Thursday, July 5, 2012

Under VW, Porsche to Change Step

For decades, auto makers Volkswagen AG and Porsche have operated like dance partners waltzing at arm's length. Now that Volkswagen is on the verge of taking full control of the storied sports car maker, the question is whether the two can adjust to a close embrace.

Volkswagen's three-year effort to take over the 911 sports car maker ended Wednesday when it disclosed it had reached a deal to acquire the remaining 50.1% of Porsche Automobil Holding SE's auto-making business that it doesn't yet own for €4.46 billion ($5.59 billion).

Volkswagen bought an initial 49.9% stake in Porsche in late 2009 after the sports car maker tried to swallow the much larger Volkswagen first, then nearly collapsed from the €10 billion in debt it racked up in the process. Legal and tax hurdles since have stymied Volkswagen's plans to complete the takeover.

The new agreement, set to be sealed Aug. 1, overcomes those obstacles and lets Volkswagen fold Porsche deeper into its auto making juggernaut of a dozen brands, including luxury marques Audi, Bentley, Lamborghini and Bugatti. With Volkswagen's heft behind it, Porsche is expected to accelerate its transformation from a niche sports car maker into a luxury powerhouse with an ever broader range of nonsports car models.

"Porsche is already more or less a VW company," said Ferdinand Dudenhöffer, director of the Center for Automotive Research at the University of Duisburg-Essen, noting the many components and manufacturing capacity Volkswagen already supplies Porsche, such as the chassis of Porsche's Cayenne SUV, which is built at the same Slovakian plant as Volkswagen's Touareg. "But from now on, the growth, the new models—everything will happen much faster."

By 2020, he estimates, Porsche could quadruple its sales, to as many as 500,000 cars a year, leveraging Volkswagen-driven plans to launch a small sport utility vehicle and other models. Last year, Porsche sold nearly 119,000 cars, more than half of which were Cayenne SUVs and Porsche's Panamera sedans.

But deeper integration with Volkswagen has its trade-offs, auto industry experts caution. While closer access to Volkswagen's immense scale will allow Porsche to trim costs and boost its already robust profitability, it also puts its prized quick-footedness and cachet at risk. "Porsche has always been very flexible," Mr. Dudenhöffer said. "That won't be the case anymore."

On Thursday, top brass from both auto makers extolled the benefits of completing the takeover now rather than later. With Porsche's sports car business a full Volkswagen entity, "we can bring our cooperation to an entirely new level," Volkswagen Chief Executive Martin Winterkorn said. The companies say they will save €700 million annually in costs by integrating their logistics, supplier agreements and product research and development.

Still, analysts point out that Porsche will be more confined to sharing components and technologies within the Volkswagen group. Already, Porsche has had to dissolve a contract it had with Magna International Inc. to build Porsche's Boxster models under contract. Instead, they'll soon be built in Volkswagen's Karmann plant in Osnabrück, Germany, alongside Volkswagen Golf convertibles.

"Porsche is already building up head count just to manage its coordination with VW," said Christoph Stürmer of IHS Automotive in Frankfurt. "It will require a lot of manpower."

Getting stuck in Volkswagen's bureaucracy is one risk for Porsche. Another, says Mr. Dudenhöffer, is the even tighter grip Volkswagen's powerful chairman and patriarch Ferdinand Piëch will have on the sports car maker.

As a member of the often at-odds Porsche-Piëch clan—descendants of legendary VW Beetle designer Ferdinand Porsche who control the Porsche SE holding company—the 75-year-old Mr. Piëch has long sought to combine Volkswagen and Porsche, with his family in control and, more specifically, him at the helm. But under a plan crafted by then-Porsche Chief Executive Wendelin Wiedeking, Porsche Chairman Wolfgang Porsche, Mr. Piëch's cousin, nearly ended up in the driver's seat.

The sports-car maker used options to amass a 51% stake in Volkswagen in the run-up to the 2008 financial crisis. But the takeover attempt left it with a crippling debt load, Porsche had to be rescued by Volkswagen in a reverse takeover engineered by Mr. Piëch instead. Under the takeover deal reached this week, Volkswagen will take over the Porsche' sports car business, leaving the family controlled Porsche SE a stand-alone holding company with just one asset for now—its 50.7% voting stake in Volkswagen.

Now with Porsche's sports car business under Volkswagen's roof, and not just a shareholding, Mr. Piëch, a car-obsessed engineer, can finally exert full control of the family business. Given the Volkswagen patriarch's penchant for investing heavily in new technologies and models, Mr. Piëch will be loathe to sign off on any moves that could tarnish the iconic Porsche brand's luster, Mr. Dudenhöffer said.

Still, "you have one person who is basically deciding everything within Volkswagen," he added. "That is always a risk for Porsche."

By VANESSA FUHRMANS from The Wall Street Journal