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April 09, 2016 01:00 AM

Porsche will keep its 15% margin target despite high EV investments

Christiaan Hetzner
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    Porsche is facing huge investment costs in greener models, including a production version of the electric Mission E concept, shown, due in 2020.

    STUTTGART -- Porsche will keep its 15% profit margin target as part of its new 10-year business plan despite facing huge investment challenges in areas such as plug-in hybrids and full electric cars.

    "The target is a sacred cow here at Porsche. We won’t give it up," Porsche's finance chief, Lutz Meschke, told Automotive News Europe.

    Meschke said the brand needs to make "enormous" investments in the near-term to mid-term, specifically to meet increasingly strict future CO2 emissions targets.

    Porsche's planned roll-out of fuel-saving plug-in hybrid technology across its model range, including the 911 sports car, translates to added costs of 10,000 euros per car over a conventional combustion version, Meschke estimates. Even Porsche’s wealthy customers are not willing to pay such an increase. The net effect is a margin dilution every time the brand sells a plug-in hybrid.

    Additionally Porsche is investing about 1 billion euros in its Stuttgart and Weissach sites in Germany to build its upcoming Mission E electric car, excluding the car's development costs. A further 300 million euros has been earmarked for IT spending for this year alone in order to ensure the company is fit for the digital age.

    Porsche was the auto industry's most profitable company last year. The company reported a 16 percent operating margin before tax with sales revenue up 25 percent to 21.5 billion euros, an operating profit of 3.4 billion euros, also up 25 percent, and vehicle sales up 19 percent to just over 225,000. Its nearest industry rival in profitability, Ferrari, reported a 15.5 percent margin for 2015.

    Saving VW

    Porsche is expected to unveil its latest business plan later this year as part of parent Volkswagen Group's "Strategy 2025" program.

    Porsche transferred 1.2 billion euros of its profits to VW Group last year, more than Audi's 1.1 billion euros. VW needs both brands to remain highly profitable to cover the costs of its diesel-emissions scandal that investment analysts Evercore ISI earlier this month estimated could reach 30 billion euros.

    However Porsche's transfers of cash to VW are a source of concern for investors because they increase Porsche’s cost of borrowing. When it came time to refinance a bond that matured in February, for example, Meschke said Porsche had to pay higher interest rates on a promissory note than BMW because it is a fully-owned subsidiary of Volkswagen. While he said he was satisfied that his team managed to reduce this handicap as much as possible, he declined to quantify what Porsche is paying so it could borrow 1.1 billion euros earlier this month.

    Porsche is also dependent on VW to make good on a pledge that its constant profit transfers do not drain Porsche too much. For 2015, VW Group wired back about 700 million euros in fresh funds, just enough to ensure Porsche’s proportion of equity to overall assets – a key solvency ratio – didn’t slip below last year’s level of 37 percent.

    "We have a gentleman's agreement that Volkswagen returns enough capital to ensure our balance sheet doesn’t weaken," Meschke said. "But we do have to get their approval every year."

    AUTOMOTIVE NEWS EUROPE E-MAGAZINE

    This story is from the current issue of the Automotive News Europe monthly e-magazine, which is also available to read on our iPhone and iPad apps.You can download the new issue as well as past issues by clicking here.

    Photo

    Lutz Meschke: The 15 percent profit margin is a "sacred cow here at Porsche. We won't give it up."

    Efficiency measures

    Speaking on the sidelines of Porsche's 2015 earnings conference on March 11, Meschke said the 15 percent margin was a target threshold, so he couldn't rule out that the margin might dip slightly lower depending on future industry developments. He forecast that the brand's finances, while not improving, will remain solid. Meschke expects free cash flow in 2016 will remain stable at last year’s high level despite the upcoming investments, while its operating margin should hit its 15 percent target.

    One key reason why Porsche believes it can maintain this level is its efforts to fulfill strict efficiency targets. Porsche's manufacturing operations must deliver an annual productivity gain of 6 percent, for example, while the goal is 3 percent in indirect areas of the business such as administration, Meschke said.

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