How Porsche plans to drive up profit by six billion euros in next 8 years

Porsche AG has an ambitious plan to improve operating profit by 6 billion euros ($6.8 billion) over eight years by streamlining operations as the automaker spends more to develop and manufacture electric cars, according to people with knowledge of the matter.

Porsche aims to increase earnings before interest and taxes by about 750 million euros annually over a timeframe starting this year and running through 2025 by increasing efficiencies, cutting costs and boost contribution from new business such as digital offerings, said the people, who asked not to be identified because the discussions are private. The increase is necessary to maintain the Volkswagen AG brand’s target of a 15 percent return on sales. Porsche declined to comment.

Keeping returns flowing at Porsche is key to Volkswagen’s plan to make the world’s largest automaker a more agile company and face the industry’s unprecedented shift to self-driving and electric cars head on. Carmakers readying electric lineups are pushing for savings elsewhere to offset lower profits from battery-powered cars when compared to vehicles with combustion engines.

Take Porsche’s first electric offering as an example of the quandary facing automakers. Cars like the four-door Taycan, which comes to market next year, will cost from 6,000 euros to 10,000 euros more to produce than a comparable traditional model, the people said. Those costs won’t be passed on to customers, meaning spending reductions need to be made elsewhere to maintain profitability, they said. In total, the sports-car maker is investing more than 6 billion euros through 2022 on electric mobility.

After 2025, the German manufacturer anticipates that the efficiency push will improve profit by about 2 billion euros annually, the people said. VW’s most profitable brand generated 4.1 billion euros in operating profit and 23.5 billion euros in revenue last year. The operating margin of more than 17 percent compares to single-digit return on sales at most mass-market carmakers.

VW’s preferred stock pared earlier losses on the news and traded 0.6 percent lower at 151 euros as of 2:10 pm in Frankfurt. The group is on its way to become “the electric powerhouse within the auto world” and should have higher revenue and earnings momentum than Daimler AG and BMW AG, Bankhaus Metzler analyst Juergen Pieper said in a note.

Porsche is working on electric-car technology with sister brand Audi and is considering using the jointly developed underpinnings to offer electric versions of existing models like the Macan compact sport utility vehicle. Porsche has said the first cars from the new platform are planned for late 2021.

Porsche expects half of deliveries will be fully-electric or hybrid cars in 2025. Developing vehicles with combustion engines won’t be economically viable from 2030 onward under the goals of the Paris Climate accord, they said.