Porsche, the mother of reinvention, does a fine balancing act

Should the company retain its exclusive status, or accept it needs to sell more cars simply to survive?

Porsche is playing a delicate balancing act. On the one hand, it revels in its role as supplier of relatively exclusive, high-end cars for the well-heeled appreciator of fine automotive objects. On the other, it knows it can survive as an independent carmaker, in control of its own destiny, only if it sells more cars to generate more profit. And what happens to the exclusivity then?

The Stuttgart company is not new to such a dilemma. The difference is that this time, it can resolve it from a position of strength rather than of crisis, because Porsche is highly profitable. Indeed, in terms of margins per vehicle sold it is the most profitable car maker in the world. Why, then, this latest dilemma?

Because the bottom is falling out of Porsche's traditional market. Total sales so far in 2003 are well up on the similar period in 2002, but that is thanks to the new Cayenne 4x4, the conspicuous-excess SUV (sports utility vehicle) that has caused Porsche purists to weep.

Worst hit is the Boxster sports car, launched in 1996 as a low(ish)-cost gateway to the Porsche experience and whose sales are down by a massive 40 per cent as the year ends. Partly this is a reaction to the new wave of exciting and desirable coupés such as Nissan's 350Z (itself soon to be available as a roadster). And partly it is because the Boxster, never a design masterpiece not least because it is far from obvious which end is the front, is just not enough of a pulse-raiser in today's high-style car market.

The 911, whose design concept goes back to 1963 with roots even further back in Porsche's first, VW Beetle-related sporty cars, has suffered less because there is always a demand for this rear-engined, idiosyn- cratic icon. Here the sales drop is 14 per cent, attributable mainly to an overall economic downturn; there is no danger that the 911 will fall out of fashion. But these two cars, 911 and Boxster, were Porsche's mainstay for too long, and the company knew it. That is why the Cayenne was created, a pragmatic pandering to Porsche's biggest market, the US, where SUVs are lifestyle must-haves whether or not there is any off-roading to be done.

Independent as Porsche may be, it has always been able to call on its friends in the Volkswagen-Audi group. There used to be family connections, too. The former VAG chairman, Ferdinand Pøech is the nephew of Ferry Porsche (son of company founder and Beetle designer Ferdinand Porsche), but the family ceased to own the Porsche company in 1972. It did retain seats on the supervisory board.

This time, the Volkswagen connection is that the Cayenne's understructure and many of its mechanical parts are shared with Volkswagen's Touareg. Sharing development costs has benefited both companies, and has helped pay for a new Porsche factory in Leipzig. Cayenne sales rates are already matching those of the 911 and Boxster combined, and the original factory at Stuttgart-Zuffenhausen could never have coped with the demand.

But the solution has not been perfect. Porsche miscalculated its first sales moves into the cut-throat culture of the US SUV; initial stocks of 13 cars per dealer were not to the colour and equipment specifications buyers wanted. And unlike buyers of 911s who are prepared to wait for the car of their choice to be built, SUV buyers want their prestige consumer durable now. So those first cars ended up being sold at discounts, anathema to Porsche.

Normally, Porsche holds no stock of cars and will cut production back by means of "overtime adjustments", as has happened with the 911 and the Boxster, rather than resort to discounting. Its experience of the US market is that the companies which offer the biggest discounts get into the biggest trouble: profit margins, customer satisfaction, brand image and the dealer chain itself will all crumble.

And already Porsche has put its Cayenne back-up plan into action. It has just launched an entry-level V6 version, powered by Volkswagen's 3.2-litre unit as found in vehicles as diverse as the Touareg, the Phaeton mega-saloon and the Golf R32 hot hatchback. Porsche would not admit to such a Cayenne when the range was launched early in 2003, fearing the inevitable gibes about brand dilution, but pragmatism has ruled and more people can now afford a Cayenne while basking in the reflected status of the grander models.

All of this US-dependence has a familiar ring, with undertones of the company's past attempts to end its dependence on the 911. The first manifestation of this was the Volkswagen-Porsche 914, a mid-engined and oddly angular machine available with a VW 411 flat-four engine or a Porsche flat-six.

It was cheap but looked too weird for most buyers' tastes, so Porsche tried again with a car built, like the 914, at the Neckarsulm factory, once the home of NSU and now operated by Audi. This new car, the 924, had an Audi 100 engine (later also used in the VW LT van) mounted in the front of an attractively Porsche-esque body. Originally intended to be an Audi, the 924 became the first front-engined Porsche.

Next came the car intended to take over from high-end 911 sales, the V8-engined 928. But it was too big and expensive to appeal to the 911 purist, and although it stayed in production until 1994 it sold in small quantities. Peter Schutz, who became chairman in 1981, realised the error and oversaw a revitalised 911 range while developing the Audi-engined 924 into the much more appealing, Porsche-engined 944. (Developed into the 968, this was the car the Boxster supplanted.) Unfortunately, 1987's worldwide stock market crash killed Porsche sales, especially in the US where unfavourable exchange rates had already slowed them. Mr Schutz was ousted, analysts having accused him of too much reliance on the US, and now, here is Porsche doing the same thing again.

But this time there is to be a full and credible model range to do the job. The 911 is due a revamp next year and the Boxster in 2005 (to include, at last, a proper coupé). Their interiors will be made more different. Then, in 2007, will come project E2 (Cayenne was E1 because Porsche has run out of 900-numbers), a four-door saloon/coupé with a front-mounted, Cayenne- derived V8 engine.

Porsche has trodden this path before, experimenting with four-door versions of the 911 and 928, but this time a market which has accepted the Cayenne is ready for another move away from core Porsche values. E2, to be made at Leipzig, will help Porsche become a 100,000 cars-a-year company as it takes on Mercedes-Benz, BMW and Audi in much the same way as Maserati is hoping to do with its new Quattroporte.

The Porsche chairman, Wendelin Wiedeking, is surely the boldest and most inventive in the company's history since Ferry Porsche himself, maybe more so. It was he who brought Porsche into consistent profit, who made the present 911 (launched in 1997) massively cheaper to build than its predecessor by sharing Boxster parts, who says there is a 5 per cent cost saving still to come by "logistics improvements".

Porsche has reinvented itself again. And this time, it could just get away with it.

THE 'PORSCHES' THAT NEVER WERE

As well as designing and building its own cars, Porsche has a busy research and development centre at Weissach, near Stuttgart, which does a lot of secret work for other car makers.

For example, the petrol engines in most of today's Volvos are derived from the 960 design that Porsche helped hone. The Kia Sorento SUV from Korea has "Porsche-tuned" suspension, calibrated at Weissach to suit European roads and tastes. The V8-powered Mercedes 500E of a decade ago had its hefty engine transplant engineered by Porsche before AMG became the official Mercedes-Benz modifier. And there have been plenty of other examples, most not revealed to the public eye.

But not all have been a total success. Porsche has been involved with various Ladas, including the Samara, and engineered much of Seat's first non-Fiat-based car, 1985's Ibiza. Porsche was not happy at the aftermarket "System Porsche" stripes with which Ibiza owners would bedeck their cars, but then it did design a truly awful switch system for the dashboard in which the easiest way to operate the wipers was by placing a hand through the steering wheel. "Even Porsche can't always get it right," Seat's then-president memorably said at the Ibiza's launch press conference.