Porsche crisis: from cash cow to problem car
2024-07-23
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As the Volkswagen Group andPorscheofAs the dual CEO, Oliver Blume was tasked with restructuring the Volkswagen Group and increasing profits at the luxury brand Porsche. But things did not go as planned, with Porsche models delayed, the Chinese market facing a recession, and, more importantly, the peace within the Volkswagen Group was being disrupted.
Spending a week with Obermu, 56, is exhausting.
This is the end of June 2024, week 26 on the schedule.on Monday, Blume's trip started in Wolfsburg, where he has been chairman of the Volkswagen Group Management Board since 2022. He then flew to the United States, to Detroit.
Volkswagen Group plans to acquire a stake in Rivian, an American electric car manufacturer, with a planned investment of $5 billion. After all, Blume is also the CEO of Volkswagen Group. Next, the board of directors met and the supervisory board approved it. Blume and Rivian CEO Robert RJ Scaringe signed a cooperation agreement.
WednesdayBefore heading to the southern city of Atlanta, he made a quick visit toFordThey test cars, discuss open projects and then the board of directors of Porsche, where Blume has been CEO since 2015, meets.
Thursday, Blume flew directly from the United States to Porsche's Stuttgart office instead of Volkswagen Group's headquarters in Wolfsburg.
A lot is going on, including in Stuttgart-Zuffenhausen, where Porsche is looking to buy a stake in troubled battery maker Varta to secure a supply of batteries for the 911 hybrid. The final details are yet to be worked out, and Blume certainly can't be absent.
Two deals, four cities, three flights, 15,400 kilometers—and that’s not even counting discussions with the troubled Swedish battery maker Northvolt. It’s an almost superhuman load, and it’s expensive.
In September 2022, Porsche boss Oliver Blume took over as CEO of Volkswagen Group and began to play a dual role. Since then, his world has been divided into working time and free time.
Restructuring the Volkswagen Group is an essential task. He needs to save Germany's most important industrial company, an automotive giant with 684,000 employees and sales of 322 billion euros.
When Blume took over from 65-year-old Herbert Diess, trouble was everywhere - subsidiariesAudiand Volkswagen, its most important market China, and its software subsidiary CARIAD, among others.
Keeping Blume at Porsche is the best option for Volkswagen Group, as it allows Blume to maintain his ties to operations and his power base in the complex corporate machinations while working at the mid-sized automaker with 42,000 employees.
Porsche's annual profit is as high as 1 billion euros, which keeps the performance of its parent company, Volkswagen Group, which owns 75% of its shares, above an acceptable level. In short, Porsche should be a guarantee of personal and professional stability for Blume.
But now, the facts are clear - responsibility and freedom, purgatory and heaven, are all just a dream. The shining Porsche is becoming the next challenge for Blume - after Audi, Volkswagen, China and CARIAD.
Last year, the luxury carmaker achieved a profit of 7.3 billion euros, and the situation in the first half of 2024 was better than initially feared. But in the near future, the outlook for the next two or three years, Porsche is causing internal turmoil, cautiously speaking.
In the first quarter of this year, Porsche's operating profit margin fell to 14.2%, the lowest level since the worst stage of the epidemic in 2020. In the first half of the year, Porsche's sales in China were just under 30,000 vehicles, a third less than a year ago.
TaycanThe residual value of electric cars has collapsed, and so has Porsche's share price - a market value of 110 billion euros has become 68 billion euros. Worse, the brotherly handshake harmony of the board is breaking down amid numerous warning signs. The frequent absence of the Porsche boss has awakened the ambitions of others.
One senior colleague commented: "100% Volkswagen and 100% Porsche, this will never work and will inevitably get out of control." Another executive, who was actually a supporter of Blume, echoed the first one and warned: "Blume must pay attention to Porsche, otherwise it will end badly."
Water can carry a boat, but it can also capsize it.
Tall, unfailingly friendly and able to quickly convince others that he was an ally, Blume owes his rise to Porsche. But as water can carry a boat, it can also capsize it.
Since taking the top job at Porsche in 2015, Blume has driven steady growth in sales and profits. The highlight came in 2022, when Porsche successfully went public and is still valued higher than its parent company, Volkswagen Group.
Blume and his colleagues on the Stuttgart board believed they were in an ideal world. They were promising sporting luxury to a sedated capital market while also hoping to transform Porsche into a pioneer in electric vehicles.
In 2023, Porsche Chief Financial Officer Lutz Meschke announced the "Road to 20" strategy, where "20" represents the strategic sales return target of 20%. In 2022 and 2023, two nearly perfect car years, with almost no discount incentives, Porsche's operating sales return did not even exceed 20%.
But Blume and Meschke have been eyeing profit margins on that dream for a period of time when, like the rest of the industry, they were racing toward the battery-electric car collapse.
They are clearly misled by some wrong assumptions. What they are looking for now is differentiation, especially for Porsche electric models. This differentiation can support the rationality of high prices and also represent the standard of luxury.
Blume and Meschke need to find the right niche in the automotive industry, just as Hermès and Prada did in fashion. In this regard, Italian rivalsFerrariHowever, at Porsche, this strategy has not really worked so far.
The greatest value of luxury goods is their ability to retain their value. Anyone who buys a Ferrari or a Porsche hopes to be able to sell it without incurring a huge loss, or even at a profit in some extreme cases. In the old Porsche world with its roaring internal combustion engine, it can still do this.
Daniel Schwarz, an analyst at investment bank Stifel, calculated that Porsche made 38,000 euros over two years on its 129,000 euro lease on a 911 because of the high resale price.
However, in the new era of electrification, this business model is collapsing. According to the same calculation method, Porsche currently loses 11,000 euros on a Taycan.
Data provided by Experian Automotive shows that the electric sports car Taycan is losing residual value at a similar rate as Volkswagen Group's expected unsuccessful ID.4.
Contrary to what Blume and Meschke assume, the electric car market is not currently favoring luxury cars. Rapid innovation, especially in batteries, has made used cars less attractive. Bernstein analyst Daniel Röska has therefore warned "Porsche luxury car believers" that their money should be better spent.
Behind the Macan and 911 delays
The originally planned electrified model lineup is unlikely to be maintained.
Blume wants 85% of sales to be electric by 2030. He is indeed leading the company towards this goal, although the official ambition is 80%. But as far as Manager Magazin can tell, problems are everywhere.
This transformation may take longer.The Macan, which has been Porsche's best-seller for nearly a decade as a combustion-engine model, was due to be relaunched in late 2021 as an electric-only model.
With this decision, Blume completely reorganized the traditional car company Porsche. Even if the first batch of electric Macans can be delivered as scheduled in September as currently planned, they will still be three years later than originally planned, causing them to lag behind their competitors as soon as they are launched.
Rivals have already surpassed them with more modern models. Endless delays and problems, not least at Volkswagen Group software subsidiary CARIAD, which was supposed to provide the systems for the E-Macan.
As a result, the new E-Macan is much more expensive than expected. On top of that, it was delayed so long that Porsche is currently unable to maintain its previous popularity in Europe. Porsche is currently in a situation where the new electric version is not ready and the previous internal combustion engine version is no longer allowed to be sold.
From July 1, 2024, a new cybersecurity rule will come into effect in Europe, and it will cost up to $300 million to convert these models to meet the new requirements. According to the original plan, the internal combustion engine Macan will run in parallel with the electric Macan for two and a half years until mid-2024, which is enough time for Porsche to adapt to the new Macan and convince the skeptics of electrification. However, this decision did not take into account the room for renewal.
Today, the internal combustion engine is banned in Europe. In the rest of the world, the Macan will also become a "classic car" in 10 years. In China, it may even become extinct in 2025 - China may also introduce new safety regulations. In 2023, Porsche sold 87,000 Macans, a number that is not yet possible this year.
The number of orders for the electric version is "very encouraging", Porsche commented, but the exact figures remain confidential.
Porsche 718The Boxster and Cayman, the entry-level models in the range, are no longer allowed to be sold in Europe, with the exception of a few top models. They have not been upgraded - they should have been electrified long ago, but are still not ready.
In addition to the common software problems, there is another serious problem - the batteries ordered by Porsche 718 come from Sweden and are produced by the new company Northvolt. However, the battery company has encountered major production problems and it is difficult to increase the factory's production capacity.
The electric 718 is not expected to hit the road until the end of 2025, having already been delayed several times. However, there is no alternative to these cells. Blume recently told his subordinates that the batteries must be kept up. In fact, this is not easy. One of the people involved said that the risks of new battery technology from an absolute newcomer are multiplied.
In fact, this applies to all planned new developments - although not all of them are quite so extreme. The launch of the new 911, Porsche's flagship model, has also been partially delayed, with the new hybrid GTS model not expected to hit the market until the fourth quarter.
Varta, a battery supplier from the neighboring town of Ellwangen, also brought battery quality to the required level, but did so too late.
GT3 RS isPorsche 911The upgraded version of the 2017 Porsche 911 is a lucrative one, with a starting price of less than 250,000 euros. The delivery of this car has also been delayed because of problems with the carbon fiber rear wing for some time. Porsche said that there were problems with the turbocharger of the basic model and the sound was not right... These and other problems forced the quality department to conduct repeated tests and verifications.
Normally, 911 problems might be considered normal. That's how vehicles are developed, and everything is under control. But given the frequency of the problems, tensions are growing at Porsche management.
Blume has responded by adjusting his plans to the actual situation. He initially hopes to sell 360,000 vehicles per year, gradually increase to 400,000 vehicles, and continue to grow at a decent rate.
But according to information obtained by Manager Magazine, this wish is over. Optimists talk about "modest growth", while others believe that 250,000-270,000 vehicles per year are more likely and more reasonable.
The goal now is to prevent prices from falling.
Porsche’s bruised self-confidence became apparent a few months ago during the Beijing Auto Show. Chinese competitors were showing off their future models in the halls, e.g.Ideal AutoA model similar in style to the Porsche K1 was shown.
This ideal model is not only cheaper than Porsche's luxury SUV, but it is also already completed.CayenneIt's much bigger, it doesn't even have a name yet, and it won't be available until 2027 at the earliest.
The test drive in Beijing was a sobering experience, as Porsche executives drove their own models and compared them with Chinese competitors, and found that it wasn't just the software that was glaringly different.
According to people who attended the Beijing Auto Show, Blume later seemed frustrated and dissatisfied, especially with the lack of interior and rear seat space. These models, despite using the PPE (Premium Platform Electric) architecture that was delayed for three years, still could not "get far ahead" of Chinese competitors.
Obermu made no secret of his frustration at the scene, commenting later that it was necessary to signal to the team when projects were not going as planned.
Challenges of the Chinese Market
Recently, Blume has been visiting China frequently. The Chinese market is the biggest challenge facing this dual CEO. He has done a lot of things - investing 2.4 billion euros in software company Horizon; acquiringXpeng MotorsPartial shares.
He even pushed Xiaopeng Motors and SAIC Motors to develop new models based on China's electrification architecture for the Germans. All of this is to ensure that the two brands, Volkswagen and Audi, can still maintain a certain degree of competitiveness in the era of electrification.
On July 20, Porsche announced plans to replace its Chinese boss: 57-year-oldAlexander Pollich will take overMichael Kirsch is appointed as President and CEO of Porsche China, responsible for the brand’s business in mainland China, Hong Kong and Macau. The new appointment will take effect from September 1.
Alexander Pollich has worked for Porsche for 23 years and is considered an experienced sales expert. He has served as Chairman of the Executive Board of Porsche since July 2018 and was CEO of Porsche Canada and the UK before taking charge of the German market.
Porsche seems to be left out. China is one of Porsche's most important markets, with sales once accounting for one-third of the global market. Today, this figure is less than 20%, reducing dependence and profits. After all, the Chinese market has a high return rate.
The fact is that Porsche wants to grow in China. In 2015, there were about 90 Porsche dealers in China. By 2021, this number reached 140, and this number will expand further. Anyone who wants to participate in Porsche dealerships must invest a lot of money.
Dealers finance their operations with loans. To refinance, they have to sell as many cars as possible. Rivals are obsessed with undercutting each other on price in the world's largest market, where competition is fiercest.
But Blume and sales chief Detlev von Platen were committed to price stability; they would not allow discounts. What happened next was, as one company executive euphemistically put it, "a certain protest attitude" among consumers. In other words, a boycott.
Porsche's sales fell 24% in the first quarter, and its first-half deliveries were 29,600 vehicles, down 33% year-on-year. As of the end of May, Cayenne and Macan sales fell 38% and 45% respectively. Taycan electric car sales fell 38%, while the highly profitable 911 sports car sales fell 59%.
The dealer wanted compensation, and Zuffenhausen executives even mentioned the word "blackmail." Blume did not want to pay the amount of the dealer's claim.BMWandMercedes BenzMillions of dollars have been paid out in similar cases, and so far, they have not been able to resolve the situation.
The great hopes for the Chinese market seemed to be shattered. Blume changed his plan, which became more realistic. The goal of selling more than 100,000 cars in China seemed to have been forgotten, said people close to Blume.
The goal now is to reach around 60,000 units by 2024. Even after reaching the 60,000 unit target, the old target will not be raised again. At the same time, the dealer network will be reduced accordingly.
The successor to Meschke?All these issues are causing discontent at Porsche headquarters. Of course, this does not prevent Porsche from continuing to make huge profits, which most other car manufacturers would be jealous of. But everything is becoming more and more difficult. Therefore, Blume's decision is no longer without controversy.
For example, Cayenne andPanameraThe model launch had problems and the plug-in hybrid model was not ready on time. Blume and quality manager Christian Friedl did not want to take any risks and preferred to secure the technology once again. For them, quality was more important than short-term returns.
Finance chief Meschke, on the other hand, wants to bring as many cars as possible to the market and slightly improve performance in 2023. At least that's how his close colleagues interpret it, and sales chief Platen is said to support Meschke.
People in Wolfsburg revealed that "there were more than one critical situation" and that Blume had to frequently miss Wolfsburg's board meetings because of his duties at Porsche. "It was a heated dispute," said a board member.
Meschke is Porsche's boss on Tuesdays, Wednesdays and Thursdays, and manages the weekdays when Blume is not around. The CFO is a veteran who has been in his current position for 15 years and remains ambitious.
In Zuffenhausen, a story has been circulating for months that Blume had promised Meschke that if he gave up his position as Porsche chairman, Meschke would take over. Blume clarified that this was not true, and Hans Dieter Pötsch, a representative of the family holding company Porsche SE, also said that there had been no promise.
But the controversy is real. Pan and family patriarch Wolfgang Porsche hired the unruly financier to the Porsche SE board in 2020. They warned Meschke not to do it again.
As if by accident, in early March, Bild published a story about Meschke owning a dual residence near Kitzbühel (which could deduct some of his taxes). From that point on, there was turmoil within Porsche.
The situation at the top of Porsche remains in a strange state of limbo. Many in the company are amazed at Blume's patience and are waiting for the next conflict. But the dual-identity boss is not about to send his opponent home just yet.
According to people close to Blume, he is preparing for a change in the top management. After all, there are six board members approaching or over 60 years old, including Meschke and Platen.
But Blume still needs his financiers. Blume has significantly streamlined the Porsche structure in recent years. When he was hired as a production manager in Zuffenhausen as a foreigner in 2013, he was involved in a lean organization with the aim of developing top talent in every area. A medium-sized company in the best sense of the word, with top talent in every area.
Now, he has gradually distributed some of his best talents throughout the group.
Klaus Zellmer is in chargeSkodaGernot Döllner takes the helm at Audi. A few weeks ago, Frank-Steffen Walliser was appointedBentleyHead.
All of these leaders come from Porsche. So does Stephan Weckbach (Gernot Döllner), who is in charge of Wolfsburg's general secretariat and strategy.
Like Blume, Michael Steiner and Michael Mauer have the dual role of Head of Corporate Development and Head of Design. Sebastian Rudolph also serves as Head of Communications.
The list of Obomou's cronies could go on and on.
For Porsche, this means that the elite class is shrinking. The top guys can't scale like a new production process.
Even Blume has reached his limit. At the beginning of his dual duties, a "load shedding team" was set up and all committees and delegation duties that were not absolutely necessary were removed from his schedule. But this only had a limited effect.
The workload is too great, and new sources of conflict continue to emerge. It's really too hard for a leader. Everyone in the company knows it, but they don't take action.
“The dual role is not a permanent model,” an influential supervisory board member believes. “Physical, psychological, we have to constantly reassess this.”
"Obermu is under too much pressure and not spending enough time in Stuttgart," warned one critic, who proposed that the "new Porsche" - the complete overhaul of the board envisioned by Obermu - should be implemented as soon as possible.
Even in the capital markets (which are extremely important due to the complex power structure of Volkswagen and Porsche), they can't see a way out. "Someone is solving everything himself," said one major investor, who did not want to call Blume by name.
What about Blume himself? Weeks ago, he was said to have told confidants that he would not be able to play a dual role forever, that it was not physically possible, and that at some point he would give up the top job at Porsche?
But, he immediately added: "I decide the time myself."
That is unlikely to happen in the foreseeable future. The Porsche family is said to be nervous about developments in Zuffenhausen. Their reaction is this - they are asking Blume not to give up Porsche.
Works council chairwoman Daniela Cavallo has been in charge of electric small cars at Volkswagen, which wants to avoid anything that could be interpreted as undermining Blume's role as CEO.
Therefore, it is considered impossible for Blume to leave Porsche this year.
However, Porsche's difficulties did not leave Blume unscathed at Wolfsburg. He had to accept the initial small failure.
When Blume and Volkswagen brand CEO Thomas Schäfer planned toRenaultThe union boss, Cavallo, questioned whether it was a betrayal when the group came together to produce a small electric car, which is targeted to be priced under 20,000 euros and is more of a social responsibility than a commercial responsibility and will be produced by Renault Group.Some influential people in Wolfsburg, who were not in favor of Renault Group putting the Volkswagen logo on it, seized the opportunity. They opposed the plan. People close to Blume revealed that Blume then took the initiative based on the facts and the company's board of directors decided to oppose the formation of a small electric vehicle alliance and said that the Volkswagen brand should develop small electric vehicles alone.
Blume has already begun to change course in order to make the Porsche brand the stability he needs personally and financially. Having achieved his major sales targets in China and other parts of the world, it is time to downshift.
For Porsche's model lineup, Blume specifically wants to reduce costs by cutting out smaller, less profitable models. He wants to sell more expensive models. Overall, Porsche should get more profit from fewer cars.
As for the thorny software problem, Blume is looking for alternatives. The motto here is: Porsche first. Porsche's future models will most likely not use Volkswagen Group's software departmentCARIADDeveloped system.
For example, Porsche maintains a close collaboration with Apple. Apple is testing Carplay+ automotive software first on Porsche vehicles, and at Apple they are beginning to talk about an "Apple-Porsche" model. The next generation of the Cayenne may have ushered in a new level of cooperation - in 2027.
Besides Audi, a stake in Rivian should be particularly helpful to Porsche. The U.S. start-up’s software will replace the E 3 1.2 electronic architecture that was originally planned for future models and on which Porsche has relied so far.
Blume and IT chief Sajjad Khan will be the main beneficiaries of Rivian's structure. Not everyone in Wolfsburg thinks that foisting a $5 billion Rivian acquisition on the Volkswagen Group is a good idea, which is not surprising.
To further reduce Porsche's costs, the factory structure is also being adjusted. However, these decisions have not yet been finalized, but this is likely to cause new turmoil within the group. The Porsche 718 will be moved out of the Volkswagen Group's expensive factory in Osnabrück, Austria, and the production capacity in Zuffenhausen is sufficient.
The electric Taycan is planned to be moved from Zuffenhausen to the Porsche plant in the eastern German city of Leipzig, where it can be built on the same platform as the K1.
Porsche's hometown of Zuffenhausen is to be partially converted into a factory to create more space for luxury 911 special editions.
In short, Porsche would produce less at Volkswagen Group plants and more at its own factories. Volkswagen Group has high fixed costs, which become a burden for Porsche when sales figures fall. The "Road to 20" quickly became the "Road to 5."
Five years ago, Blume was already facing a loss of profits, and the forced shift to electrification could eat into profits - at the time some estimated it would be significantly less than 5%. Blume immediately launched an efficiency program. This approach remains in effect until 2023.
What is not yet known is that Blume has already set up his next project, which he hopes will add up to billions of dollars in savings over the next few years.
But five years ago, Blume was the full-time boss of Porsche. Today, he is also the boss of Volkswagen Group. Blume must have known that it takes two people to implement the savings plan.
(Part of this article is based on reports from Manager Magazine & Harvard Business Manager, and some pictures are from the Internet)
