The Skoda Conundrum

When the automotive historians look back at GM they will point to many factors as to why they fell. Some might point to the Unions, some may point to their lack of reliable products, others may even point to their shoddy dealer service. But one factor which undeniably led to GM’s bankruptcy is lack of brand management. If anyone questions the harm poor brand management can do, then, may I point you in the direction of the Cadillac Cimarron? Muddled brands leave people confused and wondering why should I stay loyal to this brand? Your brand is your stamp of a promise to your customer. Safe cars? Volvo or Renault. Reliability? Toyota or Honda. Driving dynamics? BMW. Now I raise this point, because people said that this problem was endemic to GM only. It was a GM-centric problem. But is it, really? Was it really a GM-only problem? Or did GM suffer from “big company” syndrome? Well it seem there’s evidence that poor brand management isn’t just for American auto companies.

Der Spiegel reports that Volkswagen CEO, Martin Winterkorn, is utterly fuming at Skoda. What could the reason be? Profits? Well, they are down, but we’ll come to that later. No, the main reason why Herr Winterkorn is seething at Skoda is because Skoda is doing well. So, well, in fact, that their cars are now creating problems for VW cars, their main brand.

Let’s go back a bit. Reinhard Jung, the chairman of Skoda, is being sent into retirement at the age of 59. Sounds a bit young, especially when you consider that retirement age in Germany had been raised to 67. But Volkswagen is famous for its lavish early retirement packages. As reported at TTAC, Jung is being replaced by Winfried Vahland, President of Volkswagen Group China.

Why the change? Der Spiegel says that the “reason for Jung’s departure is that the Czech VW subsidiary is no longer performing the function it was meant to perform within the VW group…” Skoda’s raison d’etre was to make inexpensive, entry-level cars. Cheap and cheerful, one might say. However, all Skoda engineers had to work with were the Volkswagen cars. So they built them with more attention to detail, “with more love” as the word quickly was in Wolfsburg. Skoda models come with those little extras which make a car special, which surprise and delight. When the Skoda Superb came out, it had a feature, whereby an umbrella holder was fitted into the door (more recent version here) complete with umbrella. The Skoda Superb was one of only 2 cars on the market which had this feature. The other? Rolls Royce. Very quickly, word got around that Skodas were Volkswagens, but built better, with better features, and sold for less money. A Skoda became the smart shopper’s choice.

The end result of this is that the edge of VW’s two flagship cars (the Golf and Passat) is being lost on customers. German automotive magazine, Auto Bild, did a comparison test between the Skoda Superb and the VW Passat. The Superb was, well, Superb. Auto Bild said the Superb “simply offers more for the money…a lot more features, and even more space.”. The tester also found no difference in quality between the 2 cars.

Now, as you might suspect, all of this quality comes at a price and Herr Winterkorn knows this, which brings me to the second reason he’s angry at Skoda. Skoda’s profits have been falling. not only has the Czech Koruna been appreciating against the Euro, but all this Skoda quality comes at a price. Skoda pays its workers more in order to build the cars well. But in order for these cars to sell, they have to be priced with value in mind. Which means profits get cut, dramatically. You get a car with the trim of a VW Passat, with the price of a Skoda. That’s money out of Volkswagen’s pocket. And because more people are buying Skodas, the more profitable cars aren’t being sold at Volkswagen.

This is where Martin Winterkorn’s job gets tricky. He has to give the brands room to be themselves, but he can’t allow them to tread on the toes of other brands in the family (the fatal mistake GM made). GM allowed their brands to become the same as each other, to the point where each brand didn’t stand for anything. Not mention that Volkswagen now has a stake in Suzuki which means that’s another set of toes not to be trod on. Does Volkswagen have too many brands? Or can Herr Winterkorn perform the juggling act GM couldn’t do? One thing is for sure. Skoda is due for a “de-contenting diet” very soon. Bringing in the head guy from China suddenly makes sense.