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 / Fall 2005 / Issue 40(originally published by Booz & Company)


Skoda Leaps to Market

Skoda prefers to keep observers at arm’s length. Managers are reserved around journalists, with on-the-record discussions restricted to the directors. “We have no interest in the American market, therefore we have no interest in talking to Americans,” says Jaroslav Cerny, the company spokesperson.

Out from Communism
The nadir of Skoda’s 100-year history was probably 1968, when the Soviet Union invaded Czechoslovakia to put down the “Prague Spring” revolts. As punishment for opposing the invasion, Skoda’s best managers and engineers were sacked or put to work on the assembly line. The Politburo also scrapped two higher-quality car models (the S-720 and S-740), which had not yet finished development. Quality and morale dropped, and so did the last shreds of the carmaker’s reputation. When the Communists finally decided to invest in more competitive models (which they named Favorit and Forman) in the 1980s, they had to hire an Italian designer, bring back political undesirables, and introduce one of the only incentive programs in the Communist bloc.

Skodas exported to Western Europe during Communism received a scornful reception. The cars were perceived as smelly, noisy, and only vaguely responsive to their steering wheels and brakes. The brand became a joke, a shorthand for all the inadequacies and failings of the Communist bloc. (A typical example: “What do you call a Skoda at the top of a hill? A miracle.”) Then, in the chaotic months following the 1989 Velvet Revolution, which saw the dissident playwright Václav Havel become president, the new government made privatizing Skoda one of its first priorities. The Czech government whittled a list of 24 potential investors down to just two: Volkswagen and Renault. The odds were against Volkswagen; the last German takeover, in 1939, had turned Skoda into a Nazi munitions factory. Populist-minded politicians (including the future prime minister, now president, Václav Klaus) wondered about selling “to Germany” so soon after escaping “Russia.” Volkswagen executives knew they could not outcharm the French executives, but whereas Renault offered to turn Skoda into a modern assembly plant, Volkswagen offered to invest in the Skoda brand.

“This was the point so many early investors missed,” says Charles Paul Lewis, the author of an insightful new study on the former Communist bloc titled How the East Was Won: The Impact of Multinational Companies on Eastern Europe and the Former Soviet Union (Palgrave-MacMillan, 2005). “The Czechs didn’t want Renaults, not really. They wanted Skodas with Volkswagen quality.”

A deal was signed on April 16, 1991. Volkswagen guaranteed jobs and a $5.7 billion cash injection. It also agreed to pay $416 million for a 31 percent stake in the company and two further payments of $260 million each in 1993 and 1994 to gain a 70 percent share. (It bought the outstanding 30 percent from the Czech government in 2000.) In return, it received full control of Skoda, with a complete debt write-off, tax breaks, and assistance with currency conversion. (A separate deal, which did not include Volkswagen, was made for Skoda Plzen, the industrial sister company that makes streetcars and other mass transit vehicles. Skoda Plzen is only now finding its footing in the free market after a series of blunders, shady dealings, and bad debts. For example, the government of Iraq owes it a lot of money.)

Skoda was the first major privatization deal in Eastern Europe — and, political and automotive analysts agree, the best. The price was fair. The terms were transparent and mutually beneficial. “It was the perfect foreign investment paradigm,” says Mr. Lewis. “Western money and know-how meets cheap Slav labor and market share.” The manner in which the deal was struck was as important as the terms. “All the decision makers were in the same room, and because it was the first privatization, the laws could be written as they went along,” he says.

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  1. Alfred D. Chandler Jr. and Bruce Mazlish, Leviathans: Multinational Corporations and the New Global History (Cambridge University Press, 2005): The global rise of multinational corporations, cowritten by Harvard’s eminent historian.
  2. Graeme Maxton and John Wormald, Time for a Model Change: Re-engineering the Global Automotive Industry (Cambridge University Press, 2004): A definitive overview of the changing global context.
  3. Dennis Pamlin, editor, Sustainability at the Speed of Light (World Wildlife Fund, 2002): Online book contains a powerful chapter on leapfrogging for environmental sustainability. Click here.
  4. Dave Randle, The True Story of Skoda (Sutton, 2002): Illustrated chronicle of Skoda’s history from its 1895 origins to the Octavia.
  5. Horacio Rozanski, Allen Baum, and Bradley Wolfsen, “Brand Zealots: Realizing the Full Value of Emotional Brand Loyalty,” s+b, Fourth Quarter 1999: How Volkswagen originally “leaped to market” with its Beetle. Click here.
  6. Skoda’s Web site: Includes financials, automotive history, sports sponsorship, and current models. Click here.
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