Skoda's 2018 sales targets to be severely effected by major Russian downturn.

A severe slump in Russian car demand is making it harder for Skoda to meet its 2018 vehicle sales target.

The Volkswagen Group subsidiary also must decide whether to reduce its investment budget for the country, the Czech brand’s third-largest market, to protect profitability as Russia’s conflict with Ukraine hurts the economy, punitive trade sanctions bite, and the ruble weakens.

Recent problems in Russia combined with Skoda’s continued descent in India -- two of its three strategic growth markets -- could potentially hamper the brand’s efforts to reach its 1.5 million vehicle sales target for 2018.

In Russia, Skoda’s midterm plan forecast an overall Russian market of 3 million vehicle sales, of which it expected to have a 4 percent share, or a volume of 120,000 cars.

“The significant slump in Russia to roughly 2 million vehicles also means a lower volume for us -- we’re talking potentially over 80,000 cars this year -- and this volatility poses risks to our plans,” Werner Eichhorn, Skoda board member for sales and marketing, told Automotive News Europe. “The permanent re-evaluation of all investments and processes must have the highest priority for us.”

Russia has long been attractive to carmakers due to its more than 140 million consumers and the rapid development of a middle class. It came close to matching Germany in car sales in 2008 and 2012 and experts believe it is only a matter of time before Russia reigns as Europe’s largest vehicle market, even if much of its volume comes from low-cost models such as the Lada Granta.

Production changes

Skoda says its budget changes may impact future Russian production of the Yeti in Nizhny Novgorod, where Skoda’s SUV is built under license.

Skoda already ceased local output of the Fabia subcompact in Kaluga with November’s model changeover to the new generation, and is currently exporting them from the Czech Republic to Russia despite high tariffs, which along with the weakening ruble make it increasingly difficult to sell small, affordable cars profitably.

Skoda’s Russia sales last year fell 12 percent to 87,500 and through 10 months Skoda's volume is down 1 percent to 70,619 vehicles, according to data from the Association of European Businesses.

The brand also has been hit by a plummeting car market in Ukraine, where Skoda assembles cars with local partner Eurocar in Solomonovo on the border to Slovakia and Hungary.

An investment freeze or cut would represent a further pullback by Volkswagen Group from Russia. Earlier this month the group’s Spanish subsidiary, Seat, announced it was withdrawing entirely from the market.

“At some point we have to decide what to do with the successor to the current Yeti. We naturally have to assess the situation carefully, since it has developed differentially than believed four or five years ago,” Eichhorn said.

He added that Russia also has become a less attractive destination for the suppliers carmakers need to source components locally.

Ernesto Antolin, vice chairman of Grupo Antolin, the world largest maker of vehicle headliners, recently told Automotive News Europe, “We are not willing to invest more in Russia at the moment.” He said that the company’s plant in St. Petersburg is one of the few factories in its global network that is on track to lose money. “All the forecasts of production for our customers have been reduced [in Russia]," Antolin said. "They are slowing output and sometimes stopping it. They are in a crisis.”

The Yeti SUV -- first launched in 2009, refreshed last year and expanded to include the Outdoor derivative – has been built in Russia under license by local GAZ since December 2012. The Octavia and VW Jetta are also built there under a deal that is valid until 2019.

After pulling the Fabia, Skoda now only builds the Rapid at the VW Group’s Kaluga plant, near Moscow, together with VW brand cars, while assembling the Superb from semiknockdown kits.

Russian decree

To qualify for reduced customs duty rates under a Russian government decree from 2011, VW and Skoda hired GAZ that year to provide additional capacity of 132,000 cars, bringing the VW Group’s maximum installed capacity to the mandated 350,000 cars annually between the two sites. But Skoda’s production in Kaluga fell close to 40 percent in 2013 to about 34,000 vehicles while not even 19,000 were built by GAZ.

Eichhorn declined to comment on Skoda’s investment in Russia, but VW Group has said that it has invested more than 1 billion euros to build vehicles at its Kaluga site, a unit of Volkswagen Group Rus, in which the Czech brand holds a 16.8 percent equity stake. This would imply that Skoda likely invested about 170 million euros in Kaluga.

Moreover, VW Group poured in another 135 million euros to add the Nizhny Novgorod capacity to achieve its 2018 targets of selling more than half a million cars in Russia and gaining a 14 percent market share.

By that year, VW Group expects to have invested altogether about 2.5 billion euros in the country, which includes capital expenditure for a new powertrain plant in Kaluga that starts production of 1.6-liter gasoline engines next year.

Troubles in India

Additionally, troubles in Skoda’s Indian operations means the brand will be that much more dependent on China, its largest market, to reach its 2018 sales target.

China, meanwhile, has been cooling off, with industry data showing light vehicle sales growth halving to about 7 percent in the past couple of months. Skoda, which has doubled the number of models produced locally to six in 2014 alone, so far has been able to buck this trend with double-digit China growth.

Together, Skoda expects the three emerging economies it dubs the RIC (Russia, India, China) markets will contribute sales of about 810,000 cars by 2018 -- more than double the 375,000 sold during the brand’s record 2012.

Analysts have said the brand took a hit in India after VW Group wanted to position its flagship VW brand above Skoda, which is considered an aspirational brand on the subcontinent.

India’s currency depreciated to roughly 80 rupees to the euro from about 50 five years ago, which hurt imports of Skodas. Additionally, vehicle taxation has prompted a shift in the overall market in favor of vehicles less than 4 meters long that typically cost between 6,000 euros and 9,000 euros, where Skoda has no product offering.

“In India as well, the market conditions have changed completely since we began our projects there,” Eichhorn said.

When asked whether Skoda might bring a sub-4-meter Fabia sedan in addition to its Rapid, Octavia and Superb sedans, he replied: “It’s possible, but the question is whether we can or want to offer a car in that class for 7,000 euros.”

Despite the decline in two of Skoda’s growth markets, booming sales in other parts of the world including China mean that 2014 volumes should still surpass the best result from two years ago, when it sold 939,000 cars.

“We are determined to record a new all-time high in sales -- 2012 will be topped,” Eichhorn said.

Last year Skoda’s operating profit fell 27 percent to 522 million euros, while its margin narrowed to less than 5.1 percent from 6.8 percent in 2012. Results have improved dramatically so far this year, with volume growth and mix effects driving a 76 percent gain in earnings to 651 million in the first nine months.

Christiaan Hetzner

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