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PORSCHE EXPOSED
BMW says that its decisions on where it locates production are driven by market needs, not currency considerations. Yet it has created natural hedges for itself by producing cars in America and Britain. By incurring costs in these markets, it greatly reduces the currency translation problem. Rival Porsche makes most of its cars in Germany, so its costs are mostly in euros. Yet a large chunk of its revenues come from sales of its sports cars in America. Lacking BMW's natural hedge, Porsche uses financial hedging to minimise the short-term impact of currency swings. Grappling with the Strong Euro, The Economist, June 5, 2003, p. 53. The USA represents approximately 50 percent of our total business. There are a few other countries that also use US dollars. This situation will not change much in [the] future. That is why we are hedged against currency fluctuation for the next three to four years. In our books the dollar and the yen are above the actual rates. That allows us time to react to any currency movement. Porsche Roars Past Sales Targets, Automotive News Europe, September 22, 2003, p. 20.

It was January 2004 and Porschethe legendary manufacturer of performance sports carswished to reevaluate its exchange rate strategy. Porsche's management had always been unconcerned about the opinions of the equity markets, but its currency hedging strategy was becoming something of a lightning rod for criticism. Although the currency hedging results had been positive, many experts believed that Porsche had simply been more lucky than good. There was growing concern among analysts that the company was actually speculating on currency movements. Analysts estimated that more than 40% of earnings were to come from currency hedging in the coming year. Porsche's President and Chief Executive Officer (CEO), Dr. Wendelin Wiedeking, now wished to revisit the company's exposure management strategy.

Porsche AG
Porsche was a publicly traded, closely held, German-based auto manufacturer. Dr. Wiedeking had returned the company to both status and profitability since taking over the company in 1993. Porsche had closed the 2002/03 fiscal year with 5.582 billion in sales and 565 million in profit, after-tax (see Appendix 1). Wiedeking and his team were credited with the wholesale turnaround of the specialty manufacturer. Strategically, the leadership team had now expanded the company's business line to reduce its dependence on the luxury sports car market, historically an extremely cyclical business line. Although Porsche was traded on the Frankfurt Stock Exchange (and associated German exchanges), control of the company remained firmly in the hands of the founding families, the Porsche and Pich families. Porsche had two classes of shares, ordinary and preference. The two families held all 8.75 million ordinary shares. Ordinary shares held all voting rights. The second class of share, preference shares, participated only in profits. All 8.75 million preference shares were publicly traded. Approximately 50% of all preference shares were held by large institutional investors in the United States, Germany,
Copyright 2004 Thunderbird, The Garvin School of International Management. All rights reserved. This case was prepared by Professors Michael H. Moffett and Barbara S. Petitt for the purpose of classroom discussion only, and not to indicate either effective or ineffective management.

and the United Kingdom, 14% were held by the Porsche and Pich families, and 36% were held by small private investors. As noted by the Chief Financial Officer, Holger Hrter, As long as the two families hold onto their stock portfolios, there won't be any external influence on company-related decisions. I have no doubt that the families will hang on to their shares. 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. The company pointed to the specific requirement of Sarbanes-Oxley that senior management sign off on the financial results of the company personally as inconsistent with German law (which it largely was) and illogical for management to accept. Management had also long been critical of the practice of quarterly reporting, and had, in fact, been removed from the Frankfurt exchange's stock index in September 2002 because of its refusal to report quarterly financial results (it still only reports operating and financial results semi-annually). Porsche's public response to its removal from the MDAX was unapologetic as usual: Of far more importance, from the investors standpoint, than a continued presence in the internationally insignificant MDAX is the inclusion of Porsche's stock from the end of November 2001 in the Morgan Stanley Capital International index. Porsche's management continued to argue that the company believed itself to be quite seasonal in its operations, and did not wish to report quarterly. It also believed that quarterly reporting only added to short-term investor perspectives, a fire which Porsche felt no need to fuel. Porsche's brief press release announcing its decision not to list in New York is shown in Appendix 4. Porsche also continued to report only under German accounting standards. German standards were often criticized for their lack of transparency, and allowed companies like Porsche to mix operating results with financial results, including foreign exchange operations. Many of its rivals, even Germanbased companies, were now reporting in accordance with either International Accounting Standards (IAS) or U.S. Generally Accepted Accounting Principles (GAAP). The refusal to expand reporting was seen as one more indicator of the company's stubbornness, particularly since all EU-listed companies were required to report in accordance with IAS beginning in 2005. But, after all was said and done, the company had just reported record profits for the ninth consecutive year. Returns were so good, and had grown so quickly in the past two years, that the company had paid out a special dividend of 14 per share in 2002. That was in addition to increasing the size of the common regular dividend. The company's critics, of course, had argued that this was simply another way in which the controlling families drained profits from the company.
With net cash of 1.1 billion at the end of 2002 and our forecast of strong cash flow generation, we believe that Porsche is unlikely to need to do a rights issue for some years, although it may choose to have one in order to fund a 4th or even a 5th model seriesthat is, unless there is a major liability or a severe and sustained weakening of the U.S. dollar. As a result, we think there is the potential risk that management may not rate shareholders interests very highly. 1

The compensation packages of Porsche's senior management team were nearly exclusively focused on current-year profitability (83% of executive board compensation was based on performance-related pay), with no management incentives or stock option awards related to the company's share price. Porsche's leadership, however, had clearly built value for all shareholders in recent years. As illustrated in Exhibit 1, the current management team's tenure (beginning late 1993) had resulted in a significant increase over time in the share price, although the recent three-year period had been characterized by extreme volatility. Still, performance was nothing short of remarkable, particularly following the post9/11 share price fall (2001) and the fact that it was a German-based company currently held captive by a strengthening euro (2003).
1

Porsche: Worth the Risk, UBS Investment Research, September 1, 2003, p. 54.
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Exhibit 1
500

Porsches Share Price, 19942003 (monthly average)

400

300

200

100

0
2/ 01 11 /2 /0 1 3/ 1/ 02 7/ 1/ 02 11 /1 /0 2 3/ 3/0 3 7/ 1/0 11 3 /3 /03 5 7 9 0 4 5 5 6 6 7 0 0 1/ 0 1/ 6 7 4 4 8 8 8 2/ 9 9 9 1/ 9 1/ 9 2/ 9 2/ 9 2/ 9 2/ 9 2/ 9 1/ 9 3/ 0 2/ 0 2/ 9 1/ 9 3/9 1/ 3/9 4/9 2/ 0 2/9 2/9 4/9 1/9 9/ 5/ 9/ 1/ 5/ 9/ 9/ 5/ 9/ 1/ 5/ 1/ 5/ 9/ 1/ 1/ 5/ 1/ 9/ 5/ 5/ 1

Porsche's Changing Portfolio

Porsche's product portfolio had undergone significant change as CEO Wiedeking pursued his promise to shareholders that he would grow the firm. The company had three major vehicle platforms: the premier luxury sports car, the 911; the competitively priced Boxster roadster; and the recently introduced off-road sport utility vehicle, the Cayenne. The 911 series was still the focal point of the Porsche brand, but many believed that it was growing old and due for replacement. Sales had seemingly peaked in 2001/02, and fallen back more than 15% in 2002/03. The 911 was a highly developed series with more than 14 current models carrying the 911 tag. The 911 had always enjoyed, and probably still did, nearly exclusive ownership of its market segment. Although its sales had been historically cyclical, 911 demand was not price-elastic. Management would not comment on rumors, but it was widely believed that the 911 series would be supplemented by a fourth platform in 2005. The Boxster roadster had been introduced in 1996 as Porsche's entry into the lower price end of the sports car market, and had been by all measures a very big success. The Boxster was also considered an anticyclical move because the traditional 911 was so high-priced, its sales were heavily dependent on the disposable income of buyers in its major markets (Europe, the United States, and the United Kingdom). The Boxster's lower price made it affordable and less sensitive to the business cycle. It did, however, compete in an increasingly competitive market segment. Although the Boxster had competed head-to-head with the BMW Z3 since its introduction in 1996, the introduction of the Z4 in 2003 had drastically cut into Boxster sales. Volume sales were now only two-thirds of their peak 2000/01 levels. The third major platform innovation was Porsche's entry into the sports utility vehicle (SUV) segment, the Cayenne. Clearly at the top end of the market (2002/03 Cayenne sales averaged more than $70,000 each), the Cayenne had been a very quick success, especially in the SUV-crazed American market. The Cayenne introduction had been hailed by many in the auto industry as one of the most successful new product launches in history, and had single-handedly floated Porsche sales numbers in this most recent fiscal year. The Cayenne's success had been even more dramatic given much prelaunch criticism that the market would not support such a high-priced SUV, particularly one which shared a strong bloodline with the Volkswagen (VW) Touareg. The Porsche Cayenne and VW Touareg had been jointly developed by the two companies. The two vehicles shared a common chassis and, in fact, were both manufactured at the same factory in Bratislava, Slovakia. To preserve its unique identity, however, Porsche shipped the Cayenne chassis 17 hours by rail to its facility in Leipzig, Germany, where the engine, drivetrain and interior were combined in final assembly.2 A new six-cylinder version was slated for
A06-04-0004 3

introduction in 2004 and was expected to buoy Cayenne sales after the initial boom of the introduction year.3 As illustrated by Exhibit 2, Porsche's platform innovations had been extremely successful in growing the firm's unit sales since 1995. Exhibit 2
70,000

Porsches Expanding Platforms and Growing Sales

60,000

911

Boxster

Cayenne

50,000

40,000

30,000

20,000

10,000

0 1994/95 1995/96 1996/97 1997/98 1998/99 1999/00 2000/01 2001/02 2002/03

Financial Health
Porsche's financial performance and health was, by all European auto manufacturer standards, excellent. It was clearly the smallest of the major European-based manufacturers with total sales of 5.6 billion in 2002. But, as illustrated in Exhibit 3, Porsche was outstanding by nearly every other financial performance metric: the highest revenue per vehicle, the highest operating margins (EBIT margin of 16.4%), the highest price-earnings ratio (16.5), the highest net operating profit after tax margin (NOPAT of 8.9%), and the highest return on invested capital (ROIC of 20.5%). The only category which was generally average by industry standards was invested capital turnover (2.3). The company's low debt level was particularly notable, as Porsche had the second-lowest total debt-to-asset ratio. The company's superior operating cash flows had proven more than adequate to internally finance an aggressive capital expenditure and expansion program in recent years. In fact, Porsche's cash balances had reached a record level of 1.766 billion at the end of 2002/03 (see Appendix 2). Porsches view on debt was rather extreme compared to that held by most of the other major European-based automobile manufacturers. To quote CFO Hrter: 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.4 This antidebt philosophy was also consistent with the emphasis placed by Porsche on both cash flow and cash balances. Again, in the words of CFO Hrter: 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.
2

The engine was in fact the only part of the Cayenne which was actually manufactured by Porsche itself. All other components of the vehicle were either outsourced or built in conjunction with other manufacturers. 3 The six-cylinder engine, however, was actually a Volkswagen engine which had been reconfigured. This led to significant debate, as Porsche was criticized for degrading the Porsche brand. 4 Kersnar, Janet, Hot Wheels, CFO Europe.com, November 2002.
4 A06-04-0004

Exhibit 3

Porsches Competitive Positioning, 2002

EBIT Margin 6.6% 8.0% 1.6% 6.4% 5.3% 16.4% 4.1% 5.2% PE Ratio na 12.1 nm na 5.9 16.5 7.5 6.4 NOPAT Margin na 4.9% -1.0% na 3.5% 8.9% 2.2% 3.4% Debt to Assets 0.2% 47.5% 31.3% na 42.9% 6.4% 47.6% 42.4% Moodys Rating na A1 Ba3 na A2 na Baa2 A1 Invested Capital Turnover na 2.3 2.9 na 3.0 2.3 1.7 2.0 ROIC na 11.3% -2.9% na 10.5% 20.5% 3.7% 6.8%

European Sales Revenue Automaker (billions) per Vehicle Audi 22.6 27,000 BMW 42.3 32,221 Fiat 58.2 25,829 Mercedes Benz 50.2 39,000 Peugeot (PSA) 54.4 16,192 Porsche 5.6 72,589 Renault 36.3 14,250 Volkswagen 86.9 13,583

Source: CreditSuisse/First Boston, December 16, 2003, p. 7; Commerzbank Securities, December 2003, company reports. For 2002, the two major U.S.-based auto manufacturers, GM and Ford, had EBIT margins of 0.1% each. EBIT = earnings before interest and tax; NOPAT = net operating profit after-tax; PE = share price/earnings per share; Debt to Assets = (shortterm + long-term debt)/total assets; ROIC = return on invested capital. DaimlerChrysler does not report detailed financial results for Mercedes Benz. Audi and Porsche are not currently rated by either Moodys or Standard & Poors; Mercedes Benz is not separately rated from DaimlerChrysler.

Foreign Currency Exposure

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; we are calculating with levels which are significantly below current levels, and today I know what I will get for the dollar in 2006. I am very relaxed. Dr. Wiedeking in Capital, 2nd quarter, 2003. Porsche has the heaviest U.S. exposure (and this is increasing), yet it has the lowest level of natural hedging in the sector. Porsches earnings will have a 43% contribution from hedging contracts in 2003/04E, the highest in the sector.... Porsche, Citigroup Smith Barney, September 24, 2003, p. 5.

Among European-based automakers, BMW, Mercedes, Porsche, and VW were clearly the most exposed to exchange rate changes (primarily the dollar/euro). As illustrated by Exhibit 4, Porsche possessed the largest mismatch between where their automobiles were produced and where they were sold. With 42% of global sales in North American markets, and an additional 11% in the United Kingdom, Porsche possessed no manufacturing or assembly cost-bases in the countries of more than 50% of global sales. Exhibit 4 United Kingdom and North American Sales and Production of Selected European Automakers as a Percent of Global Results, 2002
United Kingdom Sales Production 11% 15% 6% 0% 9% 0% 12% 6% 11% 0% 9% 0% 7% 0% North American Sales Production 26% 11% 0% 0% 19% 7% 0% 0% 42% 0% 1% 1% 13% 7%

Automaker BMW Fiat Mercedes Peugeot Porsche Renault Volkswagen

Source: Company reports, authors estimates.

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All the European automakers, however, were cognizant and concerned over corporate currency exposures. BMW and Mercedes had announced plans to increase the amount of what analysts were calling natural hedging (the matching of dollar revenues with dollar costs). BMW planned to double the capacity of its Spartanburg, South Carolina manufacturing facility. Mercedes had similarly announced a capacity expansion for its Alabama manufacturing facility, while considering the downsizing of its Magna Steyr, Germany, operations. VWs continuing strategy to hedge its U.S. dollar exposure was a bit different. VW believed that if it increased its operating cost base in Brazil, it would be uniquely positioned to manage its U.S. dollar risks. In that pursuit, VW had announced it would be assembling all of its Bora line and the Fox small car in Brazil or Mexico, roughly 4% of VWs group output. Porsches exposure was clearit was a global brand with a single-currency cost-base. The company produced in only two countries, Germany and Finland (the Boxster was assembled under a licensing agreement with Valmet of Finland). Both were euro-denominated economies. 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. Porsches sales by currency in 2002/03 were estimated as: European euro () 45%; U.S. dollar ($) 40%, British pound sterling () 10%, Japanese yen () 3%, and Swiss franc (Sfr.) 2%. As illustrated in Exhibit 5, Porsches non-euro sales were only expected to increase in the coming years. Exhibit 5
6,000

Porsches Sales by Geographic Segment, 19912003 (million )

5,000

4,000

Rest of World

3,000

2,000

United States

1,000

Germany
0
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

Source: Worldscope (1991-2001) and Hoovers (2002-2003).

Pricing Pressures
Exchange rate pass-through, the process of passing through all or part of exchange rate changes to the final customer in price, was probably very product-specific for Porsche. The 911 series was largely considered price-inelastic, and could probably accommodate additional local currency (primarily U.S. dollar) price increases and maintain sales volumes. The Boxster, competing in a very price-intensive market segment, probably could not. And although the Cayenne had debuted at a very high level, Porsche was moving quickly to introduce the lower-powered, lower-priced version immediately, fearing the higher price segment of the market was not a growth segment. As illustrated in Appendix 5, all three
6 A06-04-0004

vehicle platforms enjoyed at least attractive EBIT marginssome excessive compared to that of nearly every other auto manufacturer in the world. This portfolio could probably absorb some continued currency-induced pricing pressures in North America, but not the magnitudes some were forecasting for the euros change against the dollar. Clearly, if the euro continued to rise, Porsche would be unable to absorb all of its movement in pricesmargins would have to fall in North America. The latest addition to the stable of 911 thoroughbreds, the 911 Carrera 4S Cabriolet, was symbolic of Porsches growing pricing dilemma. A 320 horsepower, 3.6 liter six-cylinder engine convertible, the new Cabriolet had a top speed of 280 kilometers per hour and could go from zero-to-100 km/hr in 5.3 seconds. It was priced at a 85,900 in Continental Europe, not including value-added tax (VAT) or other country-specific taxes. Simultaneously, Porsche introduced the new Cabriolet in North American in July 2003 at $93,200. The price/exchange-rate relationship was then: Price$ = Price x Spot rate$/ This implied an exchange rate of $1.0850/ when solving the relationship for the implied effective exchange rate: Price$ $93,200 Spot rate$/ = = = $1.0850/ Price 85,900 This was a considerably stronger dollar than what was available on the open market at that time; the July 2003 monthly average was $1.1362/. If the margins on the new Cabriolet were to be close to the similarly priced 911 Targa, which was currently averaging a 10.1% EBIT margin (see Appendix 5), these exchange rate changes and differentials from market could be quickly eliminated if not passed through to the dollar price. With the euro expected to rise to anywhere between $1.25/ and $1.35/ by July of 2004, Wiedeking and his staff did not believe even the 911 could absorb those currency price pressures that quickly. In fact, Porsches current belief was not to attempt to compete on price, but on quality and quantity. Porsche did not wish to let price clear the market. Its current contingency plans included production stops and production shifting. CEO Wiedeking was quite open about Porsches ability to stop the Boxster production line within five hours of a simple phone call, under the production agreement with Valmet. Over the longer run, Porsche was considering shifting a large proportion of Boxster production from Valmet in Finland to Porsches own Stuttgart facilities, shifting 911 production over to Boxster as 911 sales dropped. This would allow the company to sustain its operating margins under shifting product demand changes.

Current Hedging Strategy

Porsche, like some of its European counterparts, suffered the rather whimsical swings in the value of the dollar over the years. The companys aversion to dollar exposures was founded in the reality of the losses suffered in 1992 and 1993, when the combined global recession and weak dollar had caused Porsches sales to drop 38% in one year. The memory of the resulting losses was a lasting one. Since that time, with new leadership and new business and financial aggressiveness, Porsche had centralized treasury functions and implemented a corporate-level currency hedging program. Porsches leadership had taken a very aggressive currency hedging strategy beginning in 2001 when the euro was at a record low against the U.S. dollar (see Appendix 8). With 45% of all sales in North America, and that percentage expected to climb with the growth of the Cayenne, the company was long-term long dollars. The 2003/04 year ended with $1.836 billion in gross dollar revenues, auto, financing, and engineering services combined, up from $1.60 billion in 2001/02 and $1.75 billion in 2002/03. Because the company incurred some local expenses in U.S. dollars, the net dollar exposure varied between 70% and 72% of the gross dollar amount.
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Porsche began purchasing a series of put options on the U.S. dollar in 2000. These options would allow Porsche, if it desired, to exchange the U.S. dollars generated through North American sales into euros at specific exchange rates in the future. Described as a medium-term strategy, the company continued to increase its put option hedge purchases throughout 2002 and early 2003 so that it was 100% hedged for sales through the 2006 model year. To actually execute the strategy, Porsche created a threeyear rolling portfolio of put options. Hedging net dollar exposures out three years required the company not to only forecast sales and subsequent exposures out three years, but to continually carry options possessing notional principals of a full three years of net exposure. Many analysts were highly critical of the cost of such a strategy. Porsche had expected the dollar to fall in value (euro to rise). It therefore purchased put options with strike prices beginning at $0.90/, and rising in subsequent years to $1.00/. Only time would tell whether the put option strike rates chosen would provide significant profitability and protection. By locking in put option strike rates at the time of the euros historical weakness, Porsche had acquired affordable protection against a strengthening euro for years to comewhich was what Porsche both expected and feared. The gains from the hedging strategy were already materializing in 2002/03, and were expected to be even more substantial in the coming year. As illustrated in Exhibit 6, the impact of hedging activities on the basic earnings of the firm (EBIT margins) had not always been this successful. Exhibit 6
20%

Impact of Porsches Treasury Pofits on EBIT Margins

Underlying EBIT
15%

Treasury profit

10%

5%

0%

-5% 1995/96 1996/97 1997/98 1998/99 1999/00 2000/01 2001/02 2002/03 2003/04E

Source: CreditSuisse/First Boston, December 13, 2003, p. 47, p. 70. Values for 2003/04 are estimates.

Wiedeking and Hrter did not make a practice of concerning themselves with the opinions or speculations of analysts. But many analysts were now separating Porsches results into underlying versus treasury. For example, one investment banking firm had recently decomposed Porsches forward-looking PE ratio into 18 underlying and 14 treasury, rather than crediting the firm with an aggregate PE of 32. Wiedeking and Hrter wished to reconsider their current strategy. Was there a better long-term currency exposure management strategy out there for Porsche?

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Appendix 1
Income items

Porsches Consolidated Statement of Income (millions of euros)

1998/99 3,161 (1,558) (575) 1,028 32.5% 65 (568) 525 16.6% (184) 341 10.8% (2) 18 357 (166) 191 6.1% 46.5% 17.5 10.93 34.9% 1999/00 3,648 (1,972) (631) 1,045 28.6% 199 (621) 623 17.1% (197) 426 11.7% (23) 31 434 (224) 210 5.8% 51.6% 17.5 12.02 10.0% 1.48 1.53 2000/01 4,441 (2,384) (710) 1,347 30.3% 122 (789) 680 15.3% (133) 547 12.3% (7) 53 593 (322) 271 6.1% 54.3% 17.5 15.51 29.0% 2.54 2.60 2001/02 4,857 (2,236) (799) 1,822 37.5% 165 (910) 1,077 22.2% (279) 798 16.4% (3) 35 830 (367) 463 9.5% 44.2% 17.5 26.47 70.7% 2.94 14.00 3.00 2002/03 5,582 (2,281) (850) 2,451 43.9% 28 (1,182) 1,297 23.2% (392) 905 16.2% (2) 30 933 (368) 565 10.1% 39.4% 17.5 32.29 22.0% 3.34 3.40

Net sales Less cost of materials Less personnel costs Gross profit Gross margin (%) Other income Less selling, G&A and other EBITDA EBITDA margin (%) Less depreciation & amortization Operating profit or income Operating margin (%) Income from investments Interest income (expense), net EBT Less corporate income taxes Net income Return on sales (%) Effective tax rate (%) Shares (common & preferred) Earnings per share EPS growth rate Dividends per share (common) Extraordinary dividend Dividends per share (preferred)

Source: Porsche AG, Morgan Stanley, December 8, 2003, p. 9.

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Appendix 2

Porsches Consolidated Balance Sheet (millions of euros)

1998/99 1999/00 823 204 239 67 1,332 76 487 0 14 295 2,204 18 240 258 102 111 951 1,164 1,422 782 2,204 2000/01 1,121 248 267 81 1,717 108 561 0 38 443 2,867 159 236 395 0 132 1,312 1,444 1,839 1,028 2,867 2001/02 1,683 171 291 50 2,195 214 731 1,224 39 1,006 5,409 137 303 440 317 1,469 1,716 3,502 3,942 1,467 5,409 2002/03 1,766 211 468 42 2,487 346 901 1,375 42 1,163 6,314 88 337 425 317 1,729 2,088 4,134 4,559 1,755 6,314

Assets Cash & cash equivalents Accounts receivable Inventories Prepaid expenses & other Total current assets Intangibles Property, plant, and equipment Leased vehicles Financial assets Other assets Total Assets Liabilities & Equity Short-term borrowings Accounts payable Total current liablities Long-term debt Other liabilities Provision for risks and charges Total long-term liabilities Total liabilities Stockholders equity Total liabilities & equity

730 148 293 72 1,243 16 501 0 9 149 1,918 54 193 247 102 124 856 1,082 1,329 589 1,918

Source: Porsche AG, Morgan Stanley, December 8, 2003, p. 9.

10

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Appendix 3
(millions of euros)

Porsches Consolidated Statement of Cash Flow

1998/99 1999/00 210 197 75 44 526 (257) ( 257) 0 (36) (22) ( 58) 4 215 2000/01 270 133 346 (76) 673 (294) ( 294) 37 0 (26) 11 2 392 2001/02 462 138 286 119 1,005 (410) ( 410) 339 (102) (45) 192 (5) 782 2002/03 565 196 382 (183) 960 (591) ( 591) (49) 0 (297) ( 346) 0 23

Operating Activities Income before extraordinary items 191 Depreciation, depletion, & amortization 184 Non-cash provisioning (excld pensions) 176 Change in net working capital (76) Cash flow from operating activities 475 Investing Activities Capital expenditure Cash flow from investing activities Financing Activities Change in short-term debt Change in long-term debt Payment of dividends Cash flows from financing activities Exchange rate effect Net change in cash (153) ( 153) 0 28 (22) 6 1 329

Source: Porsche AG, Morgan Stanley, December 8, 2003, p. 9.

Appendix 4

Porsche Dispenses with Listing in New York

Stuttgart. The preferred stock of Dr. Ing. h.c. F. Porsche AG, Stuttgart, will continue to be listed exclusively on German stock exchanges. All considerations about gaining an additional listing in the U.S.A. have been laid aside by the Porsche Board of Management. The sports car manufacturer had been invited to join the New York Stock Exchange at the beginning of the year. The Chairman of the Board of Management at Porsche, Dr. Wendelin Wiedeking, explained the decision: The idea was certainly attractive for us. But we came to the conclusion that a listing in New York would hardly have brought any benefits for us and our shareholders and, on the other hand, would have led to considerable extra costs for the company. The crucial factor in Porsches decision was ultimately the law passed by the U.S. government this summer (the Sarbanes-Oxley Act), whereby the CEO and the Director of Finance of a public limited company listed on a stock exchange in the U.S.A. have to swear that every balance sheet is correct and, in the case of incorrect specifications, are personally liable for high financial penalties and even up to 20 years in prison. In Porsches view, this new American ruling does not match the legal position in Germany. In Germany, the annual financial statement is passed by the entire Board of Management and is then presented to the Supervisory Board, after being audited and certified by chartered accountants. The chartered accountants are commissioned by the general meeting of shareholders and they are obliged both to report and to submit the annual financial statement to the Supervisory Board. The annual financial statement is only passed after it is approved by the Supervisory Board. Therefore, there is an overall responsibility covering several different committees and, as a rule, involving over 20 persons, including the chartered accountants. The Porsche Director of Finance, Holger P. Hrter, made the following comments: Nowadays in Germany, the deliberate falsification of balance sheets is already punished according to the relevant regulations in the Commercial Code (HGB) and the Company Act (Aktiengesetz). Any special treatment of the Chairman of the Board of Management or the Director of Finance would be illogical because of the intricate network within the decision-making process; it would also be irreconcilable with current German law.
Source: Porsche, News Release of October 16, 2002.

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11

Appendix 5
Boxster Roadster Units sold Average price Revenue (million) Less variable cost Gross margin Less fixed charges EBIT EBIT margin 911 Sports Car* Units sold Average price Revenue (million) Less variable cost Gross margin Less fixed charges EBIT EBIT margin Cayenne SUV Units sold Average price Revenue (million) Less variable cost Gross margin Less fixed charges EBIT EBIT margin

The Porsche Platforms and Margins, 2002/03

Boxster 10,157 41,380 420.3 (273.2) 147.1 (124.1) 23.0 5.5% C2 Cabrio 6,500 82,877 538.7 (250.3) 288.4 (228.1) 60.3 11.2% Cayenne S 15,859 59,165 938.3 (703.7) 234.6 (161.6) 73.0 7.8% Boxster S 8,254 48,910 403.7 (262.4) 141.3 (100.9) 40.4 10.0% Targa 2,300 80,696 185.6 (86.2) 99.4 (80.7) 18.7 10.1% Cayenne Turbo 4,744 98,145 465.6 (349.2) 116.4 (48.4) 68.0 14.6% 911 Turbo 5,200 124,038 645.0 (299.6) 345.4 (182.4) 163.0 25.3% Total Boxster 18,411 44,756 824.0 (535.6) 288.4 (225.0) 63.4 7.7% Total 911 27,789 92,821 2,579.4 (1,198.4) 1,381.0 (975.0) 406.0 15.7% Total Cayenne 20,603 68,145 1,404.0 (1,053.0) 351.0 (210.0) 141.0 10.0%

*The 911 possesses 11 other models in addition to the three shown here. Source: Citigroup Smith Barney, September 24, 2003, p.12.

Appendix 6
Automaker BMW Mercedes Porsche Volkswagen

Currency Exposure Covered by Derivatives

2003E 90% 90% 100% 40% 2004E 70% 60% 100% 70% 2005E 35% 30% 100% 30%

E = estimate. Porsches fiscal year ends in July while all others end in December. Source: European Autos Quarterly, Commerzbank Securities, January 7, 2004, p. 11.

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Appendix 7
US$/

The U.S. Dollar/Euro Spot Rate, 1999-2003 (monthly average)

1.25 1.20 1.15 1.10 1.05 1.00 0.95 0.90 0.85 0.80

May

May

May

May

May

Nov

Nov

Nov

Nov

Mar

Mar

Mar

Mar

Mar

Jan-99

Jan-00

Jan-01

Jan-02

Jan-03

Appendix 8

The U.S. Dollar/Euro Exchange Rate and Selected Interest Rates and Volatilities, 1999-2003 (monthly)
Spot Rate (US$/) 1.0371 0.9386 0.8616 0.9931 1.1362 Eurodollar LIBOR Rates by Maturity 3-Month 6-Month 12-Month (percent) (percent) (percent) 5.310 5.610 5.771 6.732 6.919 7.089 3.751 3.791 4.001 1.848 1.905 2.143 1.110 1.123 1.201 US$/ Volatility by Maturity One-Year Two-Year Three-Year (percent) (percent) (percent) 9.01 12.95 14.80 10.62 13.92 16.75 11.55 15.68 18.08 9.75 15.12 18.49 9.44 14.13 17.83 Euro-LIBOR Rates by Maturity 3-Month 6-Month 12-Month (percent) (percent) (percent) 2.676 2.897 3.031 4.580 4.835 5.104 4.467 4.386 4.310 3.407 3.481 3.643 2.127 2.090 2.077

Month/Year July-99 July-00 July-01 July-02 July-03

Month/Year July-99 July-00 July-01 July-02 July-03

Spot Rate (US$/) 1.0371 0.9386 0.8616 0.9931 1.1362

Option volatilities are the mean for the 1-year, 2-year, or 3-year period ending with the listed date. For example, July 1999 one-year volatility is the mean of the August 1998July 1999 period.

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Nov

Sep

Sep

Sep

Sep

Sep

Jul

Jul

Jul

Jul

Jul

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