Economy, Auto

Success Puts Skoda's Future in Peril

Success Puts Skoda's Future in Peril
Success Puts Skoda's Future in Peril

Success can breed jealousy, and unfortunately for Skoda, Volkswagen Group’s Czech subsidiary, business is booming. Meanwhile, Skoda’s far larger and better-known sibling, the VW brand, struggles to digest heavy investments from which the Bohemian carmaker profits.

According to Autonews Europe, last year marked a record for Skoda with volumes rising 13% to hit the seven-digit-mark for the first time in its history. Operating profits surged by more than half, and its margin expanded by nearly two full percentage points to 7%.

Skoda plans to roll out a new or refreshed model every six months underpinned by the ultra-flexible MQB platform, and its biggest product offensive to date is paying dividends.

The recently launched third generation of its flagship, the Superb midsize sedan, offers the roominess of a BMW 5 series at a price that undercuts the VW Passat. Next up is a new seven-seat crossover known internally as the “A-Plus SUV,” which debuts next year.

By comparison, the VW brand saw its already weak profitability deteriorate further amid stagnant revenue, even though it is typically priced at a premium over volume rivals in Europe.

  Quicker and Better

While former VW Group Chairman Ferdinand Piech encouraged internal competition as a motivational tactic to ensure no VW Group brand rested on its laurels, times are changing now that he has resigned.

Skoda’s string of success is attracting the wrong kind of attention at VW Group headquarters in Wolfsburg. Plans are now being forged to centralize more decisions in Germany—a move that could stifle Skoda’s growth, analysts fear. The carmaker’s high profits and fat margins contrast starkly with the ongoing problems at the much larger VW brand, which achieved a 2.5% return on sales last year—in part due to costs from developing the MQB architecture that is extensively used by Skoda.

“Skoda is definitely a challenger for the VW brand that must be taken seriously—that is simply the case,” said a corporate consultant for the auto industry, who asked not to be named since VW is a client.

“It’s not just the products that are ‘simply clever’ [which is the tagline Skoda uses on its advertising]. The people at Skoda think quicker and better than many of the people in Wolfsburg, who are too slow and traditional. Many of them could learn from Skoda.”

The speed at which the advantages make themselves felt will vary.

"At the VW brand, for instance, we are currently only producing around 20% of the volume using MQB. But at Skoda the share is already almost double that figure,” he said at the company’s annual general meeting. “This is something that is also reflected in the [Skoda] brand’s outstanding earnings.”

Winterkorn, who this month relinquished day-to-day operational responsibility for the namesake marque to new VW brand chief Herbert Diess, aims to announce a new management structure by October. As a result, Skoda may end up being put into a holding of the group’s volume brands that Diess would manage

 “There is a risk of that at least. It is really important to have each brand in the market publicly reporting results separately, because it forces management to improve their performance, and you would not have this pressure under a holding,” said Arndt Ellinghorst, who is head of global automotive research at Evercore ISI.

“Let’s just agree that Skoda doesn’t have a problem, VW does, and these arrays of problems that need to be addressed are independent from any bundling. So for Skoda, it can’t be anything good really.”

  Skoda in Iran

Skoda currently has no presence in the Iranian market. The only remnant of the former Czechoslovakian maker is a classic car gallery on Tehran's Taleqani Street, which still holds the brand's name on the building but no longer stocks the cars.

IRIB reported last November that Skoda had signed a contract with an unknown automaker to produce some of their models in Iran. No further news has come of this deal since.

The group's owner Volkswagen has also been absent from the local automotive market in recent years due to sanctions placed on Iran. The market for the Wolfsburg brand in Iran is small with no local company currently representing them.