Porsche Case Study

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The other component is the velocity which enables Porsche to achieve high ROIC by strategically leveraging the capital and technological capabilities of its partners in the development and production of its own units. This enable Porsche to manufacture cars at a relatively low capital base compared to its counterparts.

However, from 1996 to 2005, its capital has grown faster than its sales. Invested capital grew by 45% in average as compared to 19% sales growth (refer to Appendix C). This means that a larger capital base relative to sales would put pressure on velocity, causing the ROIC of Porsche to decline. It’s also noteworthy to examine how capital was financed. Based on Appendix B, Porsche accumulated debt which in average has grown by 94%. This was not reflected on fixed asset acquisition which only grew by 17%. The debt was used to finance cash. A move which can be described as contrary to shareholder maximization. Possessing a large amount of non-interest bearing debt is a traditional feature of German business practices which is anchored to stakeholder capitalism.

Invested Capital if netted for cash would be EUR 1.6B only instead of EUR 4.4B in 2004. ROIC would have grown at an average growth rate of 83% instead of 9% for the ten-year period.

The exhibit below shows the change in ROIC of Porsche if netted for cash relative to the original figures in their financial statements

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Profitability in terms of earnings growth has been on a declining trend from the 176% growth in 1997 to only 9% in 2004 (Appendix A). This could mean that Porsche can no longer sustain the earnings due to mature portfolio of cars, without having a larger capital and technical resources. A move of Porsche for sustainability and control is anticipated, imminent, and necessary to happen for the survival of Porsche.

Decision and Conclusion

While not necessarily a wrong approach (in theory), stakeholder capitalism in the context of Porsche appears to only benefit one stakeholder, the Porsche and Piëch families. This leads to the disregard of the needs of outside investors as well as other stakeholders, which may also stand to lose from the business decisions being made by the Company.

As pointed out in our analysis, the Company enjoys very high profitability and ROIC, factors that still imply the ability of Porsche to generate wealth for shareholders. However, as long as its corporate governance structure and business decisions are only influenced by the controlling shareholders, there is no assurance that these will lead to wealth maximization. There is, after all, a difference in pursuing the interests of controlling shareholders from maximizing the returns of outside investors.

It is, therefore, our recommendation to