Porsche Roars Back … With Fred Schwab and an SUV

It was 1993, the back end of a recession, and at Porsche North America’s Atlanta headquarters, president and CEO Fred Schwab was at the virtual cliff’s precipice. The company had sold a mere 3,713 cars in the United States that year, about one-ninth the number of Porsches American customers had bought a few short years before in 1986. Since the United States usually counts for half of Porsche’s market, this was horrendous news for an independent company.

“I remember the movie Wall Street, where the arrogant young executive gets accused of insider trading,” said Schwab at a recent Wharton marketing club presentation. “An older gentleman comes up to him and says, ‘Man looks into the abyss and nothing stares back. It is at that moment, man gets character.’ That was when we at Porsche were able to start getting our character.”

Porsche was determined to stay independent. It had seen luxury competitors get gobbled up – and to Schwab’s mind at least, corrupted if not destroyed – by larger, more mass-production companies. “Look at Jaguar’s acquisition by Ford. The S-type is a Lincoln LS with an animal on the front,” he said, lamenting the old Jaguar cars he admired. “The X series is a Ford mid-size with a Jaguar nameplate. The people who loved the old E-type aren’t the ones being pleased by Ford. A big company like that doesn’t know how to sell a low-volume car.”

While Jaguar took one way out of the abyss, Porsche was determined to take another, more independent, route. It hired former Toyota employees as consultants. As Schwab tells it, they were perfect because they had been there before. Toyota was performing poorly in the 1950s and “top management gave workers a challenge,” said Schwab. “In return for lifetime employment, workers had to take responsibility and accountability. They had to suggest ways to streamline and make better cars. The result was that Toyota started making cars with one-third the defects in one-half the time and space. That sparked a new paradigm in car-making. It went from mass production to lean production.”

Schwab said the former Toyota employees ended up teaching lean production and employee accountability to Porsche. Not everyone signed on to the idea. Nearly one-third of the Porsche dealers left the fold. Managers fled to other companies. But according to Schwab, those who stayed prospered. In 2001, Porsche sold 25,000 cars at 200 dealerships in the United States, an almost total rebound from the recession trough.

But now, the company has a better idea, Schwab said, and that is not to ride the mountain-trough rollercoaster of a normal business cycle. “The problem is that when a recession hits, a product like ours is the ultimate delayable purchase. If we are to stay independent, we have to make some kind of change to that cycle.”

So Porsche is now going to do what some car enthusiasts believe is unthinkable. By the end of the year, it will be producing a sport utility vehicle named the Cayenne. “For the pepper. It will be red-hot,” said Schwab, adding that Porsche believes the SUV market will be a lasting one, not a whim of the moment. Though he would not reveal exact specifications of the SUV, or its price, it will clearly be competing with high-end models like BMW, Mercedes and Lexus. He isn’t worried about the Porsche SUV coming later to market than those competitors. After all, he said, Mercedes was there before Lexus and no one thought Lexus should bow out.

“Besides, what is going to distinguish us from them is that they are making practical vehicles that are good off-road, but are essentially there to get your groceries and take a ride on Sundays,” he said. “Porsche is in the business of making fun cars. I have a Lexus now and I have to hold in the side-view mirrors to get it in the garage. That is not fun. The Cayenne will go faster, handle better and you will be more comfortable in it. It won’t swing and sway like Sammy Kaye. It will go from zero-to-sixty in 5.4 seconds. This SUV will be fun to drive. It will be an SUV sports-car lovers will love.”

Or, at the very least, that is how Schwab will be marketing it. He said that Porsche buyers and dealers are fiercely loyal, citing statistics showing that more than 40% of Porsche owners already own SUVs and, he is presuming, many of them would like to buy an SUV made by Porsche. Many of the Porsche owners are in their 40s and 50s and have children at home, which is why they are SUV buyers to begin with.

“We are essentially betting the farm that this will work,” he said, noting that the company is building a new production plant on 950 acres in Leipzig in the former East Germany. “That’s as big as four golf courses. We are already looking at room for expansion. We are now the most profitable car company in the world and, with Cayenne, we will be able to go it alone even through slower times … Just like with Toyota in the 1950s, I believe that good things can easily come out of crisis. The people who stay around during the crisis are put on alert. They are forced to come up with great ideas.”

The Cayenne is a residue of that kind of thinking. But Schwab noted that what is even more important long term is not to try to fool the customers, be they dealers or consumers. Schwab was trained as an accountant, working for Touche-Ross as a CPA when he started his career. He is upset at the Enron scandal because it has tainted his profession – one he always associated with honesty.

“But even if you are cynical about that, honesty is just good business,” he said. “The consumer has become cynical. He is lied to time after time after time. But if you are straight with a customer, he will follow you. On the other hand, lie to him and he will never forget.”

Porsche, according to Schwab, has long been straight with its customers. They know they are being charged premium prices, but for that, he said, they get premium cars and service. “We may not always like catering to the whims of that kind of particular buyer, but that is what we promise.”

Currently, Porsche only makes two models, the Boxster and the 911. But after the Cayenne, it is going to come out with its first “supercar,” the Carrera GT, expected to debut in late 2003. It will be a two-seater weighing 2000 pounds with a V-10 560 horsepower engine. Schwab estimates it will sell for at least $350,000. “However many $50,000 deposits we have will determine how many we will sell,” he said. “I guess it won’t be for everybody. It isn’t a Golf or a Passat. They get you from here to there, but they are not fun. This car will be the last thing in fun and that is the market we want to stay in.

“But we have to remain independent to do that,” he said once again. “Those in the Porsche Clubs of America will castigate us for the SUV decision, but they just don’t know business. For them to keep having their beloved 911s, we have to find a niche elsewhere. That is modern business.

“We will still do the extras. We will have one-wheel braking. We may not have invented brake sensors, but we will have the best ones. We will provide the Porsche Driving Experience, a one- or two-day school in how to drive and take care of a Porsche. But the sports car business has been level for four years and the roadster is in decline. The SUV market is rising, so we feel the psychographics will be going our way. People will buy these and love to drive them.”

Schwab said Porsche could have tried to stand pat. And maybe without the recession in the early 1990s, it would have. “It is always easier to not do something. But the challenge in business is to do something that will make you stronger. Cayenne will double the sales potential of our company with minimal employee increases. And it will allow us to continue to put quality cars on the market.”

Citing Knowledge@Wharton

Close


For Personal use:

Please use the following citations to quote for personal use:

MLA

"Porsche Roars Back … With Fred Schwab and an SUV." Knowledge@Wharton. The Wharton School, University of Pennsylvania, 27 March, 2002. Web. 28 November, 2014 <http://knowledge.wharton.upenn.edu/article/porsche-roars-back-with-fred-schwab-and-an-suv/>

APA

Porsche Roars Back … With Fred Schwab and an SUV. Knowledge@Wharton (2002, March 27). Retrieved from http://knowledge.wharton.upenn.edu/article/porsche-roars-back-with-fred-schwab-and-an-suv/

Chicago

"Porsche Roars Back … With Fred Schwab and an SUV" Knowledge@Wharton, March 27, 2002,
accessed November 28, 2014. http://knowledge.wharton.upenn.edu/article/porsche-roars-back-with-fred-schwab-and-an-suv/


For Educational/Business use:

Please contact us for repurposing articles, podcasts, or videos using our content licensing contact form.

 

Join The Discussion

No Comments So Far