April 4, 2009 Porsche Finds Fortune From Unlikely Outsourcing By CARTER DOUGHERTY UUSIKAUPUNKI, FINLAND — Outsourcing to less-expensive places like India, China, Taiwan and Eastern Europe became routine for many American and Western European companies over the past decade But what’s Porsche doing in Finland? Since 1997, Porsche, the German sports car manufacturer, has headed north to this tongue-twister of a Finnish town instead of east, a move that helps explain why it is still making money even as so many automakers are tapping government aid to weather the worst industry downturn in a generation A worker checks the bodywork on a new Porsche at the Finnish Valmet factory Henna Aaltonen for the International Herald Tribune During the fat years, Valmet Automotive cranked out thousands of cars in Uusikaupunki to supplement Porsche’s production in Germany Now, the assembly lines here are slowing, which means that Valmet, rather than Porsche, is bearing much of the burden of the global auto industry’s distress “We are a lean organization, but at the end of the day, there is a threshold here,” said Ilpo Korhonen, Valmet’s president “We can’t run like this forever.” Porsche, the maker of the celebrated 911 two-seater and the Cayenne sport utility vehicle, developed a production system — call it über-outsourcing — that is inspired by Japanese models of lean manufacturing and the kind of contract manufacturing common in the electronics industry But Porsche has taken the notion even further and, at least so far, its highly supple system is molding well to the contours of an unforgiving world economy “This crisis will be the absolute test for the Porsche model,” said Jürgen Pieper, co-head of research at Bankhaus Metzler in Frankfurt “Right now, Porsche is anything but a fair-weather company.” Nothing symbolizes Porsche’s ability to steer through the storm more than its plans to introduce the Panamera, an entirely new sports car, during this difficult year for the industry Fulfilling a long-held dream of its founding family, the company will unveil a four-door sports car, which aims to blend Porsche’s legendary flair with a little modern functionality, at an auto show in Shanghai on April 19 Porsche designed the Panamera, which will be made in Leipzig, with one eye on Asian markets, where wealthy customers often have chauffeurs and want more space in back than a traditional sports car can offer Like every automaker these days, Porsche has had to buckle down and find ways to save money, and it is nipping and tucking where it can to save €100 million, or $130 million In the first half of its current financial year, which ran from August to January, Porsche’s sales tumbled 12.8 percent, to €3.04 billion, as deliveries fell 26.7 percent It also booked €6.84 billion during the period from the financial derivatives it used to secure control of Volkswagen But Wendelin Wiedeking, Porsche’s chief executive, has assured the 2,500 workers at its Stuttgart plant that their jobs are safe, securing a vital flank in a country where workers are represented on the board Automakers universally outsource production of parts or sections of vehicles, and some even contract for the assembly of small numbers of automobiles This strategy shifts part of the financial risk of a downturn onto suppliers, since a falloff in demand forces manufacturers to curtail production of cars, but not spark plugs, headlights and the like Porsche, though, is notable for using an outside company, Valmet, to assemble one of its main product lines, the Cayman, and its convertible sibling, the Boxster In some sense, the innovation makes Porsche the only major virtual vehicle manufacturer, a company that designs and markets sports cars without actually cranking them all out on its own production line The bread and butter of Porsche’s work in Stuttgart is the classic 911 sports car, but with demand for that model now falling, it is pulling Boxster production out of Uusikaupunki back to Germany Though the system creates fiendishly complex logistical challenges, Stuttgart can keep running at capacity, evading the industry’s hoary problem of covering the fixed costs of factories and labor Mr Wiedeking has said repeatedly that it is “preferable to build one car too few than one too many.” That 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 companies like Daimler and BMW are offering strong incentives for sales in the United States, 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.” Mr Wiedeking became Porsche’s chief executive in 1993 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 The Valmet-Porsche relationship began in 1997 as demand for the 911 rose, forcing Porsche to find another way to make the Boxster Rumors abound in the industry that Valmet’s quality sometimes outstripped what Porsche has managed back in Stuttgart, a charge Mr Korhonen does not deny “Officially, we are allowed to be only as good as Porsche,” he said with a smile “What matters is the customer.” In 2006, Valmet’s production for Porsche peaked at about 30,000, 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 in 2009 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 United States and Asia Mr Korhonen, a cerebral engineer with an M.B.A., is constantly calibrating his work force to match Porsche’s needs with the deft touch of an artist applying the final brushstrokes to a masterpiece 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 in March “We are adjusting capacity almost daily,” Mr Korhonen said Managing the inflow of parts that go into a high-performance Porsche is another tricky task Many suppliers are concentrated near Stuttgart, but Valmet has to arrange deliveries to Finland, and often in smaller quantities Hence the “milk run,” as Mr 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 No detail is too small Axles that are delivered to Porsche have the spring-like suspension, which sticks up from the axle, already attached But they come to Valmet disassembled, so as to pack more into a single truck 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, a company in Austria, which has the resources to assist Porsche in some 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 It will also soon produce a luxury golf car for a Danish customer and expects to sell other engineering services as automakers create derivatives of existing models, Mr 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,” Mr Korhonen said “We expect the market to recover.” How you understand the title of the article “Porsche Finds Fortune From Unlikely Outsourcing”? Please explain Summarize advantages and disadvantages of Porsche (the buyer of outsourcing service) and Valmet (the supplier of outsourcing service) in this partnership Is there anything new of paradoxical to theory? Describe the system of lean manufacturing mentioned in the article What can be the dangers to such manufacturing system? What are the threats from the economic situation that can make the system less efficient or even collapse? Suppose that you are the head of a Vietnamese mechanical factory What can you tell Porsche management to convince them to outsource the assembling their 911 or Boxster to your company as a replacement of Valmet? ... article Porsche Finds Fortune From Unlikely Outsourcing ? Please explain Summarize advantages and disadvantages of Porsche (the buyer of outsourcing service) and Valmet (the supplier of outsourcing. .. year, which ran from August to January, Porsche s sales tumbled 12.8 percent, to €3.04 billion, as deliveries fell 26.7 percent It also booked €6.84 billion during the period from the financial... became Porsche s chief executive in 1993 and brought with him the gospel of efficient production that openly copied methods he learned from Japanese automakers, above all Toyota But by outsourcing