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Russian plant a boon for Škoda, Volkswagen

Carmaker expects to save up to 10 percent off customs tariffs

By Michael Heitmann
Staff Writer, The Prague Post
December 5th, 2007 issue

COURTESY PHOTO
Parent company Volkswagen had a hand in the new plant's success.
Czech automaker Škoda Auto expects to benefit from rapid growth on Russia’s car market and cut customs tariffs with its new plant near Moscow, built in conjunction with parent company Volkswagen.
Škoda’s first Octavia, its hugely popular midsize sedan, rolled off the assembly line in Kaluga, 180 kilometers (112 miles) southwest of Moscow Nov. 28. Škoda shares the Kaluga plant with owner Volkswagen AG. It expects to use 40 percent of the plant’s total capacity, estimated at 60,000 cars next year and 150,000 in 2009.
“Opening our first production plant in Russia is a milestone in Škoda’s expansion to eastern markets, because the region is growing very dynamically,” said company chairman Reinhard Jung. “We look at it with high hopes as far as the future of Škoda Auto is concerned. Škoda is on the road worldwide.”
Construction of the new assembly plant took more than a year. Škoda also has three manufacturing plants in the Czech Republic, along with plants in India, Ukraine, Bosnia and Kazakhstan.
Full-scale production, including welding, paint and assembly shops, is not expected to be launched before 2009, however. In the meantime, the Octavia and the new-generation Fabia are assembled from parts that Škoda produces in Mladá Boleslav and ships to Russia as a kit. Assembling car bodies, engines and other parts in Russia helps lower a whopping 25 percent customs duty on imported cars.
Kaluga’s location near Moscow made the city a natural choice, officials say, since most cars are sold in the capital. The local technical university is expected to provide a welcome source of manpower as 3,000 new jobs are scheduled to be created in the coming months. Volkswagen’s total investment in Kaluga will exceed 400 million euros ($588 million/1.1 billion Kč).
Škoda Auto sold 27,000 cars in Russia in the first 10 months of this year, up from 14,835 vehicles in the same period last year.
“Russia has already become one of Škoda Auto’s strategic markets, and its importance is going to grow in the near future,” said Jan Hurt, director of Škoda Auto Russia.
As the number of new cars being sold goes down in the Czech Republic, expanding manufacturing capacity in other markets such as Russia and China is an attractive solution, said Vojtěch Benda, a senior economist with ING Wholesale Banking.
“Not only do the carmakers diversify the risk of potential cyclical economic downturns on certain markets, they can reduce their costs by escaping protectionist measures against foreign imports as well.”
The Russian economy has grown into a global powerhouse in recent years, Benda said. Its population of 142 million and annual gross domestic product of more than $700 billion makes it attractive to investors.
“Compared with the scale of foreign direct investment in the Czech Republic in the past, the ‘export of investments’ out of the economy has so far reached only very small proportions,” Benda said.
Investments in foreign countries accounted for 30 billion Kč in 2006 and 10 billion Kč in the first half of 2007, according to national statistics.
The European Bank for Reconstruction and Development (EBRD) financed part of Volkswagen’s investment in Russia.
“The EBRD supports private-sector investments with the [political] aim of contributing to the transformation of post-communist economies to standard market economies,” Benda said. “But at the same time it evaluates investments according to expected return and the risks involved.”
Škoda has been part of Germany’s Volkswagen Group since 1991. Profits were $491 million in 2006 on revenues of $5.2 billion.

Michael Heitmann can be reached at mheitmann@praguepost.com


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