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Hitting the brakes

Škoda loses its home field advantage against foreign imports

By Stephan Delbos
Staff Writer, The Prague Post
October 8th, 2008 issue

MICHAEL HEITMANN/The Prague Post
Škoda dealers such as Zdeněk Adámek of Auto-Exner face heavy losses on exports due to the rising value of the Czech crown.
MICHAEL HEITMANN/The Prague Post
The sales team at Auto-Exner fears customer loss due to the increased range of competitors' models.
Škoda Auto is battling two fronts as the crown has decimated its export profits domestically while bolstering the advantages of its foreign competitors, who can afford to cut prices without hurting their own bottom lines.
Škoda reported losses of 2.3 billion Kč ($128.7 million) in the first half of 2008, despite a 12 percent increase in total sales. The company, which depends on exports for 89 percent of its business, has seen the Czech crown’s inflation ratchet up export costs. At the same time, a decrease in new car sales throughout Western Europe, as well as changing trends in the Czech market, are forcing the company to lower prices in an attempt to stay competitive with foreign manufacturers benefiting from cheaper import costs.
“We are losing money thanks to the strong crown, but our competitors have an advantage because of it,” said Jaroslav Černý of Škoda Auto.
Škoda’s Czech-based production facility and its dependence on exports make the company vulnerable to currency fluctuations. Foreign auto manufacturers, who have received a boost from the strong Czech crown, also have the advantage of international production and distribution networks which allow them to be more flexible while leaving them less dependent on any single currency.
“We have factories in Germany, Austria and the United States,” said Kateřina Cmuntová of the BMW group. “Right now, we prefer the United States because of the cost,” she added.
As a direct result of lower import costs, foreign car manufacturers such as BMW have begun lowering their prices on the Czech market, a move they can afford because of higher profits.
“The strong crown discounts the prices of BMW cars in the Czech Republic. We recalculate prices by the Czech National Bank exchange rate,” said Cmuntová. “We then transfer the advantage of the Czech crown exchange rate to the customer.”
Analysts have labeled the current situation a sell-off among major importers. Facing heavy losses on exports, Škoda has also had to focus on staying competitive on the Czech market. The company is currently offering discounts up to 25,000 Kč on some car models, but threatens to be squeezed out of the market if competitors’ prices sink much lower.
“All companies have been adjusting prices on the Czech market, including us,” said Černý. “Importers have an advantage because they calculate in euros or dollars, not Czech crowns.”
A spokeswoman for Citroen confirmed the sell-off but added that it’s difficult to predict how far discounts will go.
“It’s difficult to say [how much lower the prices can go] because normally the increased costs for car makers should stop the sell-off,” said Lenka Martinová of Citroen. “Every car producer is affected by the price of petrol and raw materials.”
A local car dealer confirmed the recent discounts, but said competition is fierce on the crowded Czech auto market.
“The current Czech car market is very tough. Dozens of car companies offer hundreds of models, and potential customers have a lot to choose from,” said Zdeněk Adámek, head of Škoda sales at Auto-Exner.
In a market where consumers consider cost ahead of all other factors, lower car prices should add up to increased sales. But as Škoda’s market reports show, increased sales don’t guarantee profits.
Škoda reported a 12 percent increase in total sales from 2007 to 2008, but the company’s 13.2 percent decrease in gross profit belies an inability to compensate for the effect of the Czech crown. Czech consumers are also becoming more interested in imported cars due in part to price cuts. According to BMW’s market analysis, the sale of foreign and luxury cars in the Czech Republic rose 14 percent in 2008 to 68 percent.
“National brands have less and less of a share of the Czech market,” said Cmuntová.
Though Škoda’s discounts have so far allowed them to stay competitive with foreign manufacturers, low sales figures and a recently-announced production cut leave some asking if the company can afford such generosity.
On Sept. 26, Škoda implemented a daylong halt of all production excepting the new Superb model. The company also plans to halt production for the entire last week in October. The freezes will lower Škoda’s yearly production by more than 13,000 cars.
“The production halt was a response to the decrease in demand on the West European market. It’s one of the tools we can use,” said Černý.
Sales of new cars in Western Europe have fallen drastically in the past six months. As fuel costs continue to rise and banks become more hesitant to grant loans in the face of global economic instability, consumers are turning to the used car market. The European Automobile Manufacturers’ Association (EAMA) reported a 15.7 percent decrease in new car sales Sept. 16.
“The economic circumstances are deteriorating sharply while fuel prices are increasing, and this has led to lower sales,” said Sigrid de Vries of EAMA. “It’s likely that the pressure on automobile manufacturers will stay because consumer purchase power is unlikely to increase in the near future.”
A hit in new car sales will particularly influence Škoda, which distributes cars mainly to Germany and Western Europe.

Stephan Delbos can be reached at sdelbos@praguepost.com


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