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


Skoda Leaps to Market

Volkswagen’s early bets in Eastern Europe were seen as risky — the equivalent of pouring $10 billion into shaky state enterprises in Ukraine today — but the company benefited greatly from them. Today, it is the largest exporter in Slovakia, and one of the largest in Hungary. “The story of carmaking in Eastern Europe since 1989 is the story of Volkswagen,” says Mr. Lewis. VW’s executives also understood the value of diversifying beyond the former East Germany; then-weak currencies such as the Czech koruna lowered the costs of workers, infrastructure, and materials. Even if Skoda had struggled, Volkswagen would have profited from the dramatic value — as much as 100 percent — that the koruna has gained against the American dollar since the early 1990s.

Undoubtedly, Volkswagen also coveted Skoda’s 35 percent market share in Eastern Europe. Behind the iron curtain, from the Baltic Sea to the Adriatic, a Skoda was an aspirational purchase.

When they arrived, Volkswagen executives found Skoda disoriented, unmotivated, overstaffed, and undercapitalized. After some false starts, with ill-advised proclamations of company values that sounded too much like Communist exhortations, German executives realized that the future of the company lay in its past. “Workers were frustrated with Communist slogans,” says Jaroslav Povsik, a member of Skoda’s supervisory board and head of its unions, but they were aware of Skoda’s long-standing tradition of industrial craftsmanship. In its brochures Skoda began to include pictures of its distinctly bourgeois early roadsters, purring down Fifth Avenue in New York, and of the blue limousine in which the prewar president Tomas Masaryk rode. A company museum was built. To foster pride, there were parades and factory tours.

Like many other companies making acquisitions in former Communist enterprises, Volkswagen had to divest Skoda of its immediate past. That meant clearing out managers compromised by Communist Party or secret police connections as well as divesting the utility plants, transport depots, housing, kindergartens, libraries, and sports stadiums that the company had taken care of under Communism. The Germans trod carefully, appointing a Czech, Ludvik Kalma, as CEO. They introduced a system of tandem management, rotating in German managers for several-month stints to work alongside their Czech counterparts. To overcome the language differences, Volkswagen set up the largest language school in the country. Czech managers needed to speak German or English to advance (German managers were not expected to learn Czech). Enough managers developed a rapport across the language and cultural barrier for the Volkswagen methods to take hold at Skoda. “I can’t think of a single decision which was influenced by bad blood between the Germans and the Czechs,” says Mladá Boleslav’s mayor, Svatopluk Kvaizar.

Tensions were highest, however, in the early years, as Volkswagen cut production, laid off workers, and slashed its promised investment from $5.7 billion to $2.5 billion. There was posturing from the Czech government and from Volkswagen, which hinted it might move to Mexico. “There were tough moments,” says Mr. Povsik, “but the deal was never in doubt.”

Then Volkswagen’s investment paid off rapidly, with the launch in 1994 of a new compact model called the Felicia. The Felicia was a bridge vehicle between Communism and capitalism. It had a more appealing design than the Favorit: larger windows, a more modern-looking grille, and an interior that resembled those of the Volkswagen cars that Eastern Europeans admired but could not afford. Under the hood, however, the Felicia and Favorit were identical. In 1996, Skoda launched the Octavia, its first fully post-Communist vehicle. The midsized hatchback reminded the then head of Skoda technical development, Wilfried Bockelman, of “English understatement and a quiet drive in an autumn landscape.” The Octavia was also the first Skoda to turn the tide of jokes.

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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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