Porsche admits EV investment to take on Tesla is an “enormous burden”
November 3, 2017  Gene

Porsche Mission E concept rendering

It’s no secret that Porsche is looking to soak up market share away from
Tesla when the automaker releases its long range, all-electric Mission E [
] in 2019. Arguably one of Tesla’s strongest potential competitors, with
decades of  manufacturing expertise and support from parent company
Volkswagen AG, the German automaker specializing in high performance
vehicles is preparing to face financial headwinds as it aims to electrify
its fleet.

Porsche’s CFO, Lutz Meschke, recently spoke with Automotive News Europe
about the company’s plan to stay profitable as it invests billions into its
electric vehicle program.

“Today Porsche packs 8,000 to 10,000 euros in added content into an
electrified vehicle, but those costs cannot be passed on via the price. The
customer won’t accept it, just the opposite, in some parts of the world
there’s a certain hesitation,” said Meschke in his interview with Automotive
News Europe [

As Porsche looks to invest more than 3 billion euros ($3.5 billion USD) into
the development of EVs and plug-ins, the automaker will continue to build
internal combustion engine vehicles in parallel and implement company-wide
cost-cutting measures to retain its profit margin. “That’s an enormous
burden for a company of our size.” says Meschke.

“To protect your margin, you have to look at substantial fixed cost cuts,
but there’s only so much potential since the biggest chunks are personnel
and development. As sales shift toward EVs, a temporary drop in
profitability in the midterm may be expected.”

For context, Porsche’s investment into its EV program amounts to roughly 70%
of what Tesla’s Gigafactory will cost when complete. It’s a massive
undertaking that Porsche admits will require company restructuring along
with financial incentives to its workforce. “We need to structure the
company so that it is in position to sustainably achieve that. There can
always be years when it might drop to below 15 percent due to exchange rates
or an economic crisis, but every worker has to know we are not letting up.”
says Porsche’s CFO. “There’s even a pension component.”

By setting a fixed margin target of 15% on a company-wide basis, Porsche’s
entire workforce is able to work towards a single goal as looks to maintain
a steady CapEx and R&D ratio. “It’s better for Porsche to work with a fixed
margin target. It’s really an internal steering instrument. That’s why
everyone in the company from the manager to the assembly line worker knows
the goal is 15 percent. If we work with a range, that effect is diluted.”

When asked by Automotive News Europe on whether Porsche will need to
implement a deep cost-cutting program to maintain the company’s high
margins, Meschke responded “Under our Porsche Improvement Process, we aim
for annual savings of at least 3 percent in indirect areas and 6 percent in
direct ones.” Moreover, Porsche’s exec notes that the company performs a
cross-department review each year to see if they were able to maintain a 10%
savings. “There can always be a time when we need to pull on all levers, but
identifying and extracting efficiencies is our everyday business. That way
we don’t have to resort to major savings programs at the slightest

Maximizing efficiencies across the organization is something Tesla CEO Elon
Musk has long talked about. By “building the machine that builds the machine
]“, Tesla looks to utilize an army of manufacturing robots to achieve mass
volume production of its product line that consists of vehicles, solar
products and battery storage solutions. It’s the company’s key
differentiator over other manufacturers that largely have robots augmenting
human personnel as opposed to replacing them.

The goal to achieve full automation is Tesla’s biggest strength, yet also
the company’s weakest link, as made evident when Musk announced that
production of its mass market-intent Model 3 vehicle was facing issues [
]. The downside to implementing a highly automated production line is the
need to have robots that work in perfect harmony with one another. Any
misconfiguration or general issue around a specific machine in the process
becomes amplified across all other machines that rely on it. There’s less
tolerance for errors in an automated process, explained Musk during the
company’s third-quarter earnings call.

Porsche’s strategic entry into a market that’s been largely dominated by
Tesla is an interesting match up that pits David versus Goliath. With two
very different approaches to reaching mass volume production from two very
distinct companies, it’s anyone’s guess who’ll come out ahead in the race to
electric mobility. Regardless, competition helps stimulate innovation,
productivity and growth prospects in the electric car sector, and that can
only be a good thing.

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