VW brand seeks to curb competition from Skoda, report says

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Skoda cars such as the Kodiaq SUV, shown, have received favorable reviews in comparison with VW models.

Photo credit: Skoda


Reuters
October 4, 2017 14:29 CET

BERLIN — Volkswagen managers and unions are seeking to curb competition from lower-cost stablemate Skoda by moving some of its production to Germany and making the Czech brand pay more for shared technology, company sources told Reuters.

As VW struggles to cut jobs and spending at German factories and move away from its emissions-cheating scandal, Skoda’s superior car reviews and profitability have intensified the brands’ rivalry within the VW empire.

VW now wants to curb what it sees as Skoda’s unfair advantages — combining German technology with cheaper labor — and reaffirm the top-selling brand’s primacy ahead of a wave of new electric-car launches, the sources said.

The tussle between VW and Skoda is reviving tensions at the heart of the Volkswagen Group between profits and jobs, and between central control and autonomy for its 12 vehicle brands.

“Instead of devoting our efforts to beating Tesla, we may just be setting up a futile internal conflict,” said one manager.

Once the butt of jokes, Skoda has blossomed under 26 years of VW Group ownership into a successful mid-market carmaker, steadily winning business from rivals — including VW — and surpassing even Audi’s operating profit margin last year.

At the same time, VW is facing thousands of job cuts as management moves to trim excess capacity at German factories. Its powerful domestic unions see Skoda’s success as both a threat and a potential lifeline.

VW workers’ representatives are now demanding the transfer of some Skoda production to their underused German plants, a source close to the supervisory board told Reuters. The proposal aims to offset declining output of the VW Passat and aging Golf that could otherwise threaten more jobs.

They are also making the case that Skoda should pay higher royalties to use VW’s main common vehicle platform. The MQB architecture also underpins compact and midsize models from the group’s Audi and Seat brands.

VW’s works council declined to comment.

VW brand CEO Herbert Diess is leading a parallel management effort to shield future VW models from direct competition with cheaper Skodas.

At a recent group executive committee meeting, Diess called for greater differentiation between VW and Skoda target markets and clientele, particularly for future EVs, three managers with knowledge of the matter said.

“The future positioning of brands is being looked at, but discussions are still ongoing,” a VW Group spokesman said, declining further comment.

Tension is expected to rise ahead of a Nov. 17 supervisory board session due to approve annual investment budgets across the carmaker.

Profit margin advantage

Skoda’s operating profit more than doubled over three years to 1.2 billion euros ($ 1.4 billion) in 2016, lifting its profit margin to 8.7 percent — second only to Porsche within the VW Group stable of brands.

The VW brand, whose margin dipped to 1.8 percent after earnings fell by a third, still outsells Skoda globally but is growing more slowly in Europe.

Skoda’s healthy profits partly reflect the shared car platform’s economies of scale. Designed by VW engineers in Germany, MQB has been rolled out progressively since 2012.

But Skoda gets a further boost from cheaper labor. Manufacturing wages average 10.10 euros per hour in the Czech Republic, where most of its European cars are assembled, compared with 38.70 euros in German industry, according to Berlin’s official statistics office.

How VW Group CEO Matthias Mueller might resolve the dispute remains unclear. The power of the German unions, which hold half of the company’s 20 board seats, means Skoda’s success may be viewed more as a problem than a model to emulate.

The German state of Lower Saxony, which occupies another two board seats, is also preoccupied with preserving VW jobs.

Unease at VW’s Wolfsburg headquarters has been compounded by car reviews in which its models have sometimes lost face to cheaper Skoda cousins sharing the MQB platform.

The new Skoda Kodiaq SUV is priced 1,500 euros ($ 1,765) below the VW Tiguan yet trumped the German brand in a quality survey by Auto Motor und Sport magazine. Skoda’s Superb also drew favorable comparisons with the Passat.

Skoda denies any deliberate encroachment on VW’s turf.

“We mainly attract customers from outside the VW Group and that is also our mission,” brand CEO Bernhard Maier told Reuters in an interview.

EV future

Competition for resources among VW brands is nothing new. Unions lobbied for VW to lead development of emerging-market cars, but Skoda was allowed to take charge.

Now the group’s 20 billion euro push to launch 50 EVs by 2025 has brought tensions to a head as VW managers fear their battery-powered models may also be undercut, people with knowledge of the discussions said.

“The electric vehicle market is a new ball game where you cannot simply maintain the brands’ positioning,” said one manager. “Customers need to see that you are making changes.”

VW and Skoda both plan to introduce electric SUVs in 2020 that offer  the same 500km (300 mile) range.

Any renegotiation of platform cost-sharing could also affect each brand’s contribution to the new MEB platform being developed for EVs.

In public, however, VW has played down the rivalry. With a combined lineup approaching 100 vehicles, brand CEO Diess said, there is always some risk of stepping on toes.

“There will always be some substitution,” he told Reuters. “But some internal competition is also helpful.”

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