is how the first'real' Porsche was born; the Porsche 356.
The initial model was a huge success, leading to the production facilities in Gmünd, Austria, quickly becoming insufficient. Consequently, Porsche returned to Germany. Starting in 1950, the company concentrated on the Le Mans races. They introduced the Porsche 550, the first car designed exclusively for racing. Over the years, Porsche has achieved numerous victories, earning a strong reputation in the Le Mans races. To this day, Porsche has won the most races at Le Mans (see figure below). It's a significant part of Porsche's heritage.
Until 1965, no fewer than 78,000 Porsche 356s were delivered. In 1963, Porsche launched its second model, originally called the Porsche 901. However, this name couldn't be used because Peugeot held the rights to trade names for all car types with three digits, where the middle digit was zero. After many successes on the racing circuits, this model was intended to be more powerful and exclusive than the Porsche 356, giving rise to the Porsche 911.
To this day, the 911 remains the flagship of Porsche. For instance, at the stock exchange, its ticker symbol is P911.DE, and the total number of outstanding shares is 911.000.000. The car's design has barely changed in around 50 years, preserving its iconic status. The 911 continues to generate the highest profit margins for Porsche. Details on how this is achieved can be found in the section on competitive advantage.
Porsche has always had a close relationship with Volkswagen. From 1969 on, Porsche sought to expand its model range but lacked sufficient production lines. Therefore, Volkswagen was enlisted to assist in producing new models, leading to the Porsche 914 and Porsche 924 being manufactured in Volkswagen factories.
Later, the production of the Porsche 944 was outsourced to Audi, a subsidiary of the Volkswagen Group. This offered cost advantages for Porsche since it shared chassis components with Audi models. Such cost-effective strategies are still used today, such as with the Volkswagen Group's SUVs being manufactured in the same factory.
Porsche has been an icon since its first car—a distinctive brand built for car enthusiasts. If Porsche has its way, this will never change. This admirable vision of Ferry Porsche is still evident in the company's presentations.
Here's a brief explanation of Porsche's structure.
After World War II, West Germany considered Volkswagen vital to its industry, so they implemented the 'Volkswagen Law.' This rule stipulated that no one could gain controlling authority over Volkswagen without holding more than 80% of the voting rights. The German government secured a 20.1% stake through the state of Lower Saxony, making such control unattainable.
When the European Union declared this law illegal in 1993, Volkswagen faced significant turbulence. Rumors of hostile takeovers by BMW, Renault, and others caused alarm at Porsche due to its reliance on Volkswagen's production facilities. By 2007, Porsche had accumulated a 30.1% stake in Volkswagen. During this period, Porsche separated itself into Porsche AG and Porsche SE (the holding company). Investments, like those in Volkswagen, were placed in the holding company. In 2009, Porsche SE acquired a majority of Volkswagen shares but incurred so much debt that it had to sell Porsche to Volkswagen. In 2012, the remaining portion of Porsche was also sold to Volkswagen. In this unusual arrangement, Porsche SE owns Volkswagen, but Volkswagen owns Porsche AG.
The image below illustrates the current proportions. Porsche SE still holds 53.3% of Volkswagen's voting rights, but this relationship isn't shown here since the focus is on Porsche AG. The Porsche-Piëch family, which owns Porsche SE, continues to control both Volkswagen and Porsche AG.
H2 - The company
Porsche: a cheap Ferrari or an expensive BMW?
2.1 The revenue model
The car manufacturing market is generally tough. European automakers are undergoing a significant transformation as they gear up to produce electric cars on a large scale and prepare for the future. Meanwhile, new competitors, particularly from Asia, are emerging and focusing exclusively on electric vehicles. While European manufacturers are busy with reorganizations, relocating production facilities, negotiating with unions, and expanding their model ranges, new players like Tesla, Nio, BYD, MG, Xpeng, and Aiways are starting fresh.
To sell enough cars, European automakers like Volkswagen often have to offer electric models at a loss. Margins are already thin in the car industry, and there's a strong possibility that some automakers may collapse in the coming years.
You might be wondering, "Does this also apply to Porsche?" Please hold that thought; I'll try to answer this question in the section on Porsche's competitive advantage. In that section, we'll explore how Porsche generates revenue and what its product mix looks like. The vast majority of Porsche's revenue comes from car sales. Toward the end of that section, I'll explain where the rest of their income is earned. Below is an overview of Porsche's current and upcoming models.
911: Porsche's iconic model, which commands the highest price and offers the greatest margins for Porsche, has been on the market since 1963. The new 911 will be introduced in 2024. Starting price in the Netherlands: €181,400.
718: The 'cheaper' but still impressive alternative to the more expensive 911. This model comes in various versions, such as the Cayman and the convertible Boxster. Starting price in the Netherlands: €108,200.
Panamera: This luxury family car was designed to compete with high-end models from BMW and Mercedes. After the success of its SUVs, Porsche saw an opportunity in this segment and made the right call. Starting price in the Netherlands: €158,700.
Taycan: Porsche's first fully electric car, made its debut on the road in 2019. This vehicle attracted many new customers who were purchasing their first Porsche. Starting price in the Netherlands: €98,600.
Prestige: Details are yet to be released, but this SUV, to be launched in 2024, will surpass the Cayenne in luxury, becoming the most opulent SUV in the brand's lineup. It will be exclusively electric. Starting price in the Netherlands: unknown.
Cayenne: The launch of the Cayenne in 2003 raised eyebrows among car enthusiasts. How could Porsche, a premier sports car brand, introduce an SUV? Porsche has since proven its ability to blend luxury, sportiness, and the ruggedness of an SUV. The Cayenne was Porsche's best-selling car in 2022 and 2023. Starting price in the Netherlands: €158,400.
Macan: The Cayenne's "little brother," originally called the Cajun (a blend of Cayenne and Junior), also gained immense popularity and is now the second-best-selling Porsche model. The new electric Macan will be delivered starting in 2024. Starting price in the Netherlands: €88,900 (electric) & €125,700 (conventional).
When looking at Porsche's production locations, one thing stands out: all models, except for the Cayenne, are produced in Germany. The Cayenne is assembled in Bratislava, Slovakia, alongside similar models from the Volkswagen Group. The fact that nearly every Porsche is made in Germany reflects the quality Porsche strives for. Each Porsche must be flawless and the best of the best.
While the Porsche 911 remains the most iconic and prominent model in the company, the SUVs are the top sellers. In 2023, 90,161 Macans and 92,866 Cayennes were sold, giving SUVs a market share of about 55% in terms of units sold. However, this share is smaller in terms of revenue since the average prices of both SUVs are lower than those of sports cars. The table below clearly shows the distribution of car sales.
Porsche sells its models both in select showrooms and increasingly online. More car companies are adopting this hybrid sales method.
Porsche follows a dynamic pricing strategy, positioning itself in the luxury segment, which naturally entails high prices. However, Porsche also adjusts prices based on demand. Sometimes, Porsche deliberately raises prices to maintain exclusivity. In 2023, many automakers, including premium brands, lowered their prices in China due to economic instability. Porsche chose not to follow this trend and kept its prices unchanged. This approach contrasts with Ferrari, where demand consistently exceeds supply, allowing them to implement significant annual price increases. Porsche struggles more with this, as the brand is not (yet) as exclusive.
By maintaining its prices in China, Porsche saw an almost 18% drop in sales there in 2023. That year, Chinese sales made up 23.3% of total sales. The left graph shows the geographical distribution of revenue, with Europe, including Germany, accounting for 33.3% of total revenue.
Porsche doesn't only make money from selling cars. According to the table below from the annual report, about three-quarters of total revenue comes from new car sales. The "Financial Services" segment, which contributes around 8% of revenue, manages the leasing and insurance division, remaining stable compared to 2022. Porsche also generates income from selling used cars (through trade-ins) and supplying original parts to repair shops.
Furthermore, it's worth noting that Porsche has stakes in three companies, which are not factored into its revenue calculations:
Bugatti Rimac: Owns the Bugatti and Rimac sports brands. Porsche holds a 45% stake in this company.
Rimac Group: Holds a 55% controlling interest in Bugatti Rimac and controls Rimac Technology, which develops high-quality vehicle components and systems, including those supplied to Porsche. Porsche owns a 21% stake in Rimac Group.
Bertrandt: A German consultancy specializing in electrical engineering, logistics, and IT for automotive, aviation, and defense industries. Porsche holds a 29% stake.
Porsche is primarily benefiting from the knowledge sharing and cutting-edge technology of the Rimac Group. Bertrandt, however, has only been moderately profitable, providing Porsche with a mere €3 million in dividends. Yet, there might still be potential for future growth. Like Porsche, Bugatti is a brand with a rich history and heritage. Rimac and Bugatti are increasingly merging their car models, with plans to go public within the next decade. According to the CEO, they aim to establish stable and predictable cash flows first, similar to Ferrari. Overall, this investment could prove to be a hidden gem for Porsche.
2.2 The sector and industry
Porsche positions itself in the luxury car segment. It has a certain degree of pricing power and enjoys high customer loyalty. However, despite selling nearly 310,000 cars in 2022, Porsche isn't quite like Ferrari (which sold 13,221 cars in the same year) or Lamborghini. These brands occupy the ultra-luxury segment that Porsche can't fully compete with. This difference is evident not just in sales figures but also in profit margins, with Ferrari achieving operating margins that are about 10 percentage points higher.
Is Porsche more comparable to BMW or Mercedes? Not quite. BMW's sales volume is roughly eight times larger than Porsche's, and Mercedes sells around seven times as many cars annually. This is also reflected in the profit margins, where Porsche's distinction from these premium brands is clear.
Although BMW, Mercedes, and other premium brands offer very luxurious cars that can cost as much as a Porsche, these vehicles represent only a small portion of their total revenue and profit. Most of their business faces intense competition in the premium segment, where BMW competes with Audi, Jaguar, Mercedes, Lexus, Volvo, and Alfa Romeo. Chinese automakers are also introducing premium models.
The image below from AutoPunditz clearly illustrates how car brands are positioned. Of course, there's some overlap in the models offered. For instance, a "premium" Mercedes AMG could also be classified as part of the luxury segment, while a Mercedes Maybach, with a price starting at €204,000 in the Netherlands, could be seen as a top-tier car.
Overall, it's not always clear-cut which category a car brand falls into. When considering Porsche, it's essential to remember that Porsche's entry-level models compare to the highest-tier cars of the premium brands. Meanwhile, Porsche's top models, like the 911 Targa 4 GTS, are more comparable to standard cars from brands such as McLaren and Bugatti.
Part 2 is coming out tomorrow!