New technologies, new products, new competitors, new customers, new rules: Lutz Meschke, Board Member for Finance/IT and Deputy Chairman of the Executive Board, on transformation in turbulent times – and why he doesn’t want to abandon a 15% profit-margin target.
Mr. Meschke, Porsche has stated that it is developing from a sports car manufacturer into a provider of sporty mobility. When will you stop building cars altogether?
Ferry Porsche, the man who founded our company just over 70 years ago once said, “The last car ever built will be a sports car.” And I hope it will be a Porsche.
What is the difference between sports cars and sporty mobility?
Primarily that we have more to offer than just extraordinary vehicles. For most people, mobility just means driving. But in reality, it is much more than that. In the future, we will accompany customers throughout their daily lives – everything to do with the digital life style with products that typify Porsche. The core of Porsche 360+ is a personal lifestyle assistant that is at the customer’s disposal around the clock. It will simplify daily life and enable exclusive experiences.
A beautiful new Porsche world?
Our world! It is characterized not only by rising demand for mobility but also an increasingly diverse range of forms of mobility. We are experiencing an evolution of mobility. Digitalization, electrification, connectivity – it’s all happening in sync and at full speed, so to speak. And it’s not only us who are undergoing a deep transformation. The entire automotive industry is moving toward the technology and IT sectors to some extent.
What does that mean for Porsche?
Nothing is unaffected. It starts with the mentality: over many years, we’ve enlarged and refined our model ranges, perfected the vehicle technology, continuously improved our production mechanisms and adapted our sales activities to changing customer desires. We did what we have always been our forte: developing and building exclusive sports cars. We went from success to success, on all levels: sales, profits, employees. But everything we did was always close to our traditional core business. That won’t be enough in the long run.
Will Porsche become a new company?
It won’t stay the old one. We will never forget our DNA. The famous Porsche experience will always remain the focus, but we want to connect it to the future. We don’t want to play the physical and digital worlds off against each other; the idea is for them to be complementary. So we have sent a clear message: our annual IT budget is now set at just under half a billion euros. Half of that is going into digitalization.
How significant is the pressure to revitalize?
It’s high. If we don’t take the next step, then we’ll have another two years of success and after that, we won’t have any answers to the challenges ahead. If we don’t want to be relegated to the ranks of pure hardware providers, we have to demonstrate our digital expertise now. The automotive industry will change more in the next five or six years than in the previous 50 years.
Porsche wants to significantly increase its digital business, and in a relatively short period of time. The target is a double-digit share of sales by 2025 at the latest. How far along are you?
We’re in the thick of it. The biggest difficulty is simply recognizing the need for a change in the first place. It sounds banal, but it is by no means an easy thing to grasp. We continue to be the most successful sports car brand in the world. We lead our segment in technology and design. Our profitability is the benchmark in the industry, as our current figures have underlined once again. So the first task is to check our self-perception. That applies not just to us, but to Germany as a technology center as a whole. We are the world market leaders in many sectors. But we’re falling behind in terms of digitalization. That is particularly disastrous for our industry since two million people are sustained by it, at least.
We have to develop our capabilities in completely new directions. On the one hand, I think it’s absolutely essential for us to open up as a company. Particularly with regard to new technologies and people who have a completely different mindset to us but who can do a lot to help us change ours. On the other hand, we have to make sure that we bring our people along for the ride, prepare them for collaboration and train them for the digital world. It simply won’t work without their capabilities. That’s our foundation.
How do you promote digital culture in such a way that your established employees and new partners quickly pull together as a strong team?
That’s the major challenge. It certainly isn’t simply a matter of having a few management conferences and adjusting the strategy. The company management has to exemplify the transformation every day. Full stop. It’s not always easy, but it is, in my opinion, critical in deciding whether the team will be fully onboard or not. All employees should understand: we’re really serious about the new digital culture, and trying to manage the digital transformation as a sort of side occupation would be a huge mistake. And continually facing the team is a part of that. And getting their input just as regularly. If I want to get my employees on board here, I have to take an active part in the change process.
Porsche doubled expenditures for e-mobility from three to six billion euros and additionally boosted venture capital activities by150 million euros annually. Are the digital transformation and e-mobility more expensive than expected?
It was always clear that we had to invest and that these outlays would rise over time. In that respect, there was no surprise. The current situation is actually much more a reflection of the fact that we want to get the future on the road very quickly. The trends are irreversible and are speeding up. Environmental regulations are rapidly increasing in number – and not only in Europe, but also China and the United States – but also so ambitious that they can no longer be fulfilled with a conventionally powered vehicle fleet no matter how much research and development you put into it. So for us, the investment uptick from three to six billion is just a logical consequence.
The Porsche model strategy rests on three pillars: the first pillar is traditional combustion engines – high-revving, highly emotional naturally aspirated and turbo engines. The second pillar is plug-in hybrid drives with greater driving pleasure, boost power and a larger electric range. The third pillar is the e-mobility. What’s the focus?
One thing is clear: from 2030 onwards, there probably won’t be any vehicle model from Porsche without an electric variant. I actually presume that by 2025 we will have electrified significantly more than half of our entire model range. But the combustion engine will still be around in 2030. Our 911s will hopefully still be driving with them for a long time to come. Conventionally powered vehicles will at that point be the niche in our electric fleet.
And what role do Porsche’s venture capital activities play?
We have identified some customer requirements going forward for which we currently have little to no inhouse capability. That applies not only to electrification itself, but also the other two megatrends in the automotive industry: digitalization and connectivity. Where we identify gaps, we want to tap into expertise through partnerships or acquisitions. And we’re well underway with that. We founded Porsche Digital GmbH 2016 and later established a presence in Silicon Valley. Porsche Digital is focussed on identifying and developing digital customer experiences, products, business segments, and processes. Innovative information technologies are identified and tested at the Porsche Digital Lab in Berlin. In addition to our internal innovation management, these units provide a platform for collaboration with technology companies and startups. Porsche is also deliberately opening itself up to collaboration with the research community. One example is the collaboration with the HHL Leipzig Graduate School of Management. And finally, with an innovation office in Tel Aviv and investments in venture capital funds, we aim to attract talent and secure access to innovative technologies.
Which technologies are the focus?
Overall our holdings and investments are focussed on solutions that expand the customer experience. This is followed by technologies that are important for the further development of our core product and the expansion of our core competencies. The guiding question is always: With what or with which partner can we so distinguish ourselves from the competition that we can claim something that sets us apart. If we’re really convinced by something, we will naturally also look for strategic partnerships through direct interests.
Is the Croatian super sports car manufacturer Rimac an example of that?
Rimac has been working on the field of electrification for almost ten years and has demonstrated its expertise with two electric limited production runs in the super sports car segment. Through a strategic partnership, we bring in additional knowhow on the vehicle side in the high-end range. Another example is our investment in WayRay. This interest actually covers both aspects: a unique technology and customer experience.
The start-up from Zurich develops and produces holographic augmented reality head-up display technologies and is working on seamlessly integrating virtual objects into the driving experience.
The team from WayRay has unmatched technological expertise with deep experience from the aerospace field as well as hardware and software development. It is clear that the innovative ideas and products from WayRay have enormous potential. We strongly believe that we can offer our customers typical Porsche solutions in the future on that basis.
What’s special about it?
The WayRay solution is exciting technologically because the production technology is very compact. It is, therefore, a great alternative for sports cars, which generally have very little interior space, to bring in a head-up display in a very appealing form. At the same time, technology can be used as a digital marketplace and do things like showing functions-on-demand on the windscreen. These additional functions, such as extra horse power on a race track or additional dynamic headlights, could be paid for with a simple click directly in the car. Another attractive possibility of the marketplace: information about restaurants, petrol stations or sights along the route displayed for the driver and passenger. The providers could buy their way into the windscreen. We would then receive fees for the service.
Functions-on-demand and the displayed recommendations sound very much like a smartphone and pay apps.
That’s exactly the idea. That’s why WayRay technology is so interesting to us. I think that customers expect that in the future it will be just as simple and convenient in the vehicle as it now is with a smartphone on the sofa. We have to provide this seamless customer satisfaction in a Porsche as well.
Convenience is one thing – safety is another.
WayRay delivers here as well. It is much safer not having to look down to a screen in order to be navigated. And take our new 911. With continuous connectivity and new functions and services, the car is taking the next step into the future in terms of digitalization. The Porsche Communication Management system encompasses, among other things, standard swarm databased online navigation. The standard wet mode is actually a world première. This function detects water on the road, conditions the control systems accordingly and warns the driver. The driver can then set the vehicle for particularly safety-minded driving at the touch of a button or using the mode switch on the steering wheel. The warning and brake assist function detects potential collisions with moving objects and triggers the emergency brake if necessary. For the first time, a night vision assistant with thermal imaging camera is optional for the 911. The adaptive cruise control function includes autonomic gap control, a stop-and-go function, reversible occupant protection and a new type of autonomous emergency braking function. It’s all topnotch technology
Can you really charge for dynamic headlights?
Well, hold on a minute! There’s one crucial thing to say here: this is not an essential safety function, it’s an additional convenience function. Everything required for safety and normal comfort levels will naturally already be included in the base version of future vehicles. The difference: in the past, you ordered a particular set of optional equipment, paid for it at the outset and perhaps never used it. Today you only pay when you book the function and really want to use it. You’ll be able to choose flexibly between a one-off payment based on time used, a flat rate or an ongoing subscription. That’s real added value.
Customer-focussed functions like that are seldom developed in the quiet of the engineer’s den. You have to be prepared to approach customers with the product at an early stage. You have to be prepared to make mistakes. Is Porsche, renowned as an absolute perfectionist, ready for this cultural transformation?
We have to be. That’s the great task we have before us. Thinking in terms of contributing a single process step to a product and then handing over responsibility for it to the next department has to be driven out of the company entirely. That’s why we are, to a large extent, already working in agile teams using the sprint methodology.
In other words:
We’re breaking with the classical perfection machine known as Porsche and no longer waiting with a result until we’re 120 % certain that it works. By the time a digital product is completed that way, it has already lost its currency. Instead, we’re aiming to create an initial product that I can test and present to customers within two, three, four weeks. It doesn’t have to be perfect at that point; it may be just 60, 70, 80 % finished. At that point, the customer says Great idea, but I see room for improvements in the following areas. Or they say: Sorry, this product doesn’t interest me. Either way, I reach our goal more quickly with the feedback. So it must become normal to make mistakes. It’s actually good to make them as quickly as possible. As of 2019, projects that we start in IT will be 100 % agile. Without exception.
Are there areas where it makes sense not to take an agile approach?
Yes, there are indeed. Release changes, for example. But we have to set ambitious goals to achieve the best possible result. That’s why we say: 100 % agile. I strongly believe that it’s the only way. Otherwise, we will not accomplish the complete change of mindset that is required.
As the Board member for IT, you are aware of the necessity of extensive investments – but as the board member for finance, you are still calling for 15 % margins. Doesn’t that create a very slim margin for error?
It only appears contradictory at first glance. The two demands complement each other very well. The 15 % profit margin that I would like to see long term can only be achieved if we do not continue the way we have done in the past. I can only achieve that goal by investing in my future viability, in technology, my employees, and the cultural transformation. Furthermore, we aim to cover part of the targeted six billion in additional investments over the next six to seven years through savings gained through the use of modern technologies, among other measures.
Is the 15 % bar part of the typical Porsche self-image?
At Porsche, we want to continue to represent uniqueness – in technology, performance, and design of our products, and very importantly in terms of business results as well. Being successful is an attractive thing. In that sense, it speaks to a sense of self that we simply can’t get away from. That is what our brand stands for. And of course, it’s also true that we absolutely need the premium profits in order to fund the future technologies for the premium products to come. That’s where it all comes full circle.
Lutz Meschke, MBA, came to Porsche from Hugo Boss in 2001. He has been a Member of the Executive Board, responsible for Finance and IT, since 2009 and has been the Deputy Chairman of the Executive Board since 2015.
Denis Dilba writes about science, technology, and carmaking for brand reins, the magazine Technology Review, and other publications. Before completing his studies at Deutsche Journalistenschule, he studied mechatronics.
Author: Denis Dilba
Text first published in the Porsche Annual and Sustainability Report 2018.