Porsche Decision

Abstract A decade ago, Porsche, the luxury car company, found itself at a crossroads. Renowned for its classy and expensive sports cars, the firm had taken a hit in the wake of the 1987 stock market crash and suffered in great part due to Porsche's dependence on the U.S. market.

In addition to launching a new two-seater, the Boxster, in 1996, it decided to move into sport-utility vehicles, or SUVs, the popular but highly un-cool mode of transport for many American suburban families. So when the firm chose not one but two routes to recovery, Porsche caught industry watchers and Porsche enthusiasts by surprise. Porsche erected a small but substantial plant in Leipzig in eastern Germany. Unlike BMW or Daimler-Benz, Porsche did not move closer to the main U.S. market. Although wages in Germany are a good six to seven times higher than in eastern Europe, where many other automakers have moved production.

The controversial Cayenne has turned out to be Porsche's best-selling automobile ever. While rival carmakers such as Ferrari, Aston Martin, Alfa Romeo, and Lamborghini have been happy to locate where labor costs are cheaper, Porsche wanted to ensure its "Made in Germany" imprimatur.

Porsche's risky moves which ultimately led to a successful turnaround form the basis for a terrific debate on the importance of brand and location. In a remarkably globalized industry, Porsche is a rare example of a company staking its brand, in this example the Cayenne, on the image of one particular country. Porsche CEO Wendelin Wiedeking's bet-the-company decisions to branch out into SUVs, combined with opening the Leipzig plant, make for a study with rich complexity and broad implications for today.

German craftsmanship and quality are famous, and according to Fear, German companies generally compete as niche producers, particularly those that manufacture high-quality goods that demand a premium price. In 2004-2005 Germany became the number-one exporter of manufactured goods in the world, and its market share was around 10 percent, surpassing that of the United States. Brand and quality are arguably greater issues than ever before for German companies. The quality differential will also probably shrink over time in other product areas as Japanese luxury car makers have famously shown.

German companies have also had to reinvent themselves, as Porsche accomplished between '93 and the present. In a sense Porsche is applying Japanese production processes of lean production while still producing German-made cars and maintaining the German reputation for quality automobiles. And since 2000 or so, German workers have in general been moderating their wage demands, allowing German firms to become more competitive vis-à-vis other European countries. Improved productivity helps unit labor costs in Germany decline over time.

While these are positive adjustments, "the problem is that these super-successful export machines are not necessarily creating new jobs in Germany," Fear says. "Labor is also more moderate in its demands and flexible about working hours, conditions, and downsizing, but they are saving existing positions or slowing the process of shrinking them. The process does turn into kind of a second-best solution for creating new jobs." In terms of wage relations, going to Central Europe is very much like going to Mexico.

Yet as Central Europe is integrated into the European Union, it is still important for managers to keep in mind that wage rates also tend to rise very quickly there, particularly for skilled laborers, ironically because a lot of German companies in particular are moving into these countries. German firms were always highly present in central and southeastern Europe in the early part of the 20th century. What we are seeing today is a way of returning to the past.

The Cayenne is clearly German-designed and inspired. Only when you think of it in terms of a pure manufacturing product does its content become problematic for deciding just how 'German' it is. It is hard to figure that out. It's near impossible because of the long supply chains among parts suppliers. Porsche has unconsciously gone back to its roots. After leaving Mercedes, Ferdinand Porsche founded his own design firm in 1931 with his son and his son-in-law, Anton Piëch—yes, the father of Ferdinand Piëch of VW, making the original Ferdinand Porsche his grandfather.

That 1931-founded firm was mostly a design and engineering firm, which helped to create the Volkswagen Beetle. The managers examined and realized that the Leipzig plant only employs around 400 workers. BMW made a similar sort of decision to locate in Leipzig rather than go abroad, but for very different reasons, says Fear. BMW has built a plant that employs thousands of people and is a major manufacturing site, while the Leipzig plant for Porsche is much smaller.

Reference: 1. http://hbswk.hbs.edu/item/5466.html 2. Contemporary Strategy Analysis, 7th Edition, Robert M. Grant