Please ensure Javascript is enabled for purposes of website accessibility

How This New Porsche Will Squeeze Volkswagen's Profits

By John Rosevear - Feb 10, 2016 at 4:20PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Porsche is one of the biggest contributors to giant Volkswagen's bottom line. But Porsche needs to spend big on an upcoming new car, and that will squeeze VW just as it's facing the fallout from its diesel-emissions scandal.

Porsche will spend big to develop and produce the all-electric Mission E sports car, its CEO said this week -- and that big spending will squeeze parent Volkswagen's bottom line. Image source: Porsche.

If you know anything about how the huge German automaker Volkswagen (VWAGY 5.54%) makes money, the headline to this article doesn't make sense. Tiny sports-car maker Porsche has been one of the biggest contributors to VW's bottom line in recent years.

But just as VW's finances are expected to come under heavy pressure as it copes with the fallout from its diesel emissions-cheating scandal, tiny Porsche is feeling the need to make some big investments -- and those investments will take another bite out of VW's bottom line.

A very important -- and expensive -- new Porsche
Porsche CEO Oliver Blume told reporters on Monday that investments required to develop and build future products will hinder its earnings growth for the near future, according to a Reuters report. What is probably the most significant of those future products is the one requiring the biggest of those investments: Porsche will spend 1 billion euros to create an all-new facility to build the brand's first-ever electric car. 

Porsche surprised the world when it unveiled what it calls the "Mission E Concept" at the Frankfurt Motor Show last September. It's a battery-electric Porsche sports car, with a special new fast-charging system, and a claimed range of "over 500 kilometers," or more than 312 miles.

At the time, the Mission E was presented as strictly a "concept car," for show. But Porsche made it official in December: It's going to put the Mission E into production "by the end of the decade." 

Porsche says that the Mission E's fast-charging system can recharge 80% of the car's 500-plus kilometer range in just 15 minutes. Image source: Porsche.

It's part of a larger VW push into battery-electric cars that was set in motion before the diesel scandal erupted. But new VW CEO Matthias Mueller appears to have stepped up the company's electrification efforts since last fall. 

The Porsche will follow a new all-electric Audi SUV, likely to be called the Q6, that is expected to go into production in about two years. Both the Audi and the Porsche appear to share breakthrough battery and charging technology that looks likely to make them very competitive with Tesla Motors' (TSLA 3.89%) Model S and Model X. 

An added squeeze on VW's bottom line
It's hard to estimate how big a dent the Mission E and other future-product programs will make in Porsche's (and thus VW's) earnings. Right now, we don't yet know exactly how much money Porsche made last year.

Volkswagen hasn't yet released its fourth-quarter and full-year 2015 earnings, and it may not for some time. The release, originally scheduled for March 10, was indefinitely postponed last week as Mueller and his senior team continue to grapple with the costs of the diesel scandal. 

A year ago, Porsche generated 2.72 billion euros ($3.06 billion at current rates) in operating profit, up 16% on a 20% gain in sales. Blume said on Monday that Porsche "delivered a great result" again in 2015. 

He made it clear, however, that Porsche's results will be more subdued for the next few years, and that won't help VW's already-stressed bottom line.

John Rosevear has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Tesla Motors. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Volkswagen Aktiengesellschaft Stock Quote
Volkswagen Aktiengesellschaft
$20.39 (5.54%) $1.07
Tesla, Inc. Stock Quote
Tesla, Inc.
$883.07 (3.89%) $33.07

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
S&P 500 Returns

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 08/11/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.