Porsche heading in the wrong direction

Over the past decade, there have been few winners in the European auto industry. Awash with overcapacity and hammered by savage competition, even the companies with strong sales have struggled to make money for their shareholders.

Porsche AG is the exception. The Stuttgart, Germany-based carmaker glides as elegantly around the industry's pitfalls as one of its cars does along a traffic-clogged highway.

Now it looks as if Porsche is determined to get control of Volkswagen AG, which would be a crazy move.

This month, Porsche said it might increase its stake in Europe's largest carmaker to as much as 29.9 per cent. It now owns 27.4 per cent of Volkswagen.

Management is drawing closer. Volkswagen's supervisory board chairman, Ferdinand Piech, has just forced out the company's chief executive officer, Bernd Pischetsrieder.

Piech is a member of the Porsche family, and a major shareholder in that company. He is the most powerful figure at VW as well. Even if he doesn't win re-election as Volkswagen chairman next year, Piech may be replaced by Porsche CEO Wendelin Wiedeking, according to Focus magazine.

The record of German luxury brands entering the mass market is terrible. Porsche will almost certainly destroy itself if it buys Volkswagen. It might destroy Volkswagen as well.

Porsche has had a decade of unblemished success. Its niche in up-market, high-powered vehicles has been brilliantly exploited. In November 1996, Porsche shares sold for the equivalent of about €50. Now they are valued at €893 ($1720).

For comparison, a share in Ford Motor Co. would have cost you $11 in 1996, and now sells for €9 ($13).

Yesterday, Porsche said net income in the fiscal year ended July 31 rose 79 per cent to €1.39 billion ($2.7 billion) from a year earlier. The success story seems to have no end.

Porsche's sports-car models have powered ahead, commanding high prices and rising volumes. Meanwhile, the Cayenne sport-utility vehicle has been a huge success, allowing loyal customers to carry on driving a Porsche even when they have a couple of kids and a dog to fit in the back (a bit of a tight squeeze in a 911).

Success has one catch: There is a risk of hubris. It is hard to read Porsche's designs on Wolfsburg, Germany-based Volkswagen, any other way. "I don't think they are interested in taking control of Volkswagen itself; they are interested in locking in the relationship between the two companies," Michael Wynn-Williams, an analyst at automotive consulting firm Trend Tracker in Warminster, England, said.

"They would probably only take on the whole thing if there was another bidder, but I don't think they want to have to deal with all VW's problems, particularly with the labour unions in Germany," he said.

Maybe not, yet they are certainly preparing the ground. Yesterday, Porsche said it was raising €8 billion to fund possible acquisitions. Also, a recent reshuffle of the Porsche holdings would enable a quick takeover if the family wanted to make a bid, UBS AG said in a report this month.

The logic of a move on Volkswagen would be clear. Porsche relies on VW for parts and manufacturing, particularly for the best-selling Cayenne, which shares major components with VW's Touareg model. Porsche would be reluctant to see those assets fall into other hands.

It could break up Volkswagen and keep parts for itself. Audi would fit neatly with Porsche, as would luxury brands: Bentley, Bugatti and Lamborghini. There may be sentimental reasons as well. After all, the original Volkswagen Beetle was designed by Ferdinand Porsche, who went on to create his own company. A Porsche bid for Volkswagen could reunite some of the greatest names in German manufacturing.

Yet sentiment and industry don't mix. The recent history of the German auto industry shows there is nothing to be gained from entering the mass market. DaimlerChrysler AG has yet to recover from the takeover of Chrysler in 1998.

Bayerische Motoren Werke AG made an even worse mess of its purchase of Britain's Rover in 1994.

The best thing to do in today's car industry is to get away from the intense competition of the mass market. Porsche seems to be intent on doing the opposite. Customers are looking for more variety and individuality in their cars. For both reasons, niche markets are more profitable.

Porsche has been the best luxury sports-car brand in the world. It has already risked diluting that with the Cayenne, though that has been a big success.

It may risk even more with the planned four-door sedan, the Panamera. If Porsche gets much closer to VW, it will have turned itself into a mass-market manufacturer. The brand could be destroyed forever.

In buying Volkswagen, it would just be acquiring problems that even Porsche might not be able to fix.

- BLOOMBERG

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