Why Porsche's best-seller is going electric-only

By John RosevearLuxuryMotley Fool

Trucks, SUVs and powerful sports cars star at the 2019 North American International Auto Show in Detroit

Amid talk of American manufacturing jobs, plant closures and tariffs, the world's largest automakers unveil their latest models in Motor City.

Porsche's best-seller is going electric: The German maker of sports and luxury vehicles said that the next generation of its Macan crossover SUV will be offered only as a battery-electric vehicle when it arrives early next decade.

Continue Reading Below

Yes, only. It's further proof, if any were needed, that Porsche's corporate parent, Volkswagen AG, is serious about its commitment to creating a full portfolio of electric vehicles by 2025. And it's a powerful counter to those who still insist on arguing that the future of autos belongs to "disruptive" new entrants like Tesla.

MORE FROM FOXBUSINESS.COM

But from a strict business perspective, why would Porsche do this with its best-seller -- and why would VW allow it?

  

Why the Macan is a big product for Porsche and VW

Porsche's decision to make the Macan an electric-only vWhyehicle isn't trivial. The Macan, a compact crossover SUV that shares some underpinnings with the popular Audi Q5, is Porsche's best-seller. With 86,031 delivered worldwide in 2018, the Macan accounted for a third of Porsche's total global sales last year.

In fact, the Macan has been a hit since it was first introduced in 2014, accounting for a substantial portion of the brand's sales every year. And while VW doesn't break out profit per vehicle, note that Porsche is a very profitable part of VW: Through the first three quarters of 2018, Porsches accounted for just 2.3 percent of the passenger vehicles sold by VW around the world, but the brand generated 29.4 percent of VW's overall operating profit during that period.

So why would Porsche -- and VW Group -- take the risk of turning Porsche's best-seller into an electric vehicle?

Why Porsche is taking the risk of making the Macan battery-only

The answer has to do with VW's broad push into electric vehicles generally, and specifically with where Porsche sees itself going as a brand closely associated with racing and high performance. As automotive technology has improved, high-performance vehicles' power levels have risen, and they continue to rise year after year. Porsche is in something like a perpetual horsepower arms race with its rivals and needs to keep pace in order to stay competitive.

The problem: With internal-combustion engines, more power generally means more fuel consumption and greater emissions, and environmental regulations in Europe and China are set to get tougher in coming years. As that happens, Porsche will struggle to make its vehicles faster, or even to maintain current levels of performance -- unless it goes electric.

Old racetrack rival Ferrari has already said that several of its core models will become hybrids in their next iterations. For Ferrari, a brand that has been closely identified with the sound of its internal-combustion engines for decades, hybrids make sense: A hybrid Ferrari can use a smaller and more efficient internal-combustion engine, improving fuel economy and emissions, because its electric motors will deliver some of the performance needed to stay competitive.

But even Ferrari would admit that hybrids are only a partial solution. For Porsche, which has more flexibility around the drivetrains its core customers will accept, why not focus on delivering a convincing Porsche experience that's entirely electric?

Porsche will hedge the bet, but it's a big bet

Of course, Porsche isn't giving up on internal-combustion entirely -- at least, not yet. CEO Oliver Blume said that while 50% of all new Porsches could have an electric drive system by 2025, the company will be hedging its bets for a while longer, until the future becomes clearer: "[O]ver the next ten years we will focus on a drive mix consisting of even further optimized petrol engines, plug-in hybrid models, and purely electrically operated sports cars. Our aim is to take a pioneering role in technology, and for this reason we will continue to consistently align the company with the mobility of the future."

Porsche's move into pure electric vehicles will begin when its first battery-electric model, the Taycan, arrives late this year.

CLICK HERE TO GET THE FOX BUSINESS APP

The Taycan will be followed by the production version of last year's Mission E Cross Turismo show car, which will be called the Taycan Cross Turismo when it arrives in 2020. The battery-powered Macan will be Porsche's third all-electric vehicle -- and it will be an important test of just how ready Porsche's well-heeled customers are to embrace electric vehicles.

10 stocks we like better than Volkswagen AG (ADR)

When investing geniuses David and Tom Gardner have a stock tip, it can pay to listen. After all, the newsletter they have run for over a decade, Motley Fool Stock Advisor, has quadrupled the market.*

David and Tom just revealed what they believe are the ten best stocks for investors to buy right now… and Volkswagen AG (ADR) wasn't one of them! That's right -- they think these 10 stocks are even better buys.