Why bother with an Audi, when the Skoda looks this good?
Berlin: I write a lot about cars but have never actually bought one—parking’s a nightmare in Berlin and owning stuff feels a bit twentieth century. As a new father, though, I’ve been wondering whether to take the plunge.
Still, it was a surprise to find myself lusting after a Skoda, either a smart Octavia estate or the even more handsome Superb. Apparently, plenty of people feel the same way about the Czech motors. Skoda, which is meant to offer function and value-for-money, keeps picking up awards. Its earnings are pretty eye-catching too.
On Tuesday, it reported an impressive €1.6 billion ($2 billion) of operating profit for 2017, 35% more than the previous year. Good news for its owner Volkswagen AG, which needs cash to pay for a huge diesel cheating bill and a pivot towards electric vehicles. Unfortunately, that success will probably revive worries about cannibalization among the German car giant’s more prestigious brands.
VW has spent 25 years or so pimping up Skoda, whose basic engineering and low sticker price once spawned feeble jokes. (Sample: How do you double the price of a Skoda? Fill up the tank).
No one’s laughing now. Skoda was again the stand-out performer in VW’s yearly earnings report. Thanks to new high-margin sports utility vehicles, the brand’s sales jumped 6.6%—faster than the group average. Its profit makes up 17% of the VW car segment’s total.
Skoda’s 9.7% operating margin is about double that of a typical mass market brand. It’s more profitable than VW’s Audi on that metric, and is second only to Porsche among the VW brands with disclosed earnings.
That high profit comes from Skoda using much of the same technology and engineering as other VW brands, while paying lower labour costs. Of course, this does raise the question about why punters like me would bother paying more for a VW or Audi. Skoda’s favourable position has caused tensions within the VW group, according to a Reuters report last year, which said workers wanted to bring some Skoda production to Germany.
It would no doubt be preferable if VW’s brands were each so precisely differentiated that they never competed with each other, and only won sales from rivals. In reality, the group’s proud engineers have tended to push all its brands upmarket (a project to create a budget car for emerging markets has dragged on for years). So competition within the VW stable is inevitable. And that’s not necessarily bad. Skoda makes more profit per vehicle than the VW brand. Why shouldn’t it sell more?
Indeed, the point of VW investing billions in a shared vehicle architecture, known as MQB, was to be able to churn out more vehicles at lower cost. Skoda shows that MQB wasn’t a waste of money, as analysts once feared. Competition from Skoda might bruise a few egos, but neither Skoda’s customers, nor VW’s investors will mind that too much. Bloomberg Gadfly