VW and Skoda, the story of a successful alliance

The story of the acquisition of carmaker Skoda by the VW Group in 1991 is not just a textbook example of a great brand strategy. It also demonstrates how a smart East meets West merger should ideally be effected: with respect for the corporate tradition and acknowledgement of the difficult financial situation in the Czech Republic at the time. A tale of how two cultures became one.
Those who are unfamiliar with the ins and outs of the four-wheeled world may be surprised to learn that Skoda, along with Mercedes and Peugeot, is one of the oldest car manufacturers in the world. Skoda has its origins in the Czech city of Mladá Boleslav, where Vaclav Laurin and Vaclav Klement set up a bicycle factory in 1895. Ten years later they started production of a revolutionary mode of transport: the car. In 1925 the company was taken over by Skoda Pilsen, a huge engineering and manufacturing firm whose output included weapons, munitions, locomotives, ships and machine parts. After the Second World War Czechoslovakia became a socialist satellite state of the Soviet Union. Carmaker Skoda was brought under full state ownership and given the task of producing cheap cars for the people.

A joke
In the Cold War years the company operated under difficult circumstances; productivity was low as were the state investments needed to enable it to compete with Western European car manufacturers. Despite this, Skoda produced cars of relatively high technical quality, certainly as compared to other Eastern European carmakers such as Lada, Trabant and Wartburg. Whilst generating significant income for the state, there was no way Skoda could keep up with the competition from the West, where the rigours of the market ensured a constant drive towards innovation and efficiency. Eastern European cars, with their flimsy and often faulty parts, their unfashionable image and their engines and propulsion systems in the back, became a bit of a joke in the West.

Salvation
In the 1980s the absence of fresh state investments, an outdated management style and the fact that the 25-year-old engine no longer met the new European emission requirements brought Skoda to the brink of bankruptcy. The historic collapse of the communist bloc in 1989 can be considered Skoda’s salvation. One of the first decisions taken by the new government was to gradually privatise the carmaker. Renowned Western carmakers showed a surprising degree of interest in taking over the ailing Czech company, with BMW, GM, Renault, Volvo, VW, Ford, Fiat being but a few of the big names to step forward. This interest lay largely in the fact that Western carmakers saw this as an opportunity for expanding their market into Eastern Europe using Skoda as a bridgehead. But it also shows that Skoda was recognised as a relatively successful company, with a long tradition in car manufacturing. A carmaker with potential.

Biggest-ever investment
VW won the tender by being the candidate best able to make this latter point in its offer, as well as by showing respect for the prevailing economic circumstances in the Czech Republic. Skoda would continue to exist as a brand and the company was incorporated as a full member of the VW Group, which also comprises Audi and Seat, with its own R&D division and sales and purchasing departments.
VW acquired 31 per cent of the shares, while the Czech state retained 69 per cent. VW was eventually to acquire all the shares, with the Czech government continuing to be represented on the Skoda board. However, it was also VW’s tremendously ambitious plans for the new Skoda that made the government’s choice an easy one. As well as paying a fair price for the shares (DM 620 million for the 31 per cent) VW pledged to invest several billion Deutschmarks in the modernisation and development of Skoda: the biggest-ever Western European investment in an Eastern European company. At the same time VW announced its intention to double annual output to 350,000 cars.

Social stance
It is understandable that outsiders had their doubts about this. In 1991 Skoda had just one model with any real sales potential, the Favorit. Outside Eastern Europe Skoda had a bad image. The company was producing 150,000 cars a year of which only 30,000 were exported. But VW looked beyond this. The Czech demand that the Skoda brand must be maintained was entirely consistent with VW’s strategy, enabling it to sell cheaper cars outside Western Europe without the image of the other brands being undermined by the, initially still sloppy, image of Skoda. VW acknowledged both the technical skills of the production staff and the potential of the Czech suppliers. The Czech unions supported the government’s choice partly thanks to the social stance taken by the Germans, whose efforts to protect existing jobs were also well received. VW even promised an increase in jobs.

Value for money
VW had long known that a strong brand stands or falls with quality, with being the best in your class. Skoda needed to be transformed into a quality and client-oriented, learning organisation producing cars that represented value for money. Quality became the new mantra at Skoda. From a material point of view, obviously; VW invested hundreds of millions in new production lines in the cities of Vrchlabí and Mladá Boleslav, in R&D, technology, marketing and management. But the quality thinking also had to be taken on board by the entire workforce. From the day of the takeover the exchange of knowledge and the aim to produce top quality were top of the list of priorities and remain so to this day. All Skoda staff were given training courses on German standards for development and production. VW employees were sent out to the Czech Republic to share their knowledge. Czech employees were encouraged to spend three weeks at VW’s headquarters in Germany. The language of communication at Skoda was both Czech and German. Anyone who was also able to master English had even better chances of moving up through the ranks.

Platform strategy
The quality requirement did not stop at the gates of the Skoda plants. Czech suppliers, who were afforded a certain degree of protection under the contract between VW and the government, were encouraged to deliver better quality by forming joint ventures with local companies. As a result within 10 years the number of class A suppliers had risen from 39 to 61 per cent. In the longer term the investment in quality also had positive spinoffs for the wider local economy, which benefited from the introduction of German quality standards.
The first new Skoda model to be produced under the auspices of VW was presented to the world in October 1994. The Felicia was well received by the press and a year later more than 130,000 had been sold. It was the start of a series of new models in various price classes. VW group took the revolutionary step of introducing a platform strategy, enabling the brands under the umbrella – VW, Audi, Seat and Skoda – to use each other’s parts. This gave a boost to Skoda in particular, which thus gained guaranteed access to quality parts from VW and Audi.
In 1996 Skoda launched its first mid-segment model, the Octavia. This C class car built on the VW Golf chassis brought Skoda its definitive international breakthrough. Thanks to VW’s platform strategy Skoda was able to supply different types of engine, thus considerably expanding its product range. Another first for the global car industry was that the four main suppliers were allowed to build their own production facilities on the Skoda site and staff them with their own people.

A million cars a year
In 1991 Skoda was selling cars in 30 countries, in 2013 this had risen to over 100. Skoda has more than 10 models in production and is one of the few manufacturers with the ability to deliver a ‘customer-built’ car to the dealer within four weeks. In 2015 the company expects its global production to reach one million cars. Skoda Auto Group develops cars in the Czech Republic and in India and manufactures them in countries including China, Russia, Slovakia, Ukraine and Kazakhstan. It employs 28,000 people around the world. Skoda managers now hold senior management positions within VW and almost all employees in key positions know English. Skoda’s starting point following the merger with VW was to deliver top quality for a reasonable price. Today the Skoda slogan is Simply clever. Judging by what has been achieved in just over 20 years in the most competitive sector of them all, that sums it up nicely.

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