Sunday, July 19, 2015

Volkswagen should focus on profits, not kindergarten pissing contests of brands

Sound business practices more helpful than nationalism

The Czech media began to discuss an increasingly urgent issue recently raised by the prestigious Automotive News Europe magazine (ANE): the VW-owned Czech subsidiary, Škoda, is doing much better than the other brands in the corporation.

Škoda Vision C concept. The new generation of Škodas got pretty close to that. The design – contributed by the Škoda chief designer Jozef Kabáň who is Slovak – may beat other brands by its similarity to BMW etc. The vertical ribs on the front grille belong among the details that make it sexier, I think. The horizontal ribs of VW, Opel etc. help to make these brands mediocre.

Volkswagen has plans to become the world's #1 carmaker by 2018 or so. Can it be achieved? Lots of numbers were promising. But June 2015 has shown a 8.6% year-on-year drop in sales which is worrisome. One brand at least managed to stay above zero (at least a month earlier), Škoda. Its annual production is safely above 1 million cars and the growth rate remains substantial. In H1, it produced 544,300 cars, a year-on-year increase by 4.2%.

In recent 12 months, Škoda saw a big drop in the Chinese, Ukrainian, and especially Russian market – but the VW Group has experienced much steeper drops in these markets, anyway.

The Czech company has been doing some quality cars since the 19th century (founded as Laurin & Klement). It was bought by the non-car industrial giant Škoda Works, here in Pilsen, in the 1920s. The companies shared and keep on sharing the logo, the winged arrow, even though communism has de facto divided them again. The companies weren't reunited and VW bought the rights from Škoda Works to co-use the logo in 1991.

Lots of Škoda cars before the war were at the very top. For example, Škoda 935 in 1935 was ahead of the competition in aerodynamics etc. Communism meant a huge and increasing loss of quality, profitability, and competitiveness. The brand was reduced to the most successful exporter of the cars for masses in the Soviet bloc – which is not too flattering. It meant to be some 10 years retarded relatively to the West. The British car jokes were almost exclusively about Škodas. How do you double the price of a Škoda? Fill the tank. And dozens of others. ;-)

Volkswagen bought Škoda in 1991 and it's widely appreciated as the most successful example of the post-Velvet-Revolution privatization of a large company in Czechoslovakia. Under Volkswagen's leadership, Škoda immediately got access to state-of-the-art technologies. For many years, Škodas were meant to be cheaper siblings of their more perfect and expensive brothers with the VW logo.

It made perfect sense. The Czech industry was screwed after 42 years of communism. Cheap labor has been the main comparative advantage that the Czechs had – and the wages are still substantially lower than those in Germany. But can this paradigm of a "cheaper sister" work permanently? The evidence that VW simply shouldn't treat Škoda in this way is accumulating at a quick rate.

Škoda Octavia is the bestselling model (or group of models) but there are perhaps better examples of the edge.

The new Škoda Superb, an upper-class model, is increasingly reliably beating its proper German brother, Volkswagen Passat. In the U.K., the "advantage Škoda" has been obvious for years. But even in other countries, Škoda's victory became pretty much the rule. Two days ago, the Dutch Autoweek declared Superb as the winner, too. Most commenters agree. It's larger, better in many respects, still cheaper, and it seems to look better. The Passat is too bland in comparison. And all these "simply clever" gadgets in Škoda, automatic this and that, two umbrellas just like in a Rolls-Royce, seatbelts for dogs, and 100s of others.

ANE says that success can breed jealousy and Škoda is probably breeding a lot of it these days.

It's not just the final numbers in the markets that may breed this jealousy. One may see the edge internally, too. Volkswagen has developed the MQB platform architecture – one of the essential parts of a good state-of-the-art VW Group car that the Škoda's success depends upon. However, it turns out that Volkswagen proper has only incorporated it in 20% of the models they produce. In Škoda, the percentage is 40%. The adoption of the good new trends seems to be faster in Mladá Boleslav than in Wolfsburg. VW Group Winterkorn recently said that investments like MQB have helped (brands like) Škoda disproportionately.

The kind of business approach that is implicitly encoded in this statement is weird, indeed. If the competitiveness of VW Group depends on introducing improvements such as the MQB architecture, then VW Group simply has to do these things. The whole group has to do it. If someone manages to do it more quickly, he should serve as an example for others and he should be praised, not viewed as a guy who robbed or discriminated others. After all, all the profits go to the whole VW Group. It's very strange if Mr Winterkorn speaks as a social justice warrior who wants to impose some egalitarianism or justice. His task should be to achieve excellence, not egalitarianism or mediocrity, and maximize the overall profit and its growth rate, not the uniformity with which the profit is geographically distributed!

And the ANE magazine brings some examples of planned reorganization at the VW Group whose very goal seems to be to make Škodas less successful. If that were true, it would be really insane from any commercial viewpoint.

There is a discussion whether Škoda should be producing more upscale cars or sporty cars than so far. There may be different paths to success. Škoda's historical track record is undoubtedly more luxurious than Volkswagen's – just recall what the word Volkswagen means – but on the other hand, it's been successful thanks to the production of value cars with some cool "simply clever" details and it would be crazy to throw this recipe for success as long as it seems to work.

Škoda A-Plus, an SUV in preparation, formerly known as Snowman or Polar. A bigger brother of Škoda Yeti.

However, what I do have an unambiguous opinion about is the management of the co-existing brands at the VW Group level. First of all, it seems obvious to me that whatever seems to "work" in the VW Group should grow and be copied to other parts of the group; and what doesn't work too well should be suppressed or abolished. Is this really controversial?

In particular, the suggestions that Škoda's success hurts the whole VW Group are absolutely irrational. The success may breed jealousy but it surely doesn't reduce the overall profit. If you imagined that Škoda were not a part of the VW Group, the group's profits would surely be lower than they are now. You can see that, can't you? Škoda is a competitor for VW but it's an internal competitor whose success counts positively to the results of the VW Group. There are many other competitors whose success counts negatively to the results of VW Group. When Škoda sells by 100,000 cars more than in the previous year, it may reduce the number of sold VW cars, but surely by less than 100,000. A part – probably an overwhelming majority – of those 100,000 sold cars that Škoda "stole" were "stolen" from brands outside the VW Group! The suggestion that the success of a part of the whole hurts the whole is idiotic – it's some form of a communist myth.

Moreover, if there were some evidence that the Škoda models sell better than some other models, and one might argue that this evidence has been emerging for some time, it would seem reasonable to produce the Škoda models in the other plants as well. If they do something better in the Škoda plants, and ANE argues that they do, others in the VW Group should learn from Škoda. Škoda has been learning from VW proper – and perhaps others – for more than two decades. There is nothing wrong about learning from your colleagues in the VW Group.

And if the higher profits of Škoda depend on the salaries, well, it means that the salaries in Škoda should relatively go up while those in other parts of the VW Group should go down. The average wage in Škoda is 1.5 times higher than the average Czech salary, so it's a great employer, but it's still lower than in VW Germany. There is some evidence that this gap at least overstates the difference between VW and Škoda – and the difference may already have the opposite sign than what we would have assumed for 2 decades.

Germans are always assumed to do things effectively and calmly look for high revenues and profits etc. And the right business practices to achieve such things are pretty much obvious. Except that there seem to be hints that at the VW Group level, there is some denial of the obviously correct algorithms one should follow in order to optimize a somewhat heterogeneous group of plants.

Methods, brands, and models that work should be multiplied, those that don't work should be suppressed. Salaries in parts of the company that produce "too much" profit should be raised, relatively speaking, while those in the loss-making parts should be lowered. And the brands and the emotional attitude that various people have towards various brands should be just tools to achieve the actual goals – higher profits and their growth and sustainability – and not the ultimate goal of the decisions.

The boss of Škoda Mr Vahland has confirmed that there still exist no plans to sell Škodas in North America. I am not sure whether it's a wise decision and whether it's his decision or someone else. It looks ironic because Škodas are planned to be sold to the Iranians. But what I find important for Vahland et al. is that they should enjoy their success, take a big part of the credit for that, and make sure that this should increase their influence within the VW Group and not to reduce it. The future fate of the VW Group as a whole surely depends on their ability to get all these signs correctly. If sore losers get an upper hand in a group, the group is doomed.

And a detail: Given the importance of Škoda within the Czech economy, I would find it appropriate if the stocks of Volkswagen were being traded at the Prague Stock Exchange, much like the stocks of the Austrian financial institutions Erste and VIG (that have important Czech daughters, too). VW could of course be added to the Madrid Stock Exchange and others, too. Such steps would highlight the fact that VW Group is a profit-seeking multinational company and not a group of fans of the German national soccer team, for example. Sometimes it looks like it's the latter!

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