Škoda Soldiers On

As the fifth largest car producer in Europe, the Czech Republic’s economy relies heavily on the auto industry. Czech auto manufacturer Škoda Auto, a pride of Czech manufacturing since the Habsburg Empire, was a key contributor to the country’s recent economic boom following the 2004 accession to the EU, when GDP grew as much as six per cent per year. Before the onset of the financial crisis in 2008, the Czech auto industry had grown faster than any other in Central and Eastern Europe. As the Czech Republic’s largest company in revenue terms, Škoda thrived and helped the Czech economy prosper.

Since the crisis, however, the car industry in Europe, the U.S. and elsewhere is in trouble. The U.S. witnessed the biggest drop in vehicle sales in a quarter of a century, with total year-end sales falling from $16 million in 2007 to $10 million in 2009. General Motors (GM), once the world’s largest auto manufacturer has needed more than $15 billion in government loans to stay afloat. The European automobile industry began to feel the crisis when purchases of new cars fell by nearly 20 per cent in the first quarter of 2009.

"We haven’t seen such a fall in demand since 1985," said General Secretary of the European Automobile Manufacturers Association, Ivan Hodac earlier this year.

Production of passenger cars and light utility vehicles dropped by 23 per cent in the Czech Republic alone between March 2008 and 2009. Moreover, 90 per cent of the Czech automobile production is exported, which leaves the auto industry highly vulnerable to the rest of Europe’s economic woes. Fifty per cent of Czech auto exports are produced by Škoda, which exports to most regions of the world with the exception of North America. Škoda recorded its largest ever slump in production, with 82,000 fewer units over the same period one year earlier. Because the company accounts for 10 per cent of the country’s total exports, this had a drastic effect on the Czech economy.

The drop in auto demand is caused in part by the uncertainty that follows any recession, according to analysts. Consumers have been laid off or forced into part-time work, leaving luxury items like new cars out of reach. The European automobile industry encountered a sudden change in consumers’ behavior after the financial crisis took hold, with deteriorating statistics ever since. Data from July 2008 shows a 7.2 per cent drop in sales between that time and August 2007; by August 2008, sales had fallen by 16.5 per cent compared with the same time the year before; and in the first quarter of 2009, sales were down by another 17.2%, underlining Europeans’ plummeting desire to buy new cars. Eastern Europe was even worse off than pan-European data indicated: sales were down 25 per cent during the first quarter of 2009 for countries East of Austria.

Škoda’s profits last year fell by more than one fifth to €565 millions. The company had been forced to cut production in nearly all of its factories in the last quarter of 2008. A decision to cut production last year kept factories running only four days per week.

"We will lower warehouse stocks," said Škoda Auto spokesman Jaroslav Cerný. "As the biggest Czech exporter, Škoda Auto is not able to avoid negative effects."

After negotiations with the trade unions, Škoda limited work hours on two Fridays in 2008. Management later decided to close down all factories for seven working days, with the exception of the one making the new model, Superb. Production of other models stopped for more than two weeks, affecting many of Škoda’s smaller suppliers, which suspended production as well, causing a further downward spiral in the Czech economy.

Though initial estimates showed cutbacks of 13,000 cars, management ultimately settled on the higher figure of 18,000. While Škoda sold more than 530,000 cars in 2008, it still suffered a 25 per cent profit loss. Combined with a surge in the Czech koruna, Škoda was required to lower the cost of its products to keep exports competitive. And for the first time in history, it reduced the sticker price for all models.

Škoda distributors delighted in the lower prices. They had been competing with distributors from surrounding countries where consumers could find Škoda models for less than they were sold in the Czech Republic. Even Germany sold them more cheaply.

The EU decision to subsidize "scrapping" old cars has also helped auto manufacturers, including the Czech giant; Czech Automotive Industry Association spokesman Antonin Sipek claimed to be relatively confident in developments this year, largely due to this subsidy. Germany introduced the highest subsidies for getting rid of old cars and bonus amounts for buying a new car (€2,500). Demand from Germany added to Škoda’s decision to again open production throughout the week. Beginning from March 2009, the company reinstated Friday production.

Last year may have seen a decline in Škoda’s profits, but 2009 again looks promising. The first of the new Yeti models, the first sports utility vehicle to be produced by the company, rolled off the assembly line in Kvasiny early this May. And the Volkswagen Group, of which Škoda has been a subsidiary since 1991, fared generally better than its competitors in the first quarter of 2009; sales were down only 9.1 per cent compared with the European-wide 21 per cent drop during the same period. Though Czech GDP is expected to contract during 2009, a recovery is forecasted for the following year, when analysts expect growth to reach three per cent. Consumer confidence increased from April to May, and the Czech National Bank remains one of the only banks from the CEE region not requesting liquidity injections from the European Central Bank. The Czech economy, unlike so many of its neighbors, seems to have avoided the worst of the crisis.

Škoda laid off hundreds of workers in 2008, but as the Czech auto industry strives to stay competitive – particularly against its European counterparts – it has now halted cuts in production. A short-lived controversy ensued in after statements by former Czech President Vaclav Havel during a Green Party press conference in May, where he criticized the company for insisting on maintaining production to secure jobs.

"I find this a little bit perverse," Havel noted. "It is as if someone said concentration camps must exist because the camp guards and commanders need work," he said. His statement was followed by a call from the Social Democrats to apologize.

So far, the Czech government has not had to interfere in Škoda. But it has also failed to pass subsidies for car-scrapping. Neighboring countries’ subsidies have helped Škoda boost sales, as the company once again found markets for its cars. And there are no plans to repeat last year’s scenario, when they closed down the factory in Mlada Boleslav for a full week. This factory had been a part Škoda for more than 100 years and employed a large percentage of the city, producing jobs for 20,000 people in 2008.

The halting of production was sudden, and felt by the thousands of inhabitants suddenly without jobs for a full week that month. The city became quieter, the traffic and hurriedness replaced by silence. The unions were unable to act because the move was preferred to cutting salaries. And the effects were felt beyond the factory floor: 1,400 external staff living in the city were laid off towards the end of 2008.

Recent indicators at Škoda look positive, and production at Mlada Boleslav is in full swing. But despite the encouraging signs, troubled times for the auto industry may not be over. Volkswagen has informed its investors that the near future is uncertain as the financial crisis persists.