For years, Porsche's industry-leading profit margins have been the envy of carmakers the world over. No rival has had the brand, products or cost structure to earn 15 cents or more for every dollar of revenue year after year, like clockwork.
Only Ferrari comes close.
But weatherproofing Porsche to withstand headwinds from stricter carbon dioxide emission reduction targets and the changing demands of the digital age means it will get harder, not easier, to maintain this streak. While Porsche might be tempted to use its midyear strategy rethink to permanently lower the bar from its high perch, executives say it will not use this as an excuse to abandon its annual return target.
"The 15 percent is a sacred cow here at Porsche. We won't give it up," Porsche finance chief Lutz Meschke told Automotive News Europe.
Meschke said the brand needs to make "enormous" near-term to midterm investments specifically to meet increasingly strict future CO2 emissions targets.
Porsche's planned rollout of fuel-saving plug-in hybrid technology across its range, including the 911 sports car, translates to added costs of more than 10,000 euros ($11,300) per car over a conventional combustion version, Meschke estimates. Even the brand's wealthy customers are unwilling to pay such an increase, he said. The net effect is a margin dilution every time the brand sells a plug-in hybrid.
Additionally Porsche is investing about 1 billion euros ($1.13 billion) in its sites in Stuttgart and Weissach, Germany, to build its upcoming Mission E electric car. That number excludes the car's development costs. Also, more than $340 million has been earmarked for information technology spending for this year alone to help ensure the company is fit for the digital age.
Porsche was the auto industry's most profitable company last year. The automaker reported a 16 percent operating margin with sales revenue up 25 percent to $24.35 billion, an operating profit of $3.85 billion, also up 25 percent, and a 19 percent rise in sales volumes to a little more than 225,000 vehicles. Its nearest industry rival in profitability, Ferrari, reported a 15.5 percent margin for 2015.
Porsche is expected to unveil its new business plan in the middle of this year as part of parent Volkswagen Group's Strategy 2025 program. The sports car brand was the biggest contributor of profits to VW Group, transferring a net sum of $1.36 billion to Wolfsburg last year, more than Audi's net transfer of $1.25 billion. VW needs both brands to remain highly profitable to cover the costs of its diesel emissions scandal that investment analysts at Evercore ISI have estimated could reach $33.98 billion.
But the constant transfers to VW are a source of concern for Porsche investors because they increase the brand'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 reduced this handicap as much as possible, he declined to quantify what Porsche is paying so it could borrow $1.25 billion. Porsche is also dependent on VW to honor a pledge that its constant profit transfers do not drain Porsche too much. For 2015, VW Group wired back about $793 million of Porsche's overall transfer sum of $2.15 billion gross, just enough to ensure the subsidiary's proportion of equity to overall assets -- a key solvency ratio -- didn't slip below last year's level of about 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."
Speaking on the sidelines of Porsche's annual 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 below that in rare instances. One key reason why Porsche believes it can maintain this target level is its efforts to fulfill strict efficiency goals. 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, the finance boss said.
