Skoda makes big inroads into China

The Prague Post (Beijing) - When Petr Vávra, a counselor at the Czech Embassy in Beijing, recently spent a couple of days in Lianyungang, a coastal city in eastern China, he was, perhaps surprisingly, sometimes reminded of his home country.

In Lianyungang, as in many others cities in the world's most populous nation, the Czech carmaker Škoda has been making inroads into the marketplace, and vehicles bearing the company's distinctive green logo were apparently not hard to spot on the local highways.

"I saw in just two days maybe 20 cars from Škoda, which was amazing. In the beginning, it was rare to see Škodas on the street. Now it's quite common," Vávra said.

Škoda began assembling vehicles in China five years ago, a key development as the manufacturer looked to move beyond being merely a niche brand in what is now the world's largest auto market, with 14.5 million passenger cars sold in 2011.

Already, Mladá Boleslav-based Škoda has seen its sales in the dragon economy overtake those of certain European rivals that entered China more than a decade earlier.

"The brand itself was a relatively late entry into the market, and it has very quickly adopted a very strong market position," said Klaus Paur, the Shanghai-based global head of automotive at the market research company Ipsos.

China is now the largest market for Škoda worldwide, with the company selling 220,000 of its Fabia, Octavia and Superb models there last year, around a quarter of the brand's global sales and enough for a 1.5 percent market share.

In the first eight months of this year, deliveries jumped 7.5 percent to 159,000, ranking Škoda as the 16th most popular carmaker in China, two places ahead of Citroën, for example, which built its first factory in the country two decades ago.

Paur sees the fact that Škoda is pitched below many other foreign brands in price as the key factor behind growth in China. Modest prices have helped Škoda take sales from both the budget Chinese car producers and also provided tough competition to well-known overseas carmakers that charge a premium.

The close link to Volkswagen is also significant. Škodas are manufactured in China by Shanghai Volkswagen, a joint venture between Volkswagen and SAIC, formerly Shanghai Automotive Industry Corporation, which owns a 50 percent share in the partnership.

All foreign carmakers have to set up such joint ventures if they are to assemble vehicles locally and Volkswagen has a second tie-up in China, with First Automobile Works, based in the north of the country.

According to John Zeng, director of Asian vehicle forecasting for LMC Automotive, the "largest contribution" to Škoda's sales growth in China has come from being part of Shanghai Volkswagen.

"It simply reflects the consumer trusting the reputation of Shanghai Volkswagen. Škoda comes to China as one of the sub-brands of Shanghai Volkswagen," he said. "I think it's more being considered as a German car. They don't really know it comes from the Czech Republic."

Indeed, before local production began in 2007, Škoda itself was largely unknown in China, with only modest sales of imported Škodas recorded in 2006, the year the brand was reintroduced into the country.

Few people remembered the time in the early 1990s when Czech-made Škodas were shipped to China, and this was probably not a highlight in Škoda's history as the firm's local reputation was said to have been dented by poor after-sales service.

That is less likely to be an issue now because, despite being part of Shanghai Volkswagen, Škoda has standalone dealerships in China, about 400 at the latest count, and the company is looking to strengthen its network particularly in the south of the country.

Although the majority of parts for the Chinese-made cars are sourced locally, the growth of Škoda's sales in China has also benefited Czech-based suppliers.

Vávra, head of the Beijing embassy's economic section, said last year car parts valued at $106 million were exported from the Czech Republic to China last year, out of a total of $1.67 billion Czech exports to the world's second-largest economy, double the amount in 2009.

He hopes the figure could increase further as Škoda looks to maintain sales growth by launching new models in China such as the Rapid, a midrange car, and the Yeti, a crossover vehicle. With just the Fabia, Octavia and Superb presently on offer, the company's range is less than half the size of that of some rivals.

"I think they have the potential to generate more sales for Škoda and raise their market share," Vávra said, while cautioning that Chinese suppliers, with their low cost base, could ultimately provide competition for Czech firms making parts for European-made Škodas.

With the Rapid set to debut soon in China and the Yeti arriving next year, China will play a "central role" in Škoda's aim of ramping up annual sales globally from 879,200 last year to 1.5 million by 2018, said company spokesman Jozef Baláž.

"Our model offensive should help us to strengthen our position in the Chinese market," he added.