To put it kindly, Czech carmaker Skoda Auto hasn't always been a leader in quality. During the Communist era, drivers learned to carry a full tool kit for roadside repairs, and Skoda's tinny sedans were the butt of countless jokes (What do you call a Skoda with a sunroof? A Dumpster. Why do you need a rear-window defroster on a Skoda? To keep your hands warm when you're pushing it.)
Now the joke may be on Skoda's Western European competitors. After 16 years of cooperation with Germany's Volkswagen (VLKAY )—and some $14 billion in investment—Skoda's cars are better than ever, and what was once a smallish regional brand is becoming a global player. While the company initially focused on Europe, now "the major potential is in Asia—and it's a huge potential," says Skoda Chief Executive Detlef Wittig, a VW veteran. A decade ago, "we had no idea we could go global."
All told, Skoda's cars are sold in 100 countries. Though they're not available in the U.S., and the company has no plans to enter that market, Skoda is already a leader in Eastern Europe, a strong player in Western Europe, and has an increasing presence in Asia. Skoda assembles vehicles in China, India, Ukraine, Bosnia, and Kazakhstan, and in October, a new Russian factory will start producing Skodas and Volkswagens.
Skoda's global presence has been propelled by an unrelenting focus on building better cars that can be sold at bargain-basement prices. The brand has been a leader in quality surveys across Europe in recent years, and ranked No. 2 in Britain (tied with Honda (HMC ), and just a hair below Lexus) in the 2007 consumer satisfaction and quality studies by market researcher J.D. Power & Associates Inc. (MHP ) "To fix [Skoda's] brand image we needed to go for top quality," says Wittig. "We can't allow failure, or the old image might come back."
The quality push and global expansion are spurring record results at Skoda. Last year, sales jumped 9.7% in a stagnant European market, outperforming even Toyota as one of the Continent's fastest growing brands. This year, Skoda expects to sell 630,000 cars worldwide, and it's aiming for sales of 1 million by 2010. Revenues reached $5.6 billion for the first half of 2007, while profits jumped 22%, to $492 million. Skoda is growing in importance for VW, which bought 30% of the company in 1991 and by 2000 had taken over the whole thing. The Czech company in the first half accounted for 8.3% of VW's automotive revenues but 15.4% of its operating profit.
The fast-moving Czech automaker is also getting high marks for design. The Roomster, a boxy-looking cross between a station wagon and a van, earned the prestigious European Red Dot award this year, and the Octavia wagon won that honor in 2006. In Germany—the heartland of European auto fanaticism—Skoda's Superb, a midsize sedan that starts at about $30,000, ranked No. 2 in its class this year in the J.D. Power survey, trailing only Honda's Accord, and outclassing Toyota's Avensis and the Mazda 6.
Some analysts say Skoda has the potential to match VW in global sales. They suggest that management consider expanding the Czech operation beyond its current range of four model lines to meet booming demand for cheaper cars while targeting Volkswagens to more affluent buyers. Skodas are already priced well below VW's offerings, though they share engines, transmissions, and many other parts and technology with their German counterparts. A VW Golf compact, for instance, starts at about $22,000 in Germany, while the roomier Skoda Octavia is nearly $2,000 cheaper. VW won't detail its plans for Skoda, but Wittig says he's considering an ultralow-cost car that could go head-to-head with Renault's (RENA.PA ) no-frills Logan, a $7,000 sedan that was developed in Romania and has become a global hit. Says Commerzbank auto analyst Albrecht Denninghoff: "Skoda has become the true volkswagen,' or people's car.'"
By Gail Edmondson