Skoda: A Joke no More!

[SoCalCTS]

International Herald Tribune story

Skoda, a joke no more, joins Audi in driving Volkswagen profit

By Chad Thomas and Andrea Dudikova Bloomberg NewsPublished: February 9, 2007

MLADA BOLESLAV, Czech Republic

Volkswagen's executives used to consider Skoda cars so dangerous they refused to drive them, recalled Detlef Wittig, the former VW executive who became Skoda's chief executive.

At a meeting 15 years ago, after Volkswagen took control of Skoda Auto, top managers sent the Czech carmaker's engineers home to design a better car. "We told them this is either the end of the story, or you do your job," Wittig said.

Skoda executives heeded the criticism and returned months later with a better-engineered car. It was the first step in Skoda's decade-long transformation from an object of Communist-era derision into VW's most profitable unit after the Audi brand. That success is helping bolster VW's share price as the parent company trims jobs in Germany.

"Skoda used to be seen as a poor car at best and at worst the butt of many cruel jokes," said Stephen Pope, head of equity research at Cantor Fitzgerald Europe in London. "This baby has come a long way."

In response to the brand's growing popularity, Skoda will introduce an updated version of the Fabia compact at the Geneva International Motor Show in March. Skoda forecasts 2007 sales will rise at least 5.5 percent on demand for the Fabia and Roomster multipurpose vehicle. Wittig said stepped-up production in India and China would help increase sales by 45 percent to 800,000 vehicles within five years.

Those expansion plans mean that Wittig can have the last laugh, amusing visitors with his collection of old jokes about the brand. His favorite: "What's the best way to double the value of a Skoda car? Fill up the tank."

Skoda, based in Mlada Boleslav, 60 kilometers, or 37 miles, northeast of Prague, holds an outsized role in the fortunes of both its parent company and its homeland.

In 2005, Skoda sold 492,111 cars and posted record net income of 7.9 billion Czech koruny, or $364 million, making the unit responsible for more than 25 percent of the profit of VW, based in Wolfsburg, Germany. In 2001, the first year VW wholly owned the unit, Skoda generated 2.3 percent of net income.

In addition, Skoda accounts for about 3 percent of the Czech Republic's gross domestic product, said David Marek, chief economist at Patria Finance in Prague.

The unit's newfound prominence has prompted some analysts to ask whether the lower-priced cars made by Skoda and VW's Spanish unit, Seat, are siphoning sales away from the VW brand.

Patrick Juchemich, an auto industry analyst at Sal. Oppenheim Jr. in Frankfurt, said that consumers were increasingly turning to midprice Skodas to get features and engine quality usually found in more expensive VW models.

In Germany, a Skoda Octavia costs €14,790, or $19,200, about €4,000 less than a comparable VW Golf, and its larger interior rivals that of the midsize VW Passat.

"I don't believe the company's argument that there is no danger of cannibalization," Juchemich said. "I am not sure there is really a client differentiation between the potential customers for an entry-level Passat and the Octavia" from Skoda.

Wittig said market research showed that Skoda and Seat cars appealed to different types of drivers.

Few predicted that VW, Europe's largest carmaker, would face such a problem at the start of its involvement with Skoda. After the Velvet Revolution that ousted Czechoslovakia's communist government in 1989, the new government started selling state assets. At the time, Skoda made a single model, a family car called the Favorit.

The government's search for a partner led to a venture with VW in 1991. Over the next decade, VW increased its stake in exchange for investments, gaining full control in 2000. In total, VW paid about 2.05 billion Deutsche marks, or $1.25 billion, for Skoda.

In 1994, Skoda started making a redesigned small compact, the Felicia, with a sleeker look and a more responsive engine than the Favorit, in an effort to appeal to West European consumers.

Skoda began selling its first all-new model — the Octavia hatchback — in 1996. The Octavia was the first Skoda to use a VW powertrain and frame, and it offered more interior space than the Golf, its Volkswagen equivalent. Octavia sales rose to 270,274 vehicles last year, from 47,876 in 1997.

At the same time, Skoda began pushing workers to pay more attention to detail, offering bonuses for meeting quality standards.

"Someone could push a little red button and halt the assembly line if something wasn't according to quality standards and quality levels," Wittig said. "The awareness that there is a button that I can push and I can stop the assembly line was something that never existed before."

Skoda's profits are helped by labor costs that are about 20 percent of those in Western Europe, the company said. Competition for low-wage workers may grow now that Toyota Motor and PSA Peugeot Citroën have established a joint factory in the Czech Republic, said Marek of Patria Finance.

Today, it is VW that is struggling to control production costs and trim its work force. Volkswagen-brand plants operate at just 80 percent of capacity, compared with 97 percent at Bayerische Motoren Werke and 93 percent at Toyota. VW factories in western Germany lost several hundred million euros in 2005, the company said last February, declining to be more specific.

The company plans to cut 20,000 jobs, or 20 percent of its work force in western Germany, and has reached an agreement with employees to lengthen the workweek for no additional pay.

Martin Winterkorn, VW's new chief executive, said in November that he aimed to beat a target of increasing the group's pretax profit to €5.1 billion in 2008 from €1.1 billion in 2004.

Meanwhile, Skoda is expanding in emerging markets. It plans to start making the Octavia at a VW plant in China later this year, and will eventually produce the Fabia and Superb in China. In Russia, a joint Skoda-VW factory will help the carmaker avoid the 25 percent tax on imported vehicles.

The production push, along with introduction of the Yeti, a sport utility vehicle to be rolled out in 2009, may help the carmaker meet its sales goals.

Skoda's reputation for quality and reasonable prices are luring buyers like Mihael Stanic, a logistics company worker from Nersingen, Germany, who traded his Golf for a Fabia compact.

"At Skoda, you get better service, the electronics are much better," said Stanic, 23. "At Volkswagen, you pay for the brand."

[MyerShift]

As if Volkswagen brand has any business worrying about these lower priced SEATS and Skodas stealing sales away from them.

If VW had remained The People's Car as intended, then it wouldn't be an issue.

But no. Said V-Dub, "Let's issue a road crusher called Phaeton that isn't a phaeton at all, and has a sticker to stop your heart".

[Drew Dowdell]

sticker to stop your ticker

[MyerShift]

Lol! Yeah! Thanks. I should have thought of it, lol.

[Sixty8panther]

Skodas sucked for one reason and one reason ONLY: COMMUNISM.

Pre WWII CzechoSlovakian cars, weapons and other technology

were not only world class but in many cases futuristic and cutting

edge at the same time. The Communist concept of no competition

& a complete lack of outside influence or regulation was a pretty

bad way to run an automotive company. The communist way of

doing things was such a flippin joke anything and everything was

done with bribes and plentiful stupidity.

[Flybrian]

Actually, Skoda sucks for one reason: Skoda. Most are rebadges anyway. Woo.

[Sixty8panther]

Skodas from the 60s & 70s were a lot less crappy than a typical econobox from

behind the iron curtain from that era, say what you will but they made some

really interesting cars back in the day... rear engined, RWD & super space

efficient while easy to work on. Even though the motors are transverse mounted

they were very accesible and esay to work on.

Honestly what would you rather have?

Skoda?

or a Trabant? Wartburg? Volga? Yugo? or perhaps a Zastava? Yeah...

[Flybrian]

Older GAZ21 Volgas are fantastic. They look good, are notoriously overbuilt, and KGB models had a V8.

[AxelTheRed]

I just don't like the name. Skoda.

It doesn't mean much, I know. But...Skoda. It sounds like a brand of tobacco.

[Sixty8panther]

Well... (adding fuel to the fire) Skoda is Slovakian for "mishap" or "error"

Our nickname for Skodas in the home country was "Embecka"

which was a play on words based on it's town of manufacture.

As far as the Gaz 21, if I wanted a crappy '50 Ford I'd buy a

crappy '50s Ford, not a cheap '60s copycat of it from Russia.

Maybe the KGB V8 had some balls (probably not) but if you

honestly think that those cars had more redeming value than

Skodas then good luck to ya.

[Flybrian]

Good luck to Skoda. I'm not selling old, rebadged German cars on old German mechanicals. This refers to Skoda and DCX.

[ZL-1]

Actually, Skoda sucks for one reason: Skoda. Most are rebadges anyway. Woo.

I don't think you can say the Fabia is a VW Polo rebadge or that the Octavia is a Golf/Jetta rebadge. Even the Superb, which IIRC based on a VW Passat L that never saw the light of day, doesn't qualify as a VW rebadge.

I think SEAT is a much 'juicier' target in the VW Group with regard to the direction of the brand.

Edited February 20, 2007 by ZL-1

[Sixty8panther]

I'd rather have a rebadged '90s German car (esp. MB) instead of a stupid

communist era Russian car that brings zero innovation, poor quality and

mediocre styling to the table.

Getting back to 2007 I even like SEATs are not bad cars these days...

My uncle back in Slovakia has a 2000? 5dr that's quite sporty and IMHO

better looking that any VW from the same era.

The new Seats are a bit cheesy but not too shabby for economy cars.

http://www.seat.com/com/generator/su/com/a.../site/main.html

[Sixty8panther]

Here's a GAZ Volga BTW..... nice two-tone paint.

I'd love to grab that "Gazelle" hood ornament for a 1950s Rat Rod though.

[LosAngeles]

Maybe Skoda could bring America a cheapie Phaeton with new sheetmetal.