At the end of March, during Chinese President Xi Jinping's visit to the Czech Republic, senior executives of China's SAIC Motor stopped by Skoda headquarters in Mlada Boleslav, north of Prague. Xi's trip was largely about deepening business cooperation -- and SAIC, VW and Skoda did just that.
The trio announced a five-year plan to manufacture new Skoda models at SAIC Volkswagen Automotive, a joint venture between the German and Chinese companies. The agreement includes a total investment of 2 billion euros ($2.28 billion).
"Since entering the market nine years ago, Skoda Auto has made some very positive developments on the Chinese auto market, which has since become our largest single market," Skoda CEO Bernhard Maier said. "Our aim is to double Skoda deliveries in China by 2020."
Skoda has been performing well despite the emissions scandal that has rocked its German parent. The Czech unit posted a record profit for fiscal 2015.
VW, unable to predict the full financial toll of the ongoing emissions controversy, has decided to cut investment in the auto sector by 1 billion euros this year. The 2 billion euro Skoda investment in China represents a commitment to what VW sees as a sacred market. It also raises Skoda's profile in a group that includes luxury marques Audi and Porsche.
Skoda sold 280,000 cars in China last year, up more than tenfold from 2007 and accounting for a quarter of the brand's total. Overall, VW group sold 3.55 million units in the country in 2015.
While Skoda's figure is less than 10% of that, the brand looks better positioned to attract young drivers than other VW marques. Skoda aims to release SUVs, electric vehicles and other models in the country. VW already sells electric cars there.
Competitive margins
The investment signals a change in VW's strategy for courting first-time car buyers.
Former VW chief executive Martin Winterkorn launched a project to develop budget cars for emerging markets, intending to introduce them in China first. The rollout was slated for 2017, but it has been postponed due to slow progress with cost-cutting and other aspects of the plan.
Skoda, meanwhile, is getting stronger. The brand reported a 12% on-year rise in operating profit, to a record 900 million euros, for the year ended December. True, the amount was less than one-fifth of Audi's profit, but Skoda's operating margin came to 7.3% -- not far off Audi's 8.3%.
The margin was much wider than the 2.7% for VW passenger cars in the year ended December 2014.
Building on friendly Czech-Chinese relations, VW appears to be using Skoda to make up for the delays in developing entry-level cars for emerging markets.
Skoda's strong growth is mainly attributable to lower raw materials costs, as well as VW group's system for sharing chassis and key parts across different models. The Czech company has established a presence in India, too.
Skoda is, in fact, older than VW -- it was selling cars in China and Japan about 80 years ago. But the company was nationalized under communist rule and lost its competitive edge.
Twenty-five years ago, VW came to its rescue. Now, Skoda is poised to help its parent at a critical juncture.
source by asia.nikkei.com
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