Analysis-Porsche's decline from crown jewel to millstone for parent Volkswagen

By Rachel More, Christoph Steitz and Christina Amann

BERLIN/FRANKFURT, Sept 21 (Reuters) - Long Volkswagen's most reliable profit driver, luxury sports car maker Porsche has become its biggest problem, creating a road bump for CEO Oliver Blume's restructuring plans at Europe's biggest carmaker.

Less than four years after its record listing, Porsche has turned into a poster child for the broader group's woes, dethroned in the once-lucrative Chinese market and bruised from costly missteps in the transition to electric.

With thousands of workers protesting against cuts at car plants across Germany on Monday, the crisis goes beyond Porsche and the rest of the sprawling Volkswagen empire, reflecting how Germany's car sector is being squeezed by Chinese rivals and US tariffs.

'NEGATIVE SIGNAL' AND 'FRAGILE SITUATION'

Volkswagen issued its latest profit warning on Friday, tying it to a €6 billion ($6.9 billion) writedown on its 75% stake in Porsche only weeks after agreeing heavy job cuts in the biggest restructuring of the group's 89-year history.

Ingo Speich of top-10 Volkswagen investor Deka said it was a "very negative signal" so soon after the restructuring breakthrough.

"The situation remains very fragile, and visibility is very limited. It remains to be seen whether the announced restructuring measures will even be sufficient," he told Reuters.

The writedown, after a €2.7 billion impairment a year ago, points to a lack of oversight at Volkswagen, Jefferies analysts wrote, noting what it said are "endless clean-up surprises".

Volkswagen blamed the writedown on weaker financial expectations for Porsche, which was listed to much fanfare in 2022 in one of the continent's biggest IPOs in recent years.

"The days of (Porsche) being a profit driver are over," said auto industry analyst Ferdinand Dudenhoeffer.

'PORSCHE IS GETTING SMALLER AND SMALLER'

His point is emphasised by previously thick margins that have slid below those of the wider group and even been overtaken by Volkswagen's budget brand Skoda.

"With its 'value over volume' strategy, Porsche is getting smaller and smaller. Even if the profit margins are good, the profit itself will be rather meagre," Dudenhoeffer added.

In an internal memo seen by Reuters, Porsche CEO Michael Leiters insisted the company stood by its medium-term target for margins in a range of 10% to 15%.

"There is no new forecast for Porsche, either for the current business year or our medium-term goal," Leiters said ahead of a much-anticipated capital markets day in October.

But looking ahead, the company's retreat from China, where it has cut dealerships, and pressure on its US business from tariffs have cast doubt over sales volumes.

And even with a return to double-digit margins under Leiters' strategy to focus on its most profitable high-end models, Porsche needs sales to generate cash — and to help Volkswagen through its painful restructuring.

"The pressure could not be bigger right now," said Stefan Bratzel of German auto research group CAM. "Cutting costs alone will not help Volkswagen get out of its crisis."

SKODA THE NEW PORSCHE?

Porsche has been struggling for years, with Blume overseeing a key period of decline as head of the sports car brand until the end of 2025, alongside his role as group CEO.

The €6 billion impairment lowers Volkswagen's goodwill on Porsche — which essentially measures the brand's value — by more than a third from last year to about €10 billion. In 2022, the year of Porsche's listing and its promise of 20% margins, goodwill stood at €18.8 billion.

The question now is where Porsche fits in the broader group, with Skoda emerging as the more profitable operation.

"The Czech brand has effectively become the new Porsche of the group," said independent autos analyst Matthias Schmidt.

Mercedes-Benz and BMW are also reducing their German workforces, with unions demanding support from Brussels in the form of protectionist measures to shield the market from cheap vehicle imports from China.

Whether this would help Blume to reach a targeted Volkswagen operating margin of 9% by the end of the decade, compared with 1% at best this year, is unclear.

Porsche's situation, however, may serve his push for even deeper cuts, Bernstein analysts said.

"If one was of a cynical bent, this massive drop-off in anticipated reported earnings might be seen as helpful," they said.

($1 = 0.8718 euros)

(Reporting by Rachel More, Christoph Steitz and Christina AmannEditing by Adam Jourdan and David Goodman)