(FORTUNE Magazine) – With his twinkly eyes and durable smile, Wendelin Wiedeking doesn't look like a fighter. But the Porsche CEO loves a good scrap. Taking principled but unpopular positions, then defending them to the death, is his nature. When the German government offered $97.5 million in subsidies in 1999 to help Porsche build a new assembly plant, for example, Wiedeking turned it down. He said he wanted to protect Porsche customers from complaints that taxpayers were subsidizing their expensive tastes. He has also rebuffed Porsche executives who want stock options. In fact, he won't even let them buy company stock. Wiedeking worries that in a company as small as Porsche (fiscal 2002 revenues were less than $5 billion), almost every decision could affect the share price and thus lead to suspicions of insider trading.

In the past few months the pugnacious Wiedeking has picked a couple of especially visible fights. He ruled out listing Porsche on the New York Stock Exchange because he thought a new law requiring senior executives to swear to the accuracy of their financial reports was stupid. He sensibly pointed out that since hundreds of people prepare Porsche's numbers, he could not be sure they were completely right. Wiedeking also got into an unseemly public disagreement with one of his own executives. When he heard that Porsche's U.S. sales arm was offering cash rebates, he turned to the executive who authorized the offer at a public event and declared, "It won't happen again." Indeed it won't. The executive retired in January.

Speaking his mind and following his instincts--regardless of where they lead--have been the keys to Wiedeking's success at Porsche. "Those who make concessions will lose," he observes. "If we were just a small copy of a major player, our continued existence would certainly be unjustified." Instead he has justified Porsche's existence to investors in the most compelling way possible: by making money.

Since taking over as CEO of Porsche in 1992, Wiedeking, 50, has transformed what was then a struggling boutique company into a high-performance money machine. Porsche's operating profits as a percentage of sales are the highest in the industry: 13%, vs. 8% for No. 2 BMW. Despite unsettled economic conditions, its results continue to sparkle. For the fiscal year that ended last July 31, Porsche's revenues rose 9.4%, to $4.8 billion, while profits shot up 40%, to $817 million. And over the past six months Porsche's performance has been nearly as robust, with net income rising 13.8%. Equally impressive is that in an industry subject to abrupt ups and downs, Wiedeking has driven Porsche to nine straight years of increased profits. Investors are willing to pay handsomely for that kind of performance. Despite weak European markets in 2002 (Germany's DAX fell 44%) Porsche's stock rose 10%.

Wiedeking's insistence on following his own road gets a huge test in 2003. He is launching a Porsche that sends the company in a new direction. The Cayenne is a four-door, four-wheel-drive off-road vehicle--in short, an SUV. Named after the pepper, the Cayenne was the subject of intense debate within the company, and loyal Porsche owners have screamed in protest. To them it is like Manolo Blahnik making wingtips. They fear that Porsche is compromising its heritage as a maker of exclusive sports cars.

A number of industry observers agree. Wrote prominent European automotive journalist George Kacher: "Teaching a bear how to dance does not automatically qualify it for the lead role in Swan Lake. The Cayenne is a great 4WD and a disappointing Porsche." ABC radio motoring commentator Will Hagon was even blunter: "Porsche got its pedigree on racetracks, not goat tracks."

Wiedeking is unmoved. "It was not easy to make the decision, but now everybody [at Porsche] is happy with the Cayenne. It rides like a Porsche and drives like a Porsche. It is 100% Porsche." The Cayenne was launched in Europe in December and goes on sale in the U.S. in March, and Wiedeking says the first year's production of 25,000 vehicles has already sold out. If the Cayenne's appeal proves lasting, Wiedeking will have succeeded in broadening Porsche's sporty image and boosting its annual sales by half, to 80,000 cars a year by 2004. That would still leave it less than a tenth the size of BMW, but it would nevertheless constitute an important step toward securing Porsche's future. "Porsche wants to grow, and we want to have only exclusive products," he says. "That means we will keep following the niche strategy. We want to stay independent."

Other Porsche executives, several of them recruited by Wiedeking from BMW, say they are comfortable following his lead. "Wiedeking goes against the stream and is obstinate about keeping his direction," says Hans Riedel, head of sales and marketing. "That makes him different from the rest of management. He is fast, impatient, strict, and stubborn." Adds R&D head Wolfgang Durheimer: "He is very tough on timing, schedules, and money. The whole management team runs on personal targets agreed to annually with him. He is relentless. He is clearly a dedicated team player, but at no time during the year is there a question who is the leader of the company, who makes the final decisions."

Wiedeking started making decisions for himself at an early age. As one associate puts it, he grew up PSD--"poor, smart, and driven." He was raised in Beckum, a small industrial city in Westphalia, a northern region known for its stolid, somewhat stubborn inhabitants. His father, a construction engineer, died when Wiedeking was 16, and he had to begin contributing money to his family, which included three younger brothers. "We were a good family," he says, "but we weren't very well-off." An outstanding student, Wiedeking found time to start a real estate brokerage and an insurance agency (which his brothers run) while studying mechanical engineering at Aachen University of Technology.

With his doctorate in hand, Wiedeking moved to Stuttgart in 1983 and took a job with Porsche. He described it as a "dream come true" for someone who loved cars and technology as much as he did. He quit five years later to gain a broader range of experience with an industry supplier. In 1991 he was lured back to Porsche to run the production and materials department. He found a company in distress. An inefficient production system and a weak dollar had pushed prices higher at the same time that a recession had lowered demand. Car sales, which had reached 53,000 cars in 1986, crashed to fewer than 12,000 in 1993.

Wiedeking made several trips to Japan to study production techniques, and by the middle of 1992 he had come up with a plan to increase productivity 30% over the next three years. That caught the attention of Porsche's ruling family (the descendants of Ferdinand Porsche, who founded the company in 1948, and his sister Louise). Owners of a chunk of the company's preferred stock and all of its common voting shares, the family ousted the incumbent CEO and chose Wiedeking to replace him. Putting a production expert in charge of a sports-car company was a radical step--the top jobs usually go to vehicle engineers or sales and marketing experts--but Wiedeking appeared remarkably confident. "I know exactly what I want and what must happen," he told an interviewer at the time. "I am the real one. You can be sure."

Wiedeking started cutting costs, and his knife cut very close to the the company's muscle. When he killed the front-engine 928 and its less expensive stablemate, the 968, to reduce complexity and costs, he left Porsche with just one model to sell, the 30-year-old 911. He also axed plans to expand the product line with a Porsche sedan and ordered that new models be engineered for less money than the ones they replaced.

Not surprisingly, Wiedeking made his biggest impact in the Porsche factory. Shortly after becoming CEO in 1993, he hired a group of hard-nosed Japanese manufacturing consultants, known as Shin-Gijutsu, to overhaul production, a decision Wiedeking now ranks as his most difficult. He recalls getting a phone call from a member of the company's supervisory board telling him to recall the consultants because he was being "too tough." But, he says, "we had to do it."

Accounts of the arrival of the Shin-Gijutsu at Porsche have since become company legend. One of the consultants detected a poorly glued piece of carpet in a 911 and thundered, "Bring me the person responsible for this!" Another took a look at the stacks of parts along the assembly line and asked, "Where is the car factory? It looks like a mover's warehouse." To underline the urgency of the situation, Wiedeking grabbed a circular saw, walked down the parts aisle, and sawed off the metal shelving. "We needed a complete culture shock, because that is the only way to achieve a revolution in a traditional firm like Porsche," Wiedeking said later. "We had so much to learn and so little time."

Wiedeking hit his 30% target and exceeded it. By 1997, Porsche workers took only 45 hours to build a 911, compared with 120 hours in 1991. The time required to develop a new model shrank to three years from seven, and finished cars drove out of the plant after just three days of work, vs. six weeks previously.

With Porsche's production problems sorted out, Wiedeking turned his attention to modernizing the product line. Updating the 911 was an obvious call, but creating a mid-engine roadster, the Boxster, was a riskier proposition. "This was a critical decision," he says. "The company was worth only about $300 million dollars [in 1993], and I wanted to spend $1 billion on new cars." To reduce capital costs he found a Finnish supplier who would build the Boxster at its factory on the Finnish coast, making it the first Porsche assembled outside Germany. "It was unheard of," recalls Hans Riedel. "I remember the announcement when he said it was in Uusikaupunki. The whole meeting roared with laughter."

Wiedeking got the last laugh. The Boxster now accounts for 40% of Porsche's unit sales worldwide and 50% of its sales in the U.S., Porsche's largest market. However, because of its lower margins, it contributes only an estimated 10% to Porsche's profit, vs. 51% for the 911 and a projected 20% for the Cayenne (the rest comes from engineering services and parts).

With the successful launch of the Boxster in 1997, Wiedeking stepped up his search for a third model that would ease Porsche's dependence on the fickle sports-car market. Unwilling to borrow money to finance the project--Wiedeking prefers to run Porsche on a cash basis as a hedge against hard times--he began talks with Mercedes about sharing the estimated $1 billion in development costs for a new SUV. After two years of work the deal fell through at the last minute in 1997 when Mercedes unexpectedly asked for Porsche voting shares as a sweetener. Unwilling to risk Porsche's treasured independence, Wiedeking said no.

Volkswagen, whose chairman, Ferdinand Piech, was a member of the Porsche family and sat on the Porsche board, was standing by. VW and Porsche decided to develop a new vehicle with separate bodies and engines. The bodies would be built by VW, but Porsche would assemble its model. An avid agriculturist who uses an antique Porsche tractor on his own small plot near Stuttgart, Wiedeking decided to name the new vehicle after a pepper that he grows. "It is spicy and adventurous--just like the car," he says, "and it is a name we can use everywhere in the world."

Wiedeking worked as intently on the Cayenne as any vehicle engineer, driving camouflaged prototypes on the weekends and then relaying his impressions to R&D's Durheimer on Mondays. "It is surprising how fast he gets to the point," says Durheimer. "I know the car in every detail, but he is extremely fast and precise." Besides high-speed driving on the company's test track, Wiedeking tested the suitability of the Cayenne for everyday use by examining such details as how the trunk lid opens and closes.

The Cayenne is engineered for financial performance too. Porsche needs just 300 workers at its Leipzig plant to assemble 25,000 Cayennes annually. That has allowed Wiedeking to anticipate handsome profit margins. Analysts at Deutsche Bank estimate that the Cayenne will produce an overall operating profit of 19%. The price for the 450-horsepower Turbo model will start at $88,900; these are expected to account for 20% or more of sales, generating a handsome 26% operating return, compared with 16% for the 911 and 10% for the Boxster.

Demand for the Cayenne is likely to remain strong for several years, as curiosity seekers and Porsche sports-car owners snap up early models. Some critics say its exterior and interior design are inferior to the VW entry, the Touareg. But the two vehicles are unlikely to cannibalize each other because they compete in different segments; the V-8 version of the Touareg will be $15,000 cheaper than the comparable Cayenne.

Having pledged to keep Porsche growing, Wiedeking must develop a strategy. Raising production of the existing models significantly is out of the question--their exclusivity would be compromised. He hints that Porsche will develop another vehicle from the Cayenne platform. Insiders have speculated on a sporty station wagon. Planning for the new project will begin later this year.

In the meantime Wiedeking has to keep one eye in the rear-view mirror for oncoming competition. There are plenty of other automakers--all much larger--who would like to get a slice of Porsche's fat profit margins. BMW has just introduced the Z4, a competitor to the Boxster, while Mercedes-Benz, Aston Martin (owned by Ford), and Lamborghini (part of Volkswagen) are planning new sports cars to challenge Porsche's 911 business.

Because of Porsche's success, Wiedeking is mentioned for every open industrial job in Germany. A few years ago Piech made him a serious offer to move to VW, but he turned it down. Associates are betting he will stay where he is. "If you can call the shots at a company like Porsche, with its cachet, it is hard to beat," says Riedel. Wiedeking himself likes to talk about the virtues of being a small automaker and working with the same group of associates. "To know your partners for ten years, you get to know their good side and weak side. We know how to manage for the future." He notes that he can go anywhere in the company and find people he knows. "I've got friends in the factory," he adds. "I don't need bodyguards there, like some other CEOs."

During more philosophical moments Wiedeking likes to talk about the advantages of Porsche's small size. "To survive in the hostile world of automobile manufacturing, we have to be different and know when the big cats rouse themselves and set forth to satisfy their hunger." After a decade in the driver's seat, there are no signs that Wiedeking has lost any of his jungle instincts.