Porsche Zooms Ahead of the Pack

CEO Wendelin Wiedeking's savvy approach is allowing the automaker to deliver more car for the buck, but potholes could lie ahead

by Gail Edmondson

Porsche Chief Executive Wendelin Wiedeking loves to relax on weekends by rumbling around the farmed fields near his home in a tractor. But when it comes to running the world's most profitable automaker, Wiedeking never takes his foot off the gas.

With sales growth fueled by one hit model after the next, Porsche's revenues are set to double in the next five years, from $10 billion this year to $21.3 billion in 2012, according to Morgan Stanley (MS), while car sales zoom over the same period from 99,000 to nearly 200,000. And while many automakers struggle with squeezed profit margins, Porsche's earning power is the industry envy: For the fiscal year ended July 31, analysts forecast net profit of $2 billion, up 33%, and an operating margin of 19.8%.

Wiedeking has long defied predictions that Porsche (PSHG_P.DE) was too small to survive, despite its near-brush with bankruptcy in 1992. Last year the cash-rich sportscar maker took a controlling stake in Volkswagen (VOWG.DE), the world's fourth-largest car company, and rumors abound that Wiedeking will soon swallow up the rest. Overseeing an empire that spans from $120,000 sports coupes to prosaic $12,000 subcompacts is a new challenge for Wiedeking. But after 14 years at the helm, the 54-year-old engineer has already proven to be one of the world's most talented auto chiefs.

Wiedeking's winning formula at Porsche is making high-performance sports cars with Toyota-like quality at a competitive price—a feat no rival automaker has yet managed to copy. "The 911 costs $80,000, but given the performance it delivers, it's a good value," says John Casesa, of auto advisory Casesa Shapiro Group in New York. "Porsche has the latest technologies in its cars, and they work reliably. The product has real integrity. Porsche has the performance of an exotic [car] but the reliability of a Honda."

Learning from Toyota

Porsche traditionally ranks high in quality surveys, but for two years running it has even moved past Toyota (TM) and Lexus to top J.D. Power's initial quality survey with the lowest number of problems after three months of ownership. This year, the Porsche Boxster also aced the J.D. Power competition for compact premium sports cars. When it comes to quality, "Porsche is one of the industry leaders," says Joe Ivers, executive director of quality and customer satisfaction at J.D. Power (which, like BusinessWeek, is a unit of The McGraw-Hill Companies (MHP) ).

That's thanks in large part to Wiedeking's vision. Long before other German automakers, Porsche was studying the Toyota bible on quality manufacturing. In the mid-1990s, as he struggled to steer Porsche out of a death spiral, Wiedeking turned to Toyota for help, cloning its obsessive quality processes at Porsche's Stuttgart plant and sending many Porsche workers and engineers to Toyota factories in Japan to learn its ways.

But Porsche's rapid growth going forward will test Wiedeking's winning formula as never before. Wiedeking has stoked profits at Porsche for a decade by outsourcing part of the production of the entry-level Boxster model to Finland's Valmet Automotive and by co-developing the Cayenne SUV with Volkswagen, while keeping control of top-of-the-line 911 models in-house. He also relied heavily on suppliers such as Robert Bosch to co-develop new automotive technologies.

That savvy approach helped minimize costs and risks for Porsche and allowed Wiedeking to deliver more car for the buck. As demand for older models waned, for example, Porsche cut orders from Valmet but kept Porsche's own Boxster production running at full capacity. "The key is keeping supply and demand tight," says Casesa. "That's especially important when rivals are producing good sports cars for half the price of a Porsche." And by teaming up with others on research and development, Wiedeking engineered innovation at a fraction of the usual investment.

Cayenne Troubles

But growth is already putting a strain on Porsche's fabled quality, especially as emerging markets pump up demand for Porsche's iconic sports cars. And with rival models multiplying, Wiedeking can't afford a slip as Porsche adds a fourth model line, the Panamera four-door coupe, in 2009.

Wiedeking aims to co-engineer the Panamera with Volkswagen, sharing parts, electronics development, and production facilities, as it did with the Cayenne. But the first tandem with VW wasn't a flawless performance: Porsche's venerable quality reputation took a nasty hit when it launched the Cayenne in 2003. The Cayenne and VW's Touareg are built on a common platform, and the bodies of both are assembled at the same Volkswagen plant in Bratislava, Slovakia. According to J.D. Power, both the Cayenne and the Touareg were riddled with defects—though not all of the same kind.

Many of the Touareg's problems were related to Volkswagen's drive train, which differed from the Cayenne's. The Cayenne suffered faulty door locks, malfunctioning keyless entry system, wind noise, poor radio reception, and condensation inside the headlights.

Though a roaring market success, the first Cayennes to hit the market dragged down Porsche's quality reputation and its ranking in quality surveys, which measure the number of problems per 100 cars after three years on the market. Still reeling from the Cayenne quality debacle, Porsche ranked 29th this year in J.D. Power's long-term reliability survey, far below its traditional level.

Competition from Audi and Others

Individually, the Porsche 911 and Boxster models are among the best performers. "The Cayenne single-handedly drags Porsche down below average," says Ivers, who notes the ranking should steadily improve since Porsche has raced to fix those problems on recent models. In the 2007 initial quality survey, the Cayenne had 125 problems per 100 vehicles, down from 233 problems in 2004. "That's drastic improvement," says Ivers. The Porsche 911, by contrast, set a benchmark of only 69 problems per 100 cars.

Quality isn't the only challenge Wiedeking faces. Porsche has to grapple with a slew of new high-performance models from Audi, Maserati (FIA), Aston Martin (F), and Bentley, all eager to claw sales from traditional Porsche owners. "The Audi R8 super sports car is phenomenal,"says Karl Ludvigson, an independent motor-industry consultant based in Suffolk, England. "Audi is making a run at Porsche."

At the same time, government regulations to curb carbon-dioxide emissions could one day crimp the attractiveness of Porsche's cars for some buyers. In July, Greenpeace demonstrated at Porsche's headquarters as the company tried to talk up its green credentials by giving a sneak preview of a hybrid Cayenne that will boost fuel efficiency by one-third, to about 26 miles per gallon, when it hits the market in 2009. Demonstrators nonetheless branded Porsche's cars "environmental pigs." Warns Casesa: "The biggest risk to Porsche is not the competitive threat but the environmental threat."

An energetic Wiedeking shows no fatigue after 14 years at the helm, working the auto-show circuit until the wee hours of the morning. But steering the fast-moving automaker into the future—especially if Porsche takes control of Volkswagen—may well mean less time tooling around the potato patch in his favorite tractor.