Porsche

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Porsche
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What is the Problem?

• Revenue
• 45 EUR
• 40 USD
• 10 GBP
• 3 JPY
• 2 CHF
• Costs
• 911 Germany (EUR)
• Boxster Finland (EUR)
• Cayenne Slovakia (SKK - EUR stabilized)

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Comparative Exposure
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Hedging Strategy

• Porsche created a three-year rolling portfolio of
  put options.
• Hedging net dollar exposures out three years
  required the company not only to forecast sales
  and subsequent exposures out three years, but to
  continually carry options possessing notional
  principals of a full three years of net exposure.

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Comparative Hedging
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Financial Effects
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Assessment

• Even if we sell a few or no cars at all in the
  U.S. we make money . . . Because we bought
  dollars cheap which we now sell expensively. Our
  hedging is extremely good. . . .
• Many analysts were highly critical of the cost of
  such a strategy.

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Profit from Hedging
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Alternative Hedges

• Natural Hedge
• Financial Hedge
• Exchange Rate Pass Through

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Natural Hedge
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North American Manufacturing

• Porsche believed that the quality of its
  engineering and manufacturing were at the core of
  its brand, and leadership had not been willing to
  move production beyond the existing European
  footprint.
• BMW and Mercedes are increasing their
  manufacturing capacity in the U.S.
• Would manufacturing an SUV in the U.S. harm
  Porsches image worse than manufacturing it in a
  Volkswagen plant in Slovakia?

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Financial Hedge
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Comparative Financial Performance
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Attitude towards Debt

• Porsches view on debt was rather extreme
  compared to that held by most of the other major
  European-based automobile manufacturers.
• We learnt the hard way that banks are there for
  you when you dont need them, and when you do
  need them, theyre nowhere to be seen.
• This antidebt philosophy was also consistent with
  the emphasis placed by Porsche on both cash flow
  and cash balances.
• We need to optimize all of the cash we generate
  so that were able to continue to finance our
  growth ourselves, and have the confidence that if
  anything happens in the future that is beyond our
  control, well always be able to survive. Thats
  absolutely essential.
• Although long-term debt was readily available to
  a company of Porsches financial health, debt was
  clearly anathema to current management.

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Attitude

• Porsche was somewhat infamous for its independent
  thought and occasional stubbornness when it came
  to disclosure and compliance with reporting
  requirements.
• In 2002 the company had chosen not to list on the
  New York Stock Exchange after the passage of the
  Sarbanes-Oxley Act.
• Management had also long been critical of the
  practice of quarterly reporting, and had, in
  fact, been removed from the Frankfurt exchanges
  stock index in September 2002 because of its
  refusal to report quarterly financial results.
• Porsche also continued to report only under
  German accounting standards.
• The compensation packages of Porsches senior
  management team were nearly exclusively focused
  on current-year profitability, with no management
  incentives or stock option awards related to the
  companys share price.
• The Porsche and Piéch families held all of the
  ordinary shares, which held all voting rights.

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Foreign Exchange Pass Through
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Market Power

• 911 Exclusive ownership of its market segment
  and price inelastic, but sales had been
  historically cyclical and heavily dependent on
  the disposable income of buyers.
• Boxster Affordable and less sensitive to the
  business cycle but in an increasingly competitive
  market segment.
• Cayenne One of the most successful product
  launches in history but in a competitive market
  segment that may shrink with rising gasoline
  prices.

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911 Carrera 4S Cabriolet in 2003
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Hedging Strategy

• Natural Hedge?
• Financial Hedge?
• Exchange Rate Pass Through?
• Current Policy?

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