Porsche's 'King Looks to Expand Empire

CEO Wiedeking hints that by Porsche controlling VW, it could position itself to compete globally with Toyota

by Gail Edmondson

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Like a mysterious sphinx guarding a secret, Porsche Chief Executive Wendelin Wiedeking has said almost nothing about Porsche's strategic plans for Volkswagen since he started building a 27.4% controlling stake in Europe's largest automaker in September, 2005. The dramatic move—a small, highly profitable Porsche buying control of wobbly Goliath VW, with its high cost base and meager earnings—provoked a firestorm of criticism and speculation. Why would the world's most profitable automaker sink billions into mass-market VW with its debilitating cost structure, strong unions, and weak profits?

On Dec. 6, as he presented Porsche's financial results at the annual-results press conference, Wiedeking finally offered a few clues—comparing Porsche's investment in Volkswagen to a clever chess move that stuns opponents: "We opened the game. Other players are either striking out against us or joining us in our moves—and now everybody not acquainted with the tactics we had carefully considered in advance is feeling nervous."

Taking on Toyota

Wiedeking, who now sits on Volkswagen's board, insists the investment in VW is strategic and long-term, and refused to reveal his next move. But he dropped a big hint, indicating that Volkswagen will be groomed to challenge Toyota (TM) head-to-head in global markets. "VW, with all its brands, is the only one with the potential to stand up to Toyota," said the 54-year-old engineer. "It means hard work. But we believe the potential (to do that) is there."

Those are bold words, given the three-year restructuring underway at Volkswagen. While Toyota consistently scores among the top in quality, cost structure, and profitability among automakers, VW is still down at the opposite end of the scale in all three. And a management shakeup underway at Volkswagen that could prompt the departure of turnaround ace Wolfgang Bernhard could stall its resurrection. "The problem at Volkswagen is its high cost structure," says David Cole, chairman at the Center for Automotive Research in Ann Arbor, Mich.

Wiedeking has faced down skepticism about his ability and his strategy moves at Porsche ever since he took control of the near-bankrupt sportscar maker in 1993. It took the CEO only five years to transform struggling Porsche into the world's most profitable automaker, starting with only one model, the 911, and adding two more—the lower-priced Boxster and the high-performance Cayenne SUV.

The Wiedeking Touch

Many feared a Porsche SUV would dilute the brand and might even flop. But the three high-performance Cayenne variants, which started at 250 horsepower and ranged up to 450, were hugely successful, helping push total vehicle sales to 96,794 this year (see BusinessWeek.com, 12/06/06, "Porsche Unveils All New Cayenne"). Wiedeking has also shown skill in churning out a steady stream of new hit derivatives while timing new launches impeccably to take up the slack from aging models. That's helped Porsche earn steady profits and avoid the aging-model syndrome—despite its limited range of models.

For those expecting Wiedeking to stumble, it's been a long wait. Porsche has ranked as the global automotive profit kingpin for nine years running, and Wiedeking has steadily surpassed his own records each year. Pre-tax profit for the fiscal year ended July 31 of this year soared 70%, to $2.8 billion, as revenues rose 10.6%, to $9.7 billion. "Fourteen years ago, Porsche was not worth anything either. No one would have believed that Porsche's shares would go from 19 euros to 900," says Wiedeking, when asked to explain how a struggling VW can possibly challenge world-beating Toyota.

Natural Partners

If there's one ace that Wiedeking holds in speeding change at VW, it's his deep familiarity with Toyota's lean-production and continual improvement methods.