## Sunday, November 17, 2019

### Volkswagen, not Škoda, should dominate the cheapest market segment

Shortly after the Velvet Revolution (the fall of communism in Czechoslovakia that began exactly 30 years ago today), the Volkswagen Group bought the Czech mass-market carmaker, Škoda (named Laurin & Klement up to the 1925 acquisition by Škoda Works in Pilsen), and it's been a success story. The car brand that inspired almost all the British car jokes has been turned into a formidable player – perhaps a more competitive one than Škoda was even during the celebrated interwar Czechoslovakia: the main source of pride in the 1930s was Škoda Popular whose price was CSK 17k-30k (most people had salaries below CSK 1,000 a month) and only sold 21,000 pieces in total which makes it clear why it wasn't such a big deal for Škoda Works (which produced 2,000 tanks per million crowns, among tons of other things) to acquire that carmaker.

In recent years, Škoda sells over 100,000 cars a month and has the 2nd highest profit margin in the VW Group (around 10%) after Porsche (which has around 15%), rather safely beating Volkswagen, Audi, Seat, and others. About 40% of the cars have been Škoda Octavia, the most important model which is the bestselling car model in a dozen of European countries – and many other countries. About 6.5 million Octavias have been sold so far.

Škoda famously doesn't export to North America.

They produce lots of models of all kinds – tiny Citigo (Czech VW Up!, the first electric Citigos below €17,000 are sold out; a source says that they lose $9,000 on each car, communism is back), small Fabia, medium Scala (which is replacing Rapid; see how easily Scala demolished Focus, Astra yesterday; well, the best small car of 2019), Octavia, limousine Superb, and smaller SUV Karoq (which largely replaced the beloved quirky Yeti), SUV Kamiq, and large SUV Kodiaq. Škoda Auto is responsible for some 7% of the Czech GDP and 25% of the Czech exports. Almost 1/2 is Octavia, do the mathematics. Octavia is important as a term in the whole GDP of my homeland (which is why the prime minister attended the premiere of the new Octavia on Monday) – but we could still survive just fine if the whole company collapsed. Well, all the profit still flows to the mostly West German owners via dividends (5% of the Czech GDP flows out as dividends – clearly a greater amount of money than all the controversial EU subsidies). The models have used some VW Group infrastructure (MQB platform etc.) but almost everything by which Škoda differs from other VW Group brands is designed by groups dominated by Czechs. On Monday, Škoda introduced the new update of Octavia which is called the 4th generation but it should be called the 5th generation because the first Škoda Octavia was launched in 1959 (Octavia simply meant that it was the 8th model after the war, in Latin, and the name was recycled in 1996). If you're interested in cars, you may want to look at some reviews of the new model because they're generally stellar, much like most comments by the users. Carwow suggests it's the best value model in the world ever; YouCar agrees it is the best choice for money. What Car is among many of those that say it is a better car than the new VW Golf; a Russian video with similar 300,000 views agrees. This sentiment seems omnipresent; the number of additional e.g. German, Russian, and Slovak reviews that are similarly enthusiastic (and have hundreds of thousands of views) is very large. There are some refreshing changes of the exterior. The four-eyes front lights and again two eyes – now LED only. The BMW-like vertical grill is even more massive, some inches were added to the length, the already huge luggage room was inflated by 30 liters and may take up to 600 or 640 liters (hatchback vs estate – or sedan vs combi, as we call it), traditionally the highest in the categories. The tetrapack (milk cardboard) features disappeared from the rear. The design still resembles Škoda Octavia but the changes are substantial. However, it's the interior that was utterly revolutionized. Everything is more digital, there are huge displays, every detail of the now 2-spoke steering wheel seems to be optimized and stunning, like in a Mercedes. Up to 5 USB ports (all USB-C now) may be there, including one for a dash cam near a mirror. Completely new gearboxes, the first Škoda head-up display (directly inside the front window), and more. Add lots of the shields on the windows, a sleep packet to prevent your head from falling to the side if you wish, pockets for cell phones, one-hand openers for bottles, and so on. This trend has been around for several years. Around 2010 or so, it would still look rather strange to almost everybody – Czechs, Germans, Britons, and everyone else – to suggest that Škoda models were better than the similar Volkswagen models. It was just assumed that the carmaker emerging as a joke from the communist era must be a cheaper version of the cheapest VW Group's brand, Volkswagen. But gradually between 2010-2019, this "bizarre heresy" was getting widespread. For some time, the people who saw both and said "Škoda models were prettier than the corresponding VW models" were probably a majority. With the newest models (the new Golf was introduced three weeks earlier), this statement looks almost certain. Škoda generally keeps slightly lower starting prices of Octavia than some similar models of VW Golf and VW Passat. But the 2020 Škoda Octavia is often said to be more similar to Audi models, a higher-class brand within the group. Even if the prices were the same, Škoda wins most of the "make your choice" contests (and reviews in the car journals) against the VW models – and pretty much for all the major reasons: • it is a bit larger, Škoda always wins in the boot space in each category (globally) • it is more practical and has many more useful details which are called "Simply Clever", a slogan of Škoda (one of the simply clever umbrellas in the front doors was replaced by a brush in the new Octavia LOL but the number of such helpful details is counted in dozens in Škodas) • accidentally, the new Octavia is the best aerodynamical model in the category now • and perhaps most importantly Škodas just look prettier, especially now. It's not easy to describe "why" Škoda beats VW in the beauty because the beauty can't be fully conveyed by words. But Škoda models • just contain many special features that are cute, like the strong BMW-like vertical grilles, more elaborate Škoda logo, various teeth in the interior • Škodas are more rectangular (which is ironic, in the architecture, the Germanic structures are supposed to be more rectangular and the Slavic ones are more round) and that brings some conservative perception of beauty • Škoda models have more distinctive "wrinkles" which make it look different from generic cheap car "droplets" that look just like others (VW Golf just looks cheap now – no "artists" were involved, it looks so) • Škoda generally always avoids oversimplification (which is sometimes done mindlessly in other brands, perhaps for quasi-ideological reasons); Škoda folks always question "is that actually a good idea to oversimplify things too much?" and I think that this virtue does boil down to the Czech skepticism and irreligion. The latter point is rather general and has implications for the practicality, too. For example, there's this digital trend in the interior and other models are converting everything to touch buttons. But Škoda actually keeps numerous physical buttons and it's a good choice, for practicality as well as aesthetics. Even if the removal of physical buttons continued, it's just not a good idea to make this trend too fast. The new Octavia will already be sold here in December, it will get to other markets in early or late 2020, depending on how far they are from Czechia or Germany. An even more stunning model will be the luxurious electric car based on the Škoda Vision iV concept. You may want to look at this 5-minute-long review by a female electric car expert (embedded below). The prototype has cost$4 million so they will really have to reduce the price LOL (they promise below \$50,000) but it's being said that the final model should be 85-90 percent identical which would be amazing. Škoda Vision iV simply does look more luxurious than some corresponding competitors, such as Tesla, and it has many other advantages, better range (500 km), and more. The shining yellow color has helped many people to compare it with Lamborghini Urus. (VW is considering the sale of Lamborghini.)

Under a 400,000-view video, commenters agreed that Škoda Vision iV beats 9 other competitors including one VW and one Audi from the same group.

If something like that is sold within a year or two and is cheaper than Tesla Models Y (or S/X), all sane people will prefer the Škoda over Tesla because it's simply clever, better, and prettier. Incidentally, the 2020 Octavia will be available as petrol, diesel, mild hybrid, and plug-in hybrid, too. The plug-in will make 55 km on the battery which is really enough for some minimal daily travelling in the city.

You know, lots of Westerners with limited knowledge of history, geography, and the present markets unsurprisingly say – and have been saying – it's just some German car produced in one of the post-communist countries etc. It's normal. And lots of Czechs like this meme, even today, because the Czech nation has a remarkably high percentage of the nationally self-spanking people (but the Czech pride is highest now since 2005).

But it's true that there are differences and much of the "X Factor" of the Škoda cars is actually being added by Czechs. The resurrection of the company would have been almost certainly impossible without a Volkswagen-like backing but you can't explain the whole semi-infinite future by an acquisition in 1991.

While Škoda is increasingly familiar to everyone who studies the car market, it's still being compared to others. It's just like... another brand, we still hear. Well, the differences have become larger and equally importantly, the brands that Škoda is being compared to have grown more luxurious. So "a cheaper Volkwagen" was surely dominant a decade ago. But when you read about people's perceptions, you find many more comparisons to Audi, Mercedes, BMW, Lamborghini, Tesla, Volvo, Kia, Rolls-Royce (a sibling at least due to the door umbrella LOL) and more. The character of the discussion is changing.

But now to the point from the title.

In late September, a Volkswagen talking head said that the VW Group actually plans to move Sean up, to make it more emotional, while... Škoda should be moved downwards towards the cheapest models that should compete with Hyundai, Kia, and Dacia. Wow. Needless to say, the Škoda labor unions were sort of terrified.

Now, Dacia is a Romanian brand. Romania only began to become industrial since 1950 or so, a whole century after Czechia. From the engineering viewpoint, it's a totally different world. It's been acquired by French Renault in 1999 and one could argue that Renault still is technologically below the VW Group, too. Dacia cars have gotten better but e.g. the SUVs, Dacia Duster, may start at prices that are 50% lower than the cheapest Škoda SUVs, e.g. Karoq.

What does the claim that Škoda is going to compete with Dacia mean? Should we take it seriously at all?

Now, the guy who said that Škoda must become a pile of cheap šit again was... Michael Jost, the chief strategist of the VW Group. Weeks later, the proclamation was largely downplayed by the CEO of Škoda and perhaps the VW Group, too. But the strategist still says something brutal like that. It naturally makes people nervous.

How does the strategist work? Does he actually determine things? I decided that it's mostly just some prophet who is paid for making far-reaching predictions about the future but who can't really dictate far-reaching changes like that. Maybe there is a better metaphor for the "chief strategist" than a prophet: a communist central planner. Why? Because the plans almost never came true. At some level, they were just random predictions by someone who can't really know how the observables will evolve in the future. Even if you could precisely pre-plan the production and "supply", you just can't pre-plan the demand! So the idea that the future may be pre-programmed in this way is silly – it's communist-style silly.

For Volkswagen to try to abandon the successful Škoda models that have moved significantly upmarket would be crazy and a terrorist attack by the VW headquarters against the VW Group plants in Czechia would probably be needed to achieve that outcome. ;-) On the other hand, it will become clear that customers are willing to pay more for these Škoda models and they are more willing to buy more expensive versions of these models. Note that the 2020 Octavia will start at €23,000 or so and go up to €35,000 if you add the best options for everything which, I think, many people will tend to do.

How would Mr Jost exactly want to replace the bestselling Škoda model (plus the profits coming from it) by switching to models that should compete e.g. with Dacia Logan – which starts at €12,500 – while emphasizing the low price? I think it makes no sense. Škoda simply doesn't have the infrastructure now to produce cars at Dacia's price in coming years.

There is obviously an internal competition within the VW Group but it's still a healthy thing and all the profits go to the VW shareholders. I think that some other VW plants will be switched to Škoda production in 2020. The VW management and employees should serve the shareholders. Similar VW (and probably Seat) models will probably have trouble to compete with the Škoda models. I think that there are too many carmakers in Germany that try to be rather luxurious – BMW, Mercedes, Audi, Opel, and we also hear that VW – and it's an overcrowded market.

I think that Germans (or at least many German engineers) are actually stellar in minimizing the price while doing it right. (Even some food products made in Germany still manage to be cheaper than the Czech ones.) Volkswagen means "People's Wagon". The most famous model, the Beetle, has sold 23 million models. They were cheap cars. Others also did cheap cars but Volkswagen simply did it right! That's the strategy that Volkswagen proper should switch to and exploit the skills of the German engineers who are great in this kind of minimization. With this goal in mind, Volkswagen may still use plants at places where the labor is cheaper than Germany (and even cheaper than in Czechia).

You may ask why Czechs, instead of Germans, shouldn't be capable of making Dacia-like cheap cars. A good question. It's because there are just not too many Czechs and the Czechs who exist are already involved with the real-world tasks that are close enough to the existing Škoda cars. You need to accumulate many new people to produce something completely new, a Dacia-like cheap car, and most of these special new people must be from a larger nation, probably German.

So Mr Jost, tear down this wall! Correct your previous statements that will increasingly look like unrealistic predictions by a failed prophet. And announce that it is Volkswagen that will try to regain the cheapest segments of the car market!

Thank you very much.