Tue, Apr 07, 2009 page9

• Strategic outsourcing helps Porsche weather the economic storm

  A Finnish firm looms large among the reasons why Porsche has avoided a severe downturn in the industry. The firm made one-third of Porsche’s output in 2006

  • By Carter Dougherty / NY TIMES NEWS SERVICE
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  Outsourcing to lower-cost places like India, China, Taiwan and Eastern Europe became routine for many US and western European companies over the last decade. But Porsche went to Finland.

  Since 1997, Porsche, the German sports car manufacturer, has headed north to this Finnish town instead of east, which helps explain why it is still making money while so many automakers are tapping government aid to weather the worst industry downturn in a generation.

  During the boom years, Valmet Automotive, which calls itself a service provider to the automotive industry, cranked out thousands of cars in Uusikaupunki to supplement Porsche’s German production. Now that the assembly lines are slowing in the face of reduced demand for costly luxury goods, Valmet, rather than Porsche, is bearing much of the burden of the industry’s distress.

  “We are a lean organization, but at the end of the day, there is a threshold here,” Valmet president Ilpo Korhonen said. “We can’t run like this forever.”

  Automakers universally outsource production of parts or sections of vehicles and some even contract for the assembly of small numbers of automobiles.

  Porsche, the maker of the celebrated 911 two-seater and the Cayenne sport utility vehicle, has taken the idea even further. It has turned to Valmet to assemble one of its main product lines, the Cayman, and its convertible sibling, the Boxster.

  This makes Porsche the only major virtual vehicle manufacturer — a company that designs and markets sports cars without actually building them all on its own production line.

  So far, its system is molding well to the contours of an unforgiving world economy.

  “This crisis will be the absolute test for the Porsche model,” said Juergen Pieper, co-head of research at Bankhaus Metzler in Frankfurt. “Right now, Porsche is anything but a fair-weather company.”

  Like every automaker these days, Porsche has had to find ways to save money. In the first half of its current financial year, from August to January, sales tumbled 12.8 percent to 3.04 billion euros (US$4.11 billion), while deliveries fell 26.7 percent.

  At the same time, it booked 6.84 billion euros in profits from the financial derivatives it used to secure control of Volkswagen.

  VITAL FLANK

  Porsche chief executive Wendelin Wiedeking has assured the 2,500 workers at the company’s Stuttgart plant that their jobs are safe, securing a vital flank in a country where workers are represented on company boards.

  The bread and butter of Porsche’s production in Stuttgart is the classic 911, but with demand for that model falling, it is pulling Boxster production out of Uusikaupunki back to Germany.

  Wiedeking has said repeatedly that it is “preferable to build one car too few than one too many.” That line of thinking allows Porsche to keep pricing its cars like the luxuries they are rather than constantly discounting them in order to work off excess inventory — a strategy that left Porsche near bankruptcy in the early 1990s.

  At a time when other companies are offering strong incentives for sales in the US, Porsche is holding the line.

  “You wonder if they would get sales back if they did incentives like the other luxury brands,” said Jessica Caldwell, manager of pricing and industry analysis at Edmunds.com, a research company. “But their incentives are very low.”

  Wiedeking became Porsche’s chief executive in 1992 and brought with him the gospel of efficient production that openly copied methods he learned from Japanese automakers, above all Toyota. But by outsourcing assembly to Valmet, he did his Asian mentors one better.

  QUALITY

  The Valmet-Porsche relationship began as demand for the 911 rose, forcing Porsche to find another way to make the Boxster. Industry rumors abound that Valmet’s quality sometimes outstripped what Porsche had managed back in Stuttgart, which Korhonen does not deny.

  Porsche’s customers and dealers never know the difference. Only a hidden code on the cars reveals that Finnish elbow grease buttresses German engineering. Valmet’s production is mixed into shipments from northern German ports that are bound for the US and Asia.

  Valmet’s production for Porsche peaked in 2006 at about 30,000 vehicles, or roughly a third of Porsche’s total output that year. Last year, it was 17,500 vehicles, and it is likely to be far lower this year.

  Korhonen, a cerebral engineer with an MBA, is constantly calibrating his work force. In each of the last three months, he idled about a third of Valmet’s 600 employees before ramping up again in January and February, and then shifting down with 190 layoffs last month.

  “We are adjusting capacity almost daily,” Korhonen said.

  Managing the flow of parts that go into a high-performance Porsche is also tricky. Many suppliers are concentrated near Stuttgart, but Valmet has to arrange deliveries to Finland, and often in smaller quantities.

  Hence the “milk run,” as Korhonen calls it. Trucks are perpetually swinging through Germany, Poland, Sweden and Finland to collect the components that go into the Porsches assembled in Uusikaupunki, a town of 16,000 whose many inlets and islands have made it a popular spot for vacation homes.

  But Valmet’s greatest challenge is, in the end, existential. Its contract with Porsche expires in 2012. The German company will move its outsourced assembly to Magna Steyr, an Austrian division of Magna International that has the resources to assist Porsche in development work.

  Valmet workers are already clearing space in the factory to manufacture the Karma, a plug-in electric hybrid designed by Fisker Automotive, a California start-up. Soon, it will also produce a luxury golf cart for a Danish customer and expects to sell engineering services as automakers create derivatives of existing models, Korhonen said.

  And when the well-to-do rediscover their love of Porsche sports cars, Valmet hopes to produce those, too.

  “Eventually we will ramp back up,” Korhonen said. “We expect the market to recover.”
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