Skoda Auto a.s.

Vaclava Klementa 869
293 60 Mlada Boleslav
Czech Republic
Telephone: +420 326 811 111
Fax: +420 326 811921
Web site: http://www.skoda-auto.com

Wholly Owned Subsidiary of Volkswagen AG
Incorporated: 1895
Employees: 20,300
Sales: CZK 110.41 billion ($2.87 billion)(1999)
NAIC: 336111 Automobile Manufacturing

Skoda Auto a.s., also known as Skoda Automobilova a.s., has been making cars for more than a century. Skoda is the Czech Republic’s largest company in terms of revenues, producing about ten percent of the country’s exports. Small volumes of Skoda’s Felicia model are being assembled in Poland and Bosnia, and other manufacturing ventures are being pursued in India, China, and other countries. In spite of its pioneering heritage, the company reputation for quality suffered tremendously during the years it operated under Soviet control. Volkswagen AG began investing in Skoda in 1991, hoping to capitalize on the Czech Republic’s long industrial tradition and labor costs one-tenth of those in Germany. Skoda led Volkswagen’s late 1990s success story (alongside the VW, Audi, and Seat brands).

19th Century Origins

The Skoda story begins the week of Christmas 1895. While carolers everywhere were celebrating Czechoslovakia’s patron saint, King Wenceslas, a mechanic named Václav Laurin and a bookseller named Václav Klement began to make their first bicycles, adopting the brand name “Slavia.”

The Laurin & Klement company had progressed to motorcycle manufacture by 1899. Their first automobile, the Voiturette, appeared in 1905, with a V-2 engine producing seven horsepower. The company soon became, according to company literature, an international success. By 1910, a new model, the ENS, was boasting 50 horsepower.

Laurin and Klement formed a joint stock company in 1907. The company merged with Skoda, a Pilsen industrial firm, in 1925, bringing an end to the Laurin & Klement brand. Production shifted to the Czech town of Mladá Boleslav. As early as 1930, the merged entity was known as the Skoda-Car Industry Joint-Stock Company. Its Skoda 420 model was marketed internationally after the Great Depression.

During World War II, the Hermann-Göring-Werke group took over Skoda, and its production was directed towards the German military effort. During this time, its factory at Mlada Boleslav produced weapons and heavy vehicles. One of the vehicles was the Skoda RSO-Radschlepper OST, which featured a tractor constructed by Ferdinand Porsche.

The Soviet Era

After the war, the car unit split from the Pilsen industrial concern whose name it shared while taking on the cumbersome Soviet title of Skoda AZNP (National Enterprise of Car Factories). It then became sole manufacturer of passenger cars in Czechoslovakia. Its Skoda 1101/1102 Tudor series was stylistically and technologically similar to the prewar Skoda 420.

Designs such as the Skoda 1200, Spartak, Octavia, and Felicia graced the streets of Prague during the Cold War. (As its name hints, the Octavia was the company’s eighth model.) However, during this time Skoda’s technology began to lag behind that of the West, in spite of the introduction of a revamped model, the Skoda 781 Favorit, which replaced the Estelle, the butt of many auto jokes. Over a million Favorits would be produced in a new factory completed in 1987. In 1989, the last of the Estelles were brisk sellers in Britain due to their low sticker prices beginning at $5,390.

As the Soviet Bloc crumbled, Skoda began to operate in a free market environment after 1989. Like most Soviet automobiles, Skoda’s had problems with reliability, fit, and finish. In fact, the company removed its nameplate from its cars until 1993, when it introduced Volkswagen-inspired improvements in the Favorit.

The Czech government felt the debt-laden company needed a foreign industrial partner to survive, and by the end of 1990 it had chosen Volkswagen to be that partner.

Privatization in the 1990s

On April 16, 1991, Skoda Automobilova a.s. began operating as Volkswagen’s fourth branch, after VW, Audi, and Seat. Volkswagen bought an initial 31 percent stake in the company for DM 620 million, which would increase to a 70 percent shareholding by 1995, at a total cost to Volkswagen of DM 1.4 billion. (Volkswagen also bought the BAZ car factory in neighboring Slovakia, which it used for small batches of niche-produced Volkswagen models such as four-wheel drive Golf hatchbacks.) Skoda reported annual revenues in 1991 of CZK 15 billion (about $390 million).

Volkswagen simultaneously acquired co-ownership rights of the distinctive Skoda winged arrow logo, which had been the property of the Skoda Plzen engineering company since the end of World War II. The Czech government paid Skoda Plzen more than CZK 250 million ($8 million) for the right to have Volkswagen use the trademark on cars. (The logo was updated with new colors in 1993. The name “Skoda Auto” was printed in white around a black circle, said to symbolize the company’s long heritage. The green of the winged arrow within symbolized contemporary concern for environmental issues.)

Volkswagen immediately took measures to streamline Skoda’s production process. The central planning mentality of Skoda’s workers had to be retooled to bring them in line with Western standards of efficiency and quality. Skoda’s productivity improved in the year following the Volkswagen acquisition, although profits took a bit longer to achieve. By the end of 1992, the company was making 860 cars a day, versus 560 at the beginning of the year, according to the Financial Times. Skoda managed to turn a profit ($42.8 million) in 1992. Revenues, meanwhile, had risen dramatically to $1.1 billion.

Volkswagen invested about DM 360 million ($240 million) in Skoda’s Czech plants in its first two years of cooperation. A planned total investment of DM 8 billion ($5 billion) for the decade was aimed to double capacity to 460,000 cars a year by the mid-1990s. Skoda employed 17,000 workers at this time; due to the expansion, this would increase to 20,000 during the decade. They were paid an average monthly salary of $260 each in 1993. Not surprisingly, automotive suppliers flocked to the Czech Republic, chasing Volkswagen’s business.

At the time, more than half of all Skodas sold in the European Community were going to Germany, particularly the eastern provinces, where they undersold similar Volkswagen models by 20 percent. Another important market was the United Kingdom, which imported about 10,000 of the vehicles a year. Skoda Automobile UK was established to import cars for this region in 1993.

Overcoming the poor reputation of Skoda and other Eastern Bloc products would be a monumental challenge. One Skoda official estimated there were 100,000 Skodas on British roads in the early 1990s, each one a testament to inferiority. (Intriguingly, a marketing study quoted by the Financial Times found their owners loved the cars despite the jokes. Getting non-owners to try the cars was the challenge.) Volkswagen’s association with the company gave its new claims of quality credibility. Skoda spent about £11 million on advertising in 1993 and 1994 to persuade potential U.K. customers to give the brand a chance.

Volkswagen scaled back its original investment plans in mid-1993 after sustaining huge losses at its Seat division in Spain. A modified agreement signed six months later committed Volkswagen to investing DM 3.75 billion in Skoda through 1998, with the aim of boosting production to 300,000 cars a year by 2000. Skoda lost CZK 4.26 billion in 1993 on revenues of CZK 35 billion.

Ten thousand workers staged brief work stoppages to protest plans to lay off 800 employees in late 1994. The Financial Times reported growing hostility towards foreign investments in the Czech Republic, such as that of Air France in Czechoslovak Airlines.

In November 1994, Skoda replaced the Favorit with its new Felicia model. A million of them would be produced by April 1996. Some Felicias were assembled at Volkswagen’s Polish plant, and, beginning in late 1996, under license in Belarus and Smolensk. Ventures in India, Egypt, and China were also being considered.

A New Level of Competition in 1996

Skoda revived the Octavia name for a new mid-size model that debuted in the fall of 1996. Priced from DM 22,950 ($15,200) in Germany, the Octavia was Volkswagen’s answer to low-priced Asian marques. Interestingly, the vehicle was Skoda’s first to offer an automatic transmission.

Company Perspectives:

We offer top-quality products and services —because we are always thinking of our customers. Our explicit goal is to not only meet customer expectations but to exceed them. This philosophy can also be seen and felt close up in the Skoda Auto Brand Experience. Whether in the new Skoda Auto Customer Centre, the Skoda Auto Museum in Mlada Boleslav, the future Skoda Pavilion in Wolfsburg’s “Autostadt” or the permanent exhibit on the Lindenkorso in Berlin, visitors will experience a unique symbiosis of the power of innovation and living tradition. And visitors to these centres will also find forums, which promote a dialog between Skoda Auto and its guests.

The launch of the Octavia, according to Automotive Components Analysis, marked the first time that Skoda ever had two models in production at the same time. Volkswagen had built a new, thoroughly modern DM 500 million factory next to the existing one in Mlada Boleslav to accommodate the Octavia’s assembly line. Its efficiency was said to rival Japan’s most productive facilities. Czech President Václav Havel remarked on its abundance of natural lighting, including glass walls at opposite ends, saying, “it would be wonderful if all production halls looked like this. It is a beautiful plant, truly modern, truly appealing.” Reflecting the lower cost of labor in central Europe, the new facility was not highly automated. Skoda also had another, smaller plant in Vrchlabi.

Volkswagen stressed commonality of platforms between its four divisions in order to achieve maximum economies of scale. However, as many of the components were made in high-cost Germany, they seemed to have the potential of diluting the wage savings available via Seat and Skoda. The Financial Times reported that the Octavia shared a significant fraction of its parts with versions of the Audi A3 and the VW Golf then in development. Many of these parts arrived at the Skoda factory already assembled in subunits, such as the front-end module, which included the bumper, lights, and radiator.

Worldwide sales grew about 25 percent in 1996. Increases were most remarkable in central Europe. In neighboring Slovakia, sales rose 90 percent to 23,035 units; they leapt 102 percent to 15,840 in Poland. The Czech Republic itself remained a vibrant market, with 87,400 cars sold in 1996, up 21 percent.

Annual sales approached CZK 106 billion in 1998. A thoroughly redesigned Felicia was launched in February, and new versions of the Octavia soon followed. A four-wheel drive model appeared in March 1999. In April of that year, Skoda opened its new Design Center, which accommodated 160 employees. In May its new coal-fired SKO-ENERGO s.r.o. power station at Mlada Boleslav began operations.

Skoda spent £12 million to promote the Octavia in the United Kingdom. Although it maintained some of the best owner loyalty rates in the business and had been under Volkswagen ownership for nearly a decade, Skoda still had a challenge getting prospects to give their cars a chance.

Skoda broke ground for a factory in India in January 2000. The company rolled out its new Fabia hatchback three months later. Its new post-VW quality standards led some observers to regard the Skoda Octavia as a potential competitor for premium marques such as Ford Motor Company’s Volvo unit. Volkswagen finally worked out an agreement to buy the remaining 30 percent of Skoda in May 2000, paying DM 650 million.

Principal Subsidiaries

Skoda Auto Deutschland (Germany); Skoda Auto Polska S.A. (Poland); Skoda Auto Slovensko s.r.o.

Principal Competitors

Adam Opel AG; Flat S.p.A.; Ford Motor Company; Honda Motor Co., Ltd.; Mitsubishi Motors Corporation; PSA Peugeot Citroën S.A.; Renault S.A.; Toyota Motor Corporation.

Key Dates:

1895:

Laurin & Klement begin making bikes.

1905:

The partners’ Voiturette automobile debuts.

1925:

L&K merge with the Skoda industrial firm.

1943:

Germans take over the plant.

1945:

Skoda Auto begins producing cars for the proletariat.

1991:

Volkswagen AG acquires management control.

1996:

A new mid-size model wins praise.

2000:

Volkswagen buys Skoda’s remaining shares.

Further Reading

Anderson, Robert, “Skoda Drives VW’s Success Story,” Financial Times, Survey—Financial Times Auto, March 1, 1999, p. 4.

Boland, Vincent, “Job Cuts Spark Strike at Skoda,” Financial Times, October 18, 1994, p. 2.

Bollag, Burton, “VW Reaches Accord for Skoda Stake,” New York Times, Section 1, April 20, 1991, p. 33.

Brown, Kevin, “A Cure Is Found for the Mundaneness of Making Things,” Financial Times, Survey—Guide to the New Millennium, December 6, 1999, p. 16.

Done, Kevin, “Drive for Fresh Credibility,” Financial Times, Survey—Czech Industry & Finance, May 14, 1997, p. 5.

Frost, Tony, “Competing with Giants: Survival Strategies for Local Companies in Emerging Markets,” Harvard Business Review, March/April 1999, p. 119.

Genillard, Ariane, “Skoda Smoothes Out the Bumps,” Financial Times, September 23, 1992, p. 26.

Griffiths, John, “Companies in Clash Over Skoda Shake-Up,” Financial Times, January 5, 1993, p. 8.

Lloyd, John, “Cultural Resolution,” Financial Times, Comment & Analysis, January 5, 1999, p. 18.

Madden, Normandy, “Czech Carmaker to Restage Stunt,” Advertising Age, September 11, 1995, p. 6.

McClure, Richard, “Baby, You Can Drive My Skoda!” Independent (London), May 19, 1995, p. 22.

“No More Cuts in Skoda Investment, Piech Promises,” Finance East Europe, May 6, 1994.

Siler, Charles, “Skoda Rides VW’s Prestige; Automaker Turns UK Lemons into Lemonade,” Advertising Age, October 17, 1994, p. 121.

Simonian, Haig, “Octavia Becomes VW’s Spearhead in Budget Car Battle,” Financial Times, Companies and Finance, October 1, 1996, p. 23.

“Skoda: The Production Line Story,” Automotive Components Analysis, November 1996, pp. 13 + .

Stevenson, Richard W., “In a Czech Plant, VW Shows How to Succeed in the East,” New York Times, June 22, 1993, p. A1.

Summers, Diane, “Skoda’s Sales Drive Is No Joke,” Financial Times, May 12, 1994, p. 11.

Trickett, Eleanor, “Marketer Takes the Joke Out of Skoda,” Campaign, Campaign Direct: Profile of Chris Hawken, July 16, 1999.

“VW are Winners as Skoda Deal is Rewritten,” Finance East Europe, January 6, 1995.

—Frederick C. Ingram