Porsche, profits, the race program, and the soul of the company
12-08-2004, 03:34 PM
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Porsche, profits, the race program, and the soul of the company
Something for discussion
The following is from today's Wall Street Journal.
Pulls back the curtain a bit on "the world's most profitable car company", and how it achieves that distinction.
It is so frustrating to see these kinds of numbers, no matter the source, and not have a major race effort.
A few years ago, Norbert Singer (IIRC) said the company had the money for a program, but all the engineers and resources were tied up in the Cayenne effort. I would think those engineers have a little time on their hands now. And i would thnik the company has even more discretionay funds now.
I know a corporation that markets products globally has to protect itself from currency fluctuation. It's one of the reasons Porsche almost went under in the early 90s.
But after watching the demise of the top-tier race program (certainly the money is there for a Le Mans effort) , periodically hearing the promises of a return to racing at some unspecified time in the future and sensing the soul of the company changing, I finished the following and couldn't help thinking the old slogan "There is no substitute" still applies.
Only now they're talking about profits.
WSJ(12/8) Porsche Powers Profit With Currency Plays --
*
** (From THE WALL STREET JOURNAL)
** By Stephen Power
* Frankfurt -- THE WEAK DOLLAR is denting many European car makers, but Porsche
AG may have found a way of using the ailing buck to rev up its results.
* Investment analysts believe sophisticated currency bets -- not sports cars
like the 911 -- are turbo-charging Porsche's profits. Goldman Sachs, for one,
estimates that as much as 75% of the company's pretax profits -- or up to 800
million euros ($1.07 billion) of the 1.1 billion euros Porsche reported for the
fiscal year that ended July 31 -- came from skillfully executing currency
options. Other analysts say that percentage is too high, but most European auto
watchers agree that Porsche probably racks up a big chunk of its operating
profit from crafty currency plays.
* The company declined to make Chief Financial Officer Holger Haerter available
to comment on its foreign-exchange profits. A spokesman, Manfred Ayasse,
acknowledges that Porsche's hedging generates a profit and is an important part
of its overall strategy. Porsche currency exposure is fully hedged through July
31, 2007, and the auto maker is working to extend its protection well beyond
that date, he adds. "Fully hedged" refers to taking currency positions that aim
to protect all of a company's earnings from movements in the foreign-exchange
market, but currency options and other derivatives can also become profit
centers depending on how well a company makes its bets.
* Without elaborating, Mr. Ayasse says Goldman's estimate of Porsche's currency
earnings is "far too high," and "by far the majority" of Porsche's profits come
from selling cars.
* Among other analysts, Michael Raab at Sal. Oppenheim & Cie. in Frankfurt and
Stephen Cheetham at Sanford C. Bernstein in London believe Porsche is getting
40% to 50% of its pretax profit from hedging.
* Porsche's apparent success in turning a profit while weathering the dollar's
dips is rare these days, though auto makers have been able to do so in the past.
For example, even as its North American unit struggled last year,
DaimlerChrysler AG earned hundreds of millions of euros on currency hedges.
* Typically, however, the strong euro makes German cars, French wines or British
drugs more expensive for customers who pay in dollars and harms European
manufacturers.
* Among car makers, Volkswagen AG expects a $1.3 billion loss in North America
this year, largely as a result of the euro's strength. Ford Motor Co.'s Jaguar
unit has cited the dollar's slide as contributing to its decision this year to
cut output by 12%. BMW AG and DaimlerChrysler's Mercedes division have been hurt
less because, unlike Porsche and Volkswagen, both operate U.S. plants that
export cars to Europe, providing a natural hedge against exchange-rate swings.
* At late afternoon in New York yesterday, the dollar was trading at $1.347,
near its all-time low, against the euro.
* Pinpointing how much Porsche makes from currency options is difficult, because
the family-controlled company reports earnings only twice a year. The company
also provides fewer details about its accounting practices than other auto
makers.
* But in its report, Goldman points out that Porsche books hedging profits in
the cost-of-materials line in its profit-and-loss statement. The investment bank
notes that in fiscal 2002-03 Porsche's raw-material costs fell 7% -- even though
the company built 33% more cars than the year before. Goldman says falling
development costs and other savings are "insufficient" to generate such a drop.
* Porsche won't describe its hedging technique, but Goldman Sachs believes the
car maker essentially bets on a weak dollar, by buying from another party --
presumably a bank -- an option to exchange dollars for euros at an artificially
low exchange rate for the euro -- for example, 90 U.S. cents to one euro.
* If the dollar's value on the open market falls below that level -- to, say,
$1.20 for one euro -- Porsche gets a hefty cash payout, Goldman writes.
Conversely, if the dollar strengthens, the only losses Porsche incurs are the
premiums it has paid for buying those options. Although those premiums are high
-- around 2% annually of the total amount Porsche wants to hedge, or $20 million
on hypothetical U.S. revenues of $1 billion -- Porsche can afford them, since
its profit margins are among the highest in the industry.
* Goldman Sachs says Porsche's profit levels are unsustainable. Mr. Cheetham,
the Bernstein analyst, agrees. "Hedging is just a short-run thing," he says.
* Predicting the dollar's swings is critical for Porsche. It makes its cars
entirely in Europe, but generates 40% or 45% of its sales in the U.S. During the
late 1980s and early 1990s, Porsche made little effort to shield itself from
currency effects, raising prices as often as three times a year in response to a
weak dollar. The result: Porsche's U.S. sales slid from 30,000 cars in 1986 to
4,500 in 1992.
* Mr. Ayasse acknowledges the company raised its prices too often, but says
other car makers "made this error, too." "We don't want to see negative
surprises in the forthcoming years," he adds.
*
* (END) Dow Jones Newswires
The following is from today's Wall Street Journal.
Pulls back the curtain a bit on "the world's most profitable car company", and how it achieves that distinction.
It is so frustrating to see these kinds of numbers, no matter the source, and not have a major race effort.
A few years ago, Norbert Singer (IIRC) said the company had the money for a program, but all the engineers and resources were tied up in the Cayenne effort. I would think those engineers have a little time on their hands now. And i would thnik the company has even more discretionay funds now.
I know a corporation that markets products globally has to protect itself from currency fluctuation. It's one of the reasons Porsche almost went under in the early 90s.
But after watching the demise of the top-tier race program (certainly the money is there for a Le Mans effort) , periodically hearing the promises of a return to racing at some unspecified time in the future and sensing the soul of the company changing, I finished the following and couldn't help thinking the old slogan "There is no substitute" still applies.
Only now they're talking about profits.
WSJ(12/8) Porsche Powers Profit With Currency Plays --
*
** (From THE WALL STREET JOURNAL)
** By Stephen Power
* Frankfurt -- THE WEAK DOLLAR is denting many European car makers, but Porsche
AG may have found a way of using the ailing buck to rev up its results.
* Investment analysts believe sophisticated currency bets -- not sports cars
like the 911 -- are turbo-charging Porsche's profits. Goldman Sachs, for one,
estimates that as much as 75% of the company's pretax profits -- or up to 800
million euros ($1.07 billion) of the 1.1 billion euros Porsche reported for the
fiscal year that ended July 31 -- came from skillfully executing currency
options. Other analysts say that percentage is too high, but most European auto
watchers agree that Porsche probably racks up a big chunk of its operating
profit from crafty currency plays.
* The company declined to make Chief Financial Officer Holger Haerter available
to comment on its foreign-exchange profits. A spokesman, Manfred Ayasse,
acknowledges that Porsche's hedging generates a profit and is an important part
of its overall strategy. Porsche currency exposure is fully hedged through July
31, 2007, and the auto maker is working to extend its protection well beyond
that date, he adds. "Fully hedged" refers to taking currency positions that aim
to protect all of a company's earnings from movements in the foreign-exchange
market, but currency options and other derivatives can also become profit
centers depending on how well a company makes its bets.
* Without elaborating, Mr. Ayasse says Goldman's estimate of Porsche's currency
earnings is "far too high," and "by far the majority" of Porsche's profits come
from selling cars.
* Among other analysts, Michael Raab at Sal. Oppenheim & Cie. in Frankfurt and
Stephen Cheetham at Sanford C. Bernstein in London believe Porsche is getting
40% to 50% of its pretax profit from hedging.
* Porsche's apparent success in turning a profit while weathering the dollar's
dips is rare these days, though auto makers have been able to do so in the past.
For example, even as its North American unit struggled last year,
DaimlerChrysler AG earned hundreds of millions of euros on currency hedges.
* Typically, however, the strong euro makes German cars, French wines or British
drugs more expensive for customers who pay in dollars and harms European
manufacturers.
* Among car makers, Volkswagen AG expects a $1.3 billion loss in North America
this year, largely as a result of the euro's strength. Ford Motor Co.'s Jaguar
unit has cited the dollar's slide as contributing to its decision this year to
cut output by 12%. BMW AG and DaimlerChrysler's Mercedes division have been hurt
less because, unlike Porsche and Volkswagen, both operate U.S. plants that
export cars to Europe, providing a natural hedge against exchange-rate swings.
* At late afternoon in New York yesterday, the dollar was trading at $1.347,
near its all-time low, against the euro.
* Pinpointing how much Porsche makes from currency options is difficult, because
the family-controlled company reports earnings only twice a year. The company
also provides fewer details about its accounting practices than other auto
makers.
* But in its report, Goldman points out that Porsche books hedging profits in
the cost-of-materials line in its profit-and-loss statement. The investment bank
notes that in fiscal 2002-03 Porsche's raw-material costs fell 7% -- even though
the company built 33% more cars than the year before. Goldman says falling
development costs and other savings are "insufficient" to generate such a drop.
* Porsche won't describe its hedging technique, but Goldman Sachs believes the
car maker essentially bets on a weak dollar, by buying from another party --
presumably a bank -- an option to exchange dollars for euros at an artificially
low exchange rate for the euro -- for example, 90 U.S. cents to one euro.
* If the dollar's value on the open market falls below that level -- to, say,
$1.20 for one euro -- Porsche gets a hefty cash payout, Goldman writes.
Conversely, if the dollar strengthens, the only losses Porsche incurs are the
premiums it has paid for buying those options. Although those premiums are high
-- around 2% annually of the total amount Porsche wants to hedge, or $20 million
on hypothetical U.S. revenues of $1 billion -- Porsche can afford them, since
its profit margins are among the highest in the industry.
* Goldman Sachs says Porsche's profit levels are unsustainable. Mr. Cheetham,
the Bernstein analyst, agrees. "Hedging is just a short-run thing," he says.
* Predicting the dollar's swings is critical for Porsche. It makes its cars
entirely in Europe, but generates 40% or 45% of its sales in the U.S. During the
late 1980s and early 1990s, Porsche made little effort to shield itself from
currency effects, raising prices as often as three times a year in response to a
weak dollar. The result: Porsche's U.S. sales slid from 30,000 cars in 1986 to
4,500 in 1992.
* Mr. Ayasse acknowledges the company raised its prices too often, but says
other car makers "made this error, too." "We don't want to see negative
surprises in the forthcoming years," he adds.
*
* (END) Dow Jones Newswires
12-08-2004, 04:18 PM
#2
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All this short selling of the US$ is smart for them in the short term, but the $ will have it's day again when we finally get our financial house in order and quit spending money we don't have. Until then buy gold. Porsche has no LMP car, but they are getting by with strong showings in the GT class. I wonder if they will try for a GTS car based on the Carrrera GT ? They are getting a lot of cheap milage out of the Cup cars and RSR's. Usually when companies get fat from profits, management egoes will demand recognition on the track so I bet they will field a prototype at some point. Probably 06 I bet.
12-08-2004, 04:47 PM
#3
I think Porsche has a significant racing effort and dominates GT classes of most sports car series as well as the Porsche cup. "Race what you sell" is a valid concept and nobody does it better than Porsche. IMHO, a $100M ground effects sportsracer is about a relevant to the actual cars Porsche sells as a NASCAR racer...(BTW... anybody know where can I get one of those RWD, V-8 2-door Taurus?)
That said, $1B doesn't go too far in top line motorsports. Audi's LeMans effort cost 9 figures, and a top F1 team spends $200M+ per season... its expensive to win iand costly to lose.
BTW that article is potentially misleading.... maybe Porsche is heavy into speculation, but probably not....
First, I'm no international financier, but a company like Porsche that is so cost-based on Europe and so dependant on the US market needs to make some hedge against currency fluxuations... thats just prudent business...
Say they sell a car for EU100K in Europe and $100k in the US.
IF in 2005 the Euro = Dollar they are whole. If in 2005 the Euro goes to $1.37, they only get $73K Euros for each US car... a loss of 28K Euros per car. If they hedge properly, in 2004 they buy futures contracts to sell 2005 Dollars for 1 Euro... they make their EU $28K back in profits on their futures contracts. and are whole.
The reality is much more complex of course but that is the idea.....this is not some mysterious art... hedging is common, and of course they make a huge hedging gain when the dollar precipitously drops in value... but that is just offsetting future trading losses.
large international manufacturers are typically (or at leat they believe) more immune to such fluxuations, and typically hedge much less.
That said, $1B doesn't go too far in top line motorsports. Audi's LeMans effort cost 9 figures, and a top F1 team spends $200M+ per season... its expensive to win iand costly to lose.
BTW that article is potentially misleading.... maybe Porsche is heavy into speculation, but probably not....
First, I'm no international financier, but a company like Porsche that is so cost-based on Europe and so dependant on the US market needs to make some hedge against currency fluxuations... thats just prudent business...
Say they sell a car for EU100K in Europe and $100k in the US.
IF in 2005 the Euro = Dollar they are whole. If in 2005 the Euro goes to $1.37, they only get $73K Euros for each US car... a loss of 28K Euros per car. If they hedge properly, in 2004 they buy futures contracts to sell 2005 Dollars for 1 Euro... they make their EU $28K back in profits on their futures contracts. and are whole.
The reality is much more complex of course but that is the idea.....this is not some mysterious art... hedging is common, and of course they make a huge hedging gain when the dollar precipitously drops in value... but that is just offsetting future trading losses.
large international manufacturers are typically (or at leat they believe) more immune to such fluxuations, and typically hedge much less.
12-08-2004, 07:19 PM
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JCP
As I said, a company like Porsche needs to hedge. Absolutely. Especially with no US manufacturing facilities to offset the dollar's swings. Obviously, they are pretty good at it. (I wish they'd start a fund that the rest of us could participate in
)
That wasn't my point. The fact that the company is continues to make record profits.
The lack of a major race effort has been a hot topic for many years now. I figured Porsche needed the truck line to avoid the cyclical nature of it's products. I figured the company could live off past glories for a bit.
But the heavy lifting for the Cayenne effort is long over. Where are all the record profits going?
As to racing, Porsche has found a way to stay involved for the least cost and best chance of winning something. No knock on the CupCar or the RSR. They are both terrific race cars. But GT is basically a one marque spec class in every series. A couple years ago BMW (borrowing a page from Weissach) kicked their butt with the M3GTR, till PMS lobbied to outlaw it. And Porsche doesn't race the TT anymore in the GTS class where there is real competition.
Once upon a time, when Porsche was far less capitalized, it could develop not one but two different prototype platforms concurrently, as well as race the 911 in what was in essence the world rally championship in addition to sportscar races. Ten years later, and still a much smaller company than today, it could develop one of the most dominate race cars in history, as well as the most technically advance car of that era.
It's a matter of where the board wants the money to go.
As the 9 figures for a prototype effort, remember much of it comes from the people who put their logos on the car, not solely from profits on car sales or currency hedging.
The reputation of the brand was built on racing. In the 50s and early sixties, the goal was to be the dominant small bore sportscar. In the latter sixties til the late 90s, it was to be the dominant sportscar. Today Porsche wins classes, but not races. I hope they continue to race production cars.
We all directly benefit from that. But winning Le Mans is how a reputation is maintained, not finishing eigtht and winning GT. (BTW, change your Boxster's brake pads to see how a prototype racer is relevant to the car you drive)
So again, where are the record profits going? Evidently, into the pockets of the Piech and Porsche families. Nothing wrong with investors taking money off the table.
But I fear they are just milking the brand. And ignoring the fundamentals of maintaining a brand.
You have to feed the cow once in a while, or it will stop giving milk.
Just my .0145985 Euros.
As I said, a company like Porsche needs to hedge. Absolutely. Especially with no US manufacturing facilities to offset the dollar's swings. Obviously, they are pretty good at it. (I wish they'd start a fund that the rest of us could participate in
)That wasn't my point. The fact that the company is continues to make record profits.
The lack of a major race effort has been a hot topic for many years now. I figured Porsche needed the truck line to avoid the cyclical nature of it's products. I figured the company could live off past glories for a bit.
But the heavy lifting for the Cayenne effort is long over. Where are all the record profits going?
As to racing, Porsche has found a way to stay involved for the least cost and best chance of winning something. No knock on the CupCar or the RSR. They are both terrific race cars. But GT is basically a one marque spec class in every series. A couple years ago BMW (borrowing a page from Weissach) kicked their butt with the M3GTR, till PMS lobbied to outlaw it. And Porsche doesn't race the TT anymore in the GTS class where there is real competition.
Once upon a time, when Porsche was far less capitalized, it could develop not one but two different prototype platforms concurrently, as well as race the 911 in what was in essence the world rally championship in addition to sportscar races. Ten years later, and still a much smaller company than today, it could develop one of the most dominate race cars in history, as well as the most technically advance car of that era.
It's a matter of where the board wants the money to go.
As the 9 figures for a prototype effort, remember much of it comes from the people who put their logos on the car, not solely from profits on car sales or currency hedging.
The reputation of the brand was built on racing. In the 50s and early sixties, the goal was to be the dominant small bore sportscar. In the latter sixties til the late 90s, it was to be the dominant sportscar. Today Porsche wins classes, but not races. I hope they continue to race production cars.
We all directly benefit from that. But winning Le Mans is how a reputation is maintained, not finishing eigtht and winning GT. (BTW, change your Boxster's brake pads to see how a prototype racer is relevant to the car you drive)
So again, where are the record profits going? Evidently, into the pockets of the Piech and Porsche families. Nothing wrong with investors taking money off the table.
But I fear they are just milking the brand. And ignoring the fundamentals of maintaining a brand.
You have to feed the cow once in a while, or it will stop giving milk.
Just my .0145985 Euros.
12-08-2004, 08:15 PM
#5
Race Director
Originally Posted by JCP911S
I think Porsche has a significant racing effort and dominates GT classes of most sports car series as well as the Porsche cup.
But I remember the days of the 917, 934, 935, 936, 956, 962, and 962C. Those cars dominated. Just barely before my time were the 904 and 908. The 917 established Porsche as a force to be reckoned with. The 935 showed they could do it again. Same with the 956/962. The current offerings I would never say that about.
Originally Posted by JCP911S
"Race what you sell" is a valid concept and nobody does it better than Porsche.
Who does it better than Porsche? How about Subaru? How about Mitsubishi? They sell homologation specials. I don't think Porsche does it any better than anybody else these days. I don't expect a serious racing effort from Porsche anytime soon. They would need a change in corporate culture. It would have to be run by engineers instead of MBAs.
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12-08-2004, 11:08 PM
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Hiya Dan
You at sea? (You know, you could add "the Bounding Main" to those other three locdations)
I hope you're back in Fla the second weekend in February
You at sea? (You know, you could add "the Bounding Main" to those other three locdations
)I hope you're back in Fla the second weekend in February
12-08-2004, 11:44 PM
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Surprised no one mentioned the little blurb in Autoweek about the Boxster GTS (the new coupe version). According to AW, Porsche is contemplating producing another spec car based on it. Frankly, I love the idea. Be very cool to have a factory racer if the cost was around that of a street 911. Make for a great club racing series. I miss the 917s and 962s, but frankly, I'm happy with the notion of the racing effort staying being based on the street cars. Personally, I like the idea of the development dollars going into something I might actually be able to race myself.
12-09-2004, 03:21 AM
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Porsche: current strategy and future profitability
Originally Posted by Geo
I don't expect a serious racing effort from Porsche anytime soon. They would need a change in corporate culture. It would have to be run by engineers instead of MBAs .
12-09-2004, 08:19 AM
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Originally Posted by Mike in Chi
Hiya Dan
You at sea? (You know, you could add "the Bounding Main" to those other three locdations)
I hope you're back in Fla the second weekend in February
You at sea? (You know, you could add "the Bounding Main" to those other three locdations
)I hope you're back in Fla the second weekend in February
My households now stretch to the extreme opposites of the continent!!!! Thank God this happened before I moved the 993's up North too!!!As for Sebring...Yeap... I will be there!!!!
12-09-2004, 09:51 AM
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To say that Porsche "profits" from currency hedging is misleading: they use hedges to protect their profits from negative currency fluctuations, and pay for this protection. If the dollar had not declined, this profit would simply have shown up in the reveue from sales. This is not speculation, it is simply protecting cash flow from currency fluctuations, and good business. As pointed out in "Excellence Was Expected", one of the main reasons that Porsche got into trouble in the late 1980's was a lack of sufficient hedging: after their hedging expired, they went into a downward spiral of increasing prices leading to reduced sales, compounded by a recession. One of the advantages of having major private shareholders is a robust corporate memory, and they're unlikely to repeat that mistake. We may not like the lack of serious racing, but the alternative would have been a Porsche on a Passat platform. It is arguably better to have an independent Porsche, albeit imperfect, than none at all - which almost happened on the early 1990's. The reason that Porsche still exists is due to the skills of the current management team, and we should cut them a little slack. If they had continued building cars by hand, they would have gone the way of the Duesenberg. (By the way, I'm not a Porsche employee - just a fan since the 1950's).
12-09-2004, 10:12 AM
#14
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Originally Posted by smokey
We may not like the lack of serious racing, but the alternative would have been a Porsche on a Passat platform.
I don't have a problem with hedging. In fact, I'd say it would be malpractice on the part of management to not do this. But that's the responsibility of the finance department. The finance department doesn't produce cars and profits.
Let's ask a philosophical question here. What is Porsche without a racing program? IMHO, not what is used to be. And it's not about bragging rights. It affects the entire culture of the company and the cars (and trucks) they produce.
12-09-2004, 10:28 AM
#15
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The problem is this...
... Short Term....
Racing = spending money = less profits.
The problem is that in the long term no racing errodes the heritage of the cars and also will degrade the engineering level of the cars. Porsche has long use racing to test and prove out technologies that make it into production cars. Turbos first used in 917 program and tested to death in the 935 era came to be many prodiction cars. The original 911 motor began testing in the 904 racer. The 944 motor got tested in the 924GTP Le Mans car. I am sure many of you could go on and on. So what does the future hold? Well if Porsche stops racing it will turn into just any car company. In my mind what good is it for Porsche to be "independant" if acts just like any other profit first car company.
... Short Term....
Racing = spending money = less profits.
The problem is that in the long term no racing errodes the heritage of the cars and also will degrade the engineering level of the cars. Porsche has long use racing to test and prove out technologies that make it into production cars. Turbos first used in 917 program and tested to death in the 935 era came to be many prodiction cars. The original 911 motor began testing in the 904 racer. The 944 motor got tested in the 924GTP Le Mans car. I am sure many of you could go on and on. So what does the future hold? Well if Porsche stops racing it will turn into just any car company. In my mind what good is it for Porsche to be "independant" if acts just like any other profit first car company.