International Business Case Study

QCF

Volkswagen - Skoda

Tuesday 7 June 2016, Afternoon

This is an open-book examination, and you may consult any previously prepared written material
or texts during the examination.

Only answers that are written during the examination in the answer book supplied by the
examination centre will be marked.

Notes

As in real life, anomalies may be found in this Case Study. Please simply state your
assumptions where necessary when answering questions. ABE is not in a position to answer
queries on Case data. Candidates are tested on their overall understanding of the Case and
its key issues, not on minor details. There are no catch questions or hidden agendas.

After the publication of the Case Study, subsequent developments may occur. The
examination is based on the published Case Study, and students who do not mention such
developments will not be penalised. However, students may consider such developments in
their answers if they wish.

6IBCS0616 The Association of Business Executives 2016 J/601/2793

 June 2016 International Business Case Study

Volkswagen - Skoda

History of the business

Skoda had a humble beginning as a bicycle manufacturer. In 1895 in Czechoslovakia, two keen cyclists,
Vaclav Laurin and Vaclav Klement, designed and produced their own bicycle. Their business became Skoda
in 1925. Skoda went on to manufacture cycles, cars, farm ploughs and airplanes in Eastern Europe.

1933 to 1939 - A popular legend

In the early 30s, Skoda made a breakthrough with the Type A Popular, which was to become a legend in
the second half of the decade. Populars served as reliable utility vehicles, such as ambulances and
delivery vans, and the roadster version performed superbly in the famous Monte Carlo rally of 1936.

1939 to 1960 - From the Second World War to the first Octavia

In 1939 came World War II with Czechoslovakia occupied by the Germans. The civilian car production
programme was very limited and the majority of manufacturing was to support the German war effort.

After the war, as part of large-scale nationalisation in Czechoslovakia, the company became a national
enterprise. Although Skoda thrived in the then communist Czechoslovakia, it was mostly deprived of the
new technological innovations that were taking place in the West and often faced economic and political
turmoil.

1960 to 1989 - Lots of innovation, not enough production

The Czech economy performed well up until the 1960s, then began to suffer because of new technology
in more developed markets. Skoda continued to make new and improved cars in the form of the
Octavia, the Felicia, the MB range and the Rapid but production really only grew again with the arrival of
the Favorit model range in 1987.

1990 onwards - The new era of driving happiness

The huge political changes of 1989, when the Berlin Wall came down, brought new market economy
conditions. The government of the Czech Republic and the management of Skoda began to search for a
strong foreign partner to secure its long-term international competitiveness. In December 1990, they
decided on a partnership with the German company Volkswagen (VW), and a joint venture began was
established in 1991, with Volkswagen taking a 31% stake in Skoda, while the Czech government retained
69%.

Although this arrangement offered Volkswagen immediate access to new markets in Eastern Europe, it
also required some significant management compromises. Volkswagen started work in training and
educating the workforce to Western quality standards and it invested over 2 billion in the plant, research,
development and new models, honouring its pledge to the Czech government to retain the services of
local suppliers and employees.

Ten years later, in 2001, Volkswagen acquired total control of the business, which provided the
opportunity to completely reorganise the business and its structure, within the Volkswagen group as a
wholly owned subsidiary. The Czech Republics entry into the EU in 2004 provided further opportunities
for Skoda sales within the trading bloc. Skoda Auto is now a completely independent entity from other
companies bearing the Skoda name.

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Brand Perceptions and positioning

Despite Volkswagen having taken full control of Skoda, the brand continued to suffer from a poor brand
image in many Western markets. These out-dated perceptions related to Skoda's Eastern European
origins and many years of poor vehicle quality, design, assembly and materials. At its lowest point, there
was a strong perception of an outdated brand with obsolete manufacturing techniques. So poor was the
opinion of the brands qualities, that in some countries the brand became the subject of jokes such as:

Why does a Skoda have a heated rear windscreen?

Answer: To keep your hands warm when you push it

What do you call a Skoda with twin exhaust pipes?

Answer: A wheelbarrow

As a consequence, a key focus of Skodas immediate marketing was to correct these old perceptions and
demonstrate how Skoda cars had changed since Volkswagen took control. To improve its performance in
the competitive car market, Skodas management needed to address its brand positioning. Through a
combination of new products, its Volkswagen links, and an effective public relations strategy, the brand
was slowly turned around and, after several years or marketing efforts, Skoda cars were no longer
perceived as low budget or low quality. Factory visits, meetings and interviews with designers and
engineers, motor shows, sponsorships, displays at public arenas and well-planned advertising campaigns
were part of this strategy.

However, market research data obtained by Skoda from internal and external strategic audits showed
that, although the brand no longer had a poor image, it did not have a strong appeal either. A 2006 survey
showed that the Skoda brand still had a weak and neutral image in the mid-market range it occupies,
compared to competing manufacturers, such as Ford, Peugeot and Renault.

Skoda realised it needed to be more positive in its promotion and to develop a more clearly defined brand
identity, building a marketing message that reflected the fact that Skoda owners were extremely happy
with their cars and the service support they receive. The aim was to convince potential customers, and the
car industry as a whole, that Skoda cars were great to own and drive, especially as the costs of the
improved VW car structure had pushed up Skoda prices. The cars carried a higher price tag and Skoda
needed to convince consumers that this price was worth paying.

A VW marketing manager working for Skoda explained: We needed to move away from being a cheap
brand to being a value-for-money brand. At the same time, we badly needed to find our own positioning
within the group, rather than just trading on being part of the VW Group. Otherwise, we might just as well
have re-branded ourselves as VW, with very little reason for existence.

In pursuit of its own identity, all Skoda activities became defined by the motto Simply Clever that has
become the core of the Skoda brand. This simple motto captures the essence of the companys mission,
has shaped its products and processes and is a symbol of its practical, refined and smart solutions.

Skoda has now become one of the fastest emerging car brands, particularly in Europe and China, building
its reputation on excellent engineering and clever design touches. The brand image is dominated by its
value proposition, coupled with intelligent use of space in cars that offer refinement and practicality. In
recent years, it has won numerous awards for its ambitious, innovative and sophisticated vehicle design.

Appendix 1 details Skodas product range.

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Volkswagen - the parent company

In 2013 the Volkswagen Group overtook General Motors to become the world's second largest carmaker
after Toyota, with 572,800 employees, 112 production plants, and products in all market segments. It is
divided into two primary divisions, the Automotive Division and the Financial Services Division, and has
approximately 340 subsidiary companies. The company has operations in approximately 150 countries
and operates 100 production facilities across 27 countries. It has an attractive product portfolio consisting
of twelve successful brands. Its brands range from the core Volkswagen cars (accounting for around 60%
of sales), Audi at the high end, and Porsche, Bugatti, Lamborghini and Bentley at the luxury end. Skoda is
positioned at the more affordable end along with the Spanish brand SEAT. Each Volkswagen brand has
its own national character and operates as an independent entity on the market, which has both costs and
benefits for the parent company. Volkswagen still sets group strategic objectives and targets and expects
its subsidiaries to contribute to these, but its structure is essentially decentralised.

Volkswagen is aiming to move Skoda upmarket, while SEAT continues to aim for the youth segment, but it
is still unclear whether there is room for both in the VW group. One key issue is ensuring each of its
brands occupies a distinct market position that avoids competing with other VW family brands. With 300
distinct models across Volkswagens 12 brands, there is always a danger of brand cannibalisation. For
example, in 2009, Skoda's Superb estate outperformed VWs equivalent, but more expensive, Passat in
quality surveys and offered standard features that were priced as extras in the Passat. The overlapping,
and consequent competition, of models led to concern in Volkswagen about Skodas strategy and its
potential effect on the groups corporate objectives. These management tensions, and the lack of group
coordination, resulted in the departure of Skodas CEO.

Shared common car platform production chain

Ever since its Skoda takeover in 1991, Volkswagen has used its multiple brands as a way to share costs.
So called cross-badging saves on engineering, design and product development costs, and creates
purchasing economies of scale. It also reduces the lead time in bringing a new product to the market, and
produces better investment returns. Brand partnerships in new product development are becoming more
important as new technologies shorten product life cycles. Volkswagen-Skoda share common car
platforms and technological developments, with the many universal components in Skoda, Volkswagen,
Audi and Porsche cars. Luxury-segment quality standards are applied to these components, which
contribute to overall quality of vehicles throughout all classes. Volkswagen benchmarks its components
against its major competitors to ensure it remains the class leader.

Some critics call Skoda the better Volkswagen because of the unpretentious simplicity of its design and
VW technology, all matched with an affordable price. These strengths have made the Czech brand an
internal threat to the higher positioned VW brand with customers seeing negligible difference between
models from the two companies. The future strategy, therefore is to avoid the brands of Skoda and
Volkswagen eating into each others sales. Apart from differentiating the product on appearance, price and
brand presentation, Volkswagen is looking at timing of product launches to avoid brand cannibalisation.

Volkswagens approach has become even more sophisticated with the development of a versatile
platform, its modular transverse matrix, launched in early 2012. This system underpins several new
models, notably the VW Golf, Audi A3, Skoda Octavia and SEAT Leon and allows VW to streamline its
design process and its supplier relations. All four cars share the same axle, and pedal and engine
positioning. This allows the company to take a lead on innovations, such as advanced braking and
environmental targets, as emission controls tighten. The platform can be adapted not only for alternative
fuel engines, but also promises to reduce car weights without compromising performance. It should also
cut costs across the board, from model development to production.

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Key Skoda markets

Volkswagens growth plans are based on its expansion into emerging markets, such as, China, the largest
and fastest-growing automotive market, and India, the worlds seventh largest passenger vehicle market.

Positive developments on the global automobile market 2014 / 2015

In 2014, the global automotive market continued to grow driven mainly by growth in markets such as
China and North America, as well as most countries in the Middle East. After several years of decline
following the 2008 global recession, Western Europe experienced a recovery in demand with a 4.9%
increase in the number of cars sold over the previous year. These positive developments were the main
drivers behind the year-on-year increase in global car sales of 3.8%.

The automotive market in Eastern Europe decreased by 11.1% in 2014 with Russia registering a year-on-
year decrease of 10.0% and Ukraine a huge 54.9% fall. In contrast, the Romanian market grew by 20.8%,
and the Baltic market by 16.2%. The Central European market developed positively and exceeded
expectations with a year-on-year increase of 14.1%. The Czech automobile market experienced a
significant 16.7% growth with market research showing that Czech customers give priority to home-
produced cars.

In 2014, sales of Skoda cars topped a million for the first time, representing a year-on-year increase of
12.7%, with the firm making a record operating profit of 817 million euros. In addition, the 17th millionth
vehicle came off the production line at the companys Czech headquarters in Mlad Boleslav and
highlighted the success of the carmakers growth strategy. Volkswagen plans to increase Skoda sales
further to 1.5 million per year by 2018.

Responding to the 2014 results, Chief Executive, Winfried Vahland, said: The overall conditions of the
markets remain challenging, but we are confident that we will grow even further in 2015.

Indeed, Vahlands confidence was confirmed as Skoda recorded a 2.8% increase in sales in April 2015.

Appendix 2 provides details of Skodas Balance Sheet and Profit and Loss Accounts for 2013 and 2014.

Asia and emerging markets

The most important driving force for international automotive sales are the fast-growing Asian and
emerging markets, particularly those of China, India and Russia. Skoda expects the three emerging
economies, which it dubs the RIC (Russia, India, China) markets, will together contribute sales of about
810,000 cars by 2018 more than double the 375,000 sold during the brands record breaking sales of
2012.

China

The Chinese economy has been growing strongly for many years, but 2015 saw Gross Domestic Product
increasing at its slowest pace for almost six years. Cars are considered status symbols. In 2015,
Shenzhen, one of Chinas most industrialised cities put a cap on sales of new cars with residents only
permitted to acquire a new vehicle either by lottery or auction. The action follows concerns over
congestion and pollution and is expected to further flatten car sales. Shenzhen is the eighth in China to
adopt such policies, following similar actions by Beijing, Shanghai, Guangzhou, Tianjin,
Shijiazhuang, Guiyang, and Hangzhou.

Skoda has found meeting its growth targets in China difficult, with sales actually falling in 2013 and
remaining flat in the early part of 2014. Nonetheless, China remains Skodas strongest single market and
2015 sales showed a slight improvement, despite the slowdown in the Chinese economy. Skoda expects
its new Rapid Spaceback compact car, its next-generation Octavia sedan, and a new version of the Yeti
sport-utility vehicle (SUV) to lift sales in China. Skoda Chinas President said in an interview in Beijing:
We did a lot of homework regarding our brand and vehicles. We intend to expand into segments where
we were not positioned in the past.

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However, Skoda is facing increasing competition from Chinas domestic car makers, often subsidised by
the government. In 2015, Chinese car manufacturers sales were 21% higher than those of the previous
year on the back of booming demand for Chinese sport-utility vehicles, despite a softening economy. In
the first quarter of 2015, the combined share of Chinese brands rose to 43% of the countrys passenger-
vehicle market from 39% in the same period the previous year.

Skoda aims to more than double deliveries in China by 2018 by increasing its Chinese dealerships and
expanding its local production beyond the six models it already assembles in China: The Fabia, Octavia,
Rapid, Rapid Spaceback, Yeti and the Superb. Such growth will require Skoda to avoid competition with
its parent companys brands. Pricing policies in China differ from many other markets in that Skoda and
VW models sell for similar prices making it difficult for Skoda to increase its market share. Certain brands
in China are seen as status symbols, including several German brands, such as Mercedes and Audi. Lin
Huaibin, a Shanghai-based analyst, said: Consumers here truly believe in German brands. If you have to
pay almost the same price as a Volkswagen, why not just go straight for a Volkswagen model instead?

India

A stable government and increasing consumer confidence boosted vehicle sales in India with GDP growth
of 7.5% in the first half of 2015. Penetration of vehicles is still low at around 18 per 1,000 individuals, but
with increasing disposable incomes, vehicle sales continue to rise. Analysts expect India to become the
third largest global car market by 2020.

Almost half of new cars sold are entry-level compacts that cater to first-time buyers, supported by
government incentives such as lower excise taxes for smaller cars and price-sensitivity of the lesser
affluent customers. Volkswagen positioned itself as a premium brand, but has gained less than a 4%
market share in India since its entry in 2010. With strong brand recognition and a vast dealership networks
across India, local manufacturer Maruti Suzuki and foreign automakers Hyundai and Honda control over
70% of the car market.
Volkswagen has found it difficult to sell its value proposition. In the face of stiff competition and poor sales
of Bentley, Audi, Skoda, VW and Lamborghini in India, Volkswagen has been forced to scale down its
previous target of capturing 20% of the Indian auto market by 2018 to just 8%. Analysts said the
Volkswagen brand took a hit in India after it positioned its flagship VW brand above Skoda, which is
considered an aspirational brand in India.

Despite having entered the Indian market over a decade ago, Skoda has not been able to boost volumes
in this huge emerging market, managing a poor 0.8% share at the end of 2013-14. Skodas unit sales
were actually lower in 2014 than those achieved in 2011. As a consequence, Skoda has decided to
concentrate on after-sales services and cutting costs without compromising on brand character. The firm
is looking to reduce the development cost of cars and make more localised products to boost volume, with
the engineering process done more in India by Indians.

In order to improve its competitiveness, Volkswagen will invest around $250 million in India to increase
local content sourcing and production and introduce new models. The group aims to raise the level of
locally sourced content in its models in India to 90%, up from around 65-70% presently. Volkswagen aims
to expand its production base in India, starting with building engines and gearboxes in the country itself.
By further raising local production and content sourcing in India, the company will benefit from the lower
manufacturing and operational costs in the country, expanding its profit margins and gaining from
economies of scale. It intends to launch seven new vehicles in the subcompact sedan and SUV segments
before 2017, doubling current annual output of 100,000 vehicles at its Indian factory in Chakan.

Volkswagen calls India a very challenging market, and is struggling to find the right product and cost
structures. It is working on a new product portfolio strategy and focusing on creating differentiation of
products sold by Skoda and Volkswagen in India. The group will have to develop an effective strategy that
prevents brand cannibalisation and more clearly differentiate Volkswagen cars from those of Skoda, along
with entry-level cars from Audi.

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Russia

Russia is 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 market analysts
believe it is only a matter of time before Russia becomes Europes largest vehicle market, even if much of
its volume comes from low-cost models.

Skodas production in its two Russias factories was significantly increased in 2014. The Kaluga plant
began producing the Skoda Rapid in early 2014, which ensured local production of all key Skoda models
for the Russian market.

However, a severe slump in Russian car demand during 2014 will make it harder for Skoda to meet its
2018 vehicle sales target. Skoda is considering whether to reduce its investment budget in its third biggest
market, to protect its profitability as Russias conflict with Ukraine hurts its economy, punishing trade
sanctions bite, and the Russian currency weakens. Volkswagens Spanish subsidiary, SEAT, has
withdrawn entirely from the Russian market.

Appendix 3 provides details of Skodas largest global markets by region and country.

Environment and Corporate Social Responsibility (CSR)

Although the Volkswagen Group does not have an official mission statement, the closest statement that
could be called VW Groups mission is expressed as the companys goal: The Groups goal is to offer
attractive, safe and environmentally sound vehicles, which can compete in an increasingly tough market
and set world standards in their respective class.

Skoda fundamental business strategy is to contribute to the Volkswagen Groups aim of becoming the
worlds most sustainable automobile company by 2018, with sustainable development integrated
throughout its supply and value chain. The company has established a GreenFuture strategy for the
environment and a social responsibility strategy for social issues and ethical and transparent behaviour.

Skodas sustainable management is based on a balance between economic, social and environmental
issues and is driven by both commercial and legal pressures. Trading blocs, such as the European Union,
are setting stricter standards on acceptable levels of car emissions and introducing legal requirements for
recycling vehicles at the end of their life. Europe is to become the first place in the world to force real
world emissions tests on car makers, opening up a new front in the fight to tackle air pollution. New
regulations will introduce tests to reveal what cars emissions are like when driving in traffic rather than in
ideal laboratory-like conditions.

Over the long-term Skoda aims to minimise the impact of products on the environment throughout their
lifecycle, by managing their cars after they have ended their service life, both in the form of re-purchasing
and by maximising the use of recyclable materials. Key environmental impact indicators are
systematically monitored and evaluated, and appropriate measures implemented on the basis of the
results.

Employees are motivated through targeted awareness campaigns and training, as well as workshops and
committees. They can also actively contribute to measures through the Green Zebra employee suggestion
programme for improving the environment. Since 2007, the company has regularly published its
Sustainability Report, which provides information about its activities in this field.

Corporate Social Responsibility is closely linked to Skodas business strategy. It focuses on four main
priorities (road safety, technical education, aid for children and barrier-free mobility) and two regional
priorities (employee welfare and cooperation with the region). It is also involved in sponsorship at local,
regional and national level and supports a variety of social, cultural and humanitarian projects as part of its
cooperation with leading foundations and charitable organisations.

Skoda attaches great importance to the welfare of its employees and provides them with a wide range of
social benefits, comprehensive healthcare, work-life balance, and also the possibility of further
professional development. The company complies with occupational health and safety standards and

6IBCS0616 7 [Turn over

offers a unique system of in-company training and professional development. The Volkswagen Group unit
is the country's top exporter and employs about 24,600 people including temporary staff and provides
work for tens of thousands more at supplier companies.

The Skoda plant in Mlad Boleslav employs more than 3,000 foreign workers. To help local employees to
better understand the lifestyles of their foreign colleagues, Skoda is the main sponsor of a major
intercultural event at the company headquarters.

The average monthly wage earned by manual workers at Skoda is about 35% higher than the average
wage in Central Bohemia where its main factory is located, but well below the wages earned by
employees in other parts of European Union. However, there have been recent threats of strikes and
industrial action in the Czech Republic over fears of redundancies and claims by employees for an
improvement in their pay and conditions following Skodas increase in revenues and profits. Skoda agreed
on an above inflation pay rise for its Czech employees in 2015.

Skodas promotional strategy

To identify its core strengths, Skoda uses independent surveys that ask customers about their opinions of
its cars and its brand. Surveys of UK customers have placed Skoda in the top five manufacturers for the
past 13 years. Skoda attributes these results to the business concentrating on owner experience, rather
than on sales, considering the human touch from design through to sale. Skoda knows that 98% of its UK
drivers would recommend Skoda to a friend. This is a clearly identifiable and quantifiable strength, which
Skoda uses to guide its future strategic development and marketing of its brand image.

Skodas biggest global strength is the satisfaction of its customers. Its brand is associated with high quality
products and happy customers and appeals at an emotional, rather than a practical level. By focusing on
making cars that customers enjoy, instead of just increasing sales, Skoda enjoys the highest loyalty rate
(buying again) of 84% against 48% of industry average.

Marketing and sponsorship

With its history steeped in cycling technology, the support of cycling is one of the most important parts of
the Skodas sponsoring programme. The company has been an official partner and vehicle supplier to the
Tour de France, the cycling event, for over a decade and it recently renewed its sponsorship of media
coverage to 2017. It is also a partner to many other cycling events, such as the Giro d Italia, Vuelta
Espaa and UCI Road World Championships, and supports several professional cycling teams.

Ice hockey is one of the Czech national sports and Skoda has been the main sponsor of the Ice Hockey
World Championship since 1993. The official Skoda fleet is used for transportation of officials, sponsors
and guests.

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Digital and Social Media

In line with Volkswagens emphasis on innovative and cutting edge technology, Skoda is employing digital
and social media promotional methods. The company is aware that their customers use the digital and
social media as a tool to research and refine their purchase decisions, as well as a way of sharing their
own experiences of brands. The company built an active Facebook community to share their enthusiasm
about the brand, which by 2012, had become the second largest Facebook page in the sector.

Skoda has used other social media tools to enhance its promotion and brand awareness. For example, a
recent interactive online experience, called Fight for Attention features two Skoda Fabias racing. This
campaign used pupil eye-tracking technology to measure and display the results of the users interaction
with the film. The technology monitors how the viewer interacts with the film by producing a custom
infographic revealing which car held the viewers attention throughout the sequence. The user then had
the option to book a test drive with its local dealership, and share the experience with friends on social
media.

Production and operations: promoting worldwide growth

For Skoda, 2014 and 2015 represented a continuation of its growth strategy, focusing mainly on releasing
further models and an expansion of production capacity worldwide to satisfy increasing customer demand.
During 2014, fourteen new or revised models entered production in the Czech Republic, Russia, India and
China. More are planned by 2016, such as the re-launch of its new top-of-the-range, Superb model.

Czech Republic

Skoda factories are among the most efficient and productive in the world. Skoda claimed its Mlad
Boleslav plant was the first fractal factory in full production in the world. The fractal factory concept differs
from the traditional production line with assembly operations spread throughout the factory in the form of
cells, rather than being placed close to the main assembly line. All operations are coordinated by a
computer-controlled schedule to ensure consistent production. The factory incorporates areas reserved for
its supplier companies and their own employees. Parts and materials are delivered according to a precise,
just-in-time schedule, reducing transportation costs and cutting stock levels to zero. Assembly of parts
become the responsibility of Skoda only at the moment they are fitted to the car, and only when they have
passed the suppliers quality control. These techniques are now used across most of Volkswagens
production facilities.

Volkswagen has invested more than 12 billion euros in the Mlad Boleslav factory in the Czech Republic
since it took an initial stake in Skoda, upgrading and retooling the plant to the highest standards. Inside
the factory, 60km northeast of Prague, state-of-the-art robots tool parts with pinpoint accuracy. Employees
at the Skoda plant are recruited from Czech universities, which produce about 2,500 automotive
engineering graduates a year.

Skoda set up a new Logistics Centre at the Mlad Boleslav factory in 2013, which won the European Gold
Medal in Logistics and Supplier Chain. Skoda installed a fully automatic, 60-metre conveyor tunnel to its
production hall, along with new warehouse technology which it says ensure the fast, flexible and highly
efficient supply of parts. The factorys fully automatic transport trolley delivers parts and components
directly to shelves on the assembly line, while conveyor belts made from buffalo leather and ostrich
feather brushes remove static electricity.

Skoda is at the heart of the domestic car industry and a pillar of the Czech economy. By 2018, it will have
created up to 1,300 new jobs and increased production capacity up to 280,000 vehicles per year at its
Kvasiny plant, one of Skodas three production facilities in the Czech Republic. Skodas CEO said in a
press release: As an important cornerstone of Skoda production network, the Kvasiny plant makes a vital
contribution to Skodas growth strategy. Over the coming years, Skoda will be expanding further in this
location.

At the same time, the Czech state and the Hradec Krlov region will be making investments into the
public infrastructure and improving education and health in the city and region.

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The Octavia is Skodas most successful model. A new manufacturing facility was opened in Mlad
Boleslav in May 2014 to produce Octavia cars running on CNG (Compressed Natural Gas). CNG powered
cars represent a key technology for further reduction of CO2 emissions.

The new Octavia CNG models will be gradually rolled out in 14 other European countries. To meet the
EUs 2020 emissions target of 95g/km, Skoda intends to add a hybrid model to its new flagship range,
the Superb, combining petrol and electric power sources and offering lower exhaust emissions.

Appendix 4 provides details of factories producing Skoda cars.

Where now for Volkswagen and Skoda?

Volkswagens strategic aim to replace Toyota as the worlds largest auto company by 2018 is looking
optimistic, with Skoda failing to meet its ambitious sales targets in key Asian markets and SEAT battling a
decade of losses. It is also reported that Volkswagen is struggling to hit cost goals for its planned budget
car for emerging markets.

Although Skoda and SEAT accounted for 13% of Volkswagens record sales in 2014, the companys new
strategy is to boost the image and appeal of Skoda and SEAT, by moving the Skoda brand back
upmarket, while refocusing SEAT on Europe, after a failed China export strategy. The risk of this new
approach is this may recreate friction between Skoda and SEAT and the core VW division. However, such
cross-group competition may be minimised by differentiating the brands, which will require considerable
investment in market research as perceptions vary so much across nationalities and cultures. While Audi
emphasises the technology in products through its marketing phrase, 'Vorsprung Durch Technik'
(advantage through technology), Skodas strengths lie in happy Skoda drivers and their resulting brand
loyalty and in its competitive pricing and value. No other car manufacturer has driver happiness as its
USP. The problem is that these strengths are not necessarily replicating in emerging markets, such as
China and India, where competing manufacturers already have an established value proposition and
extensive dealer network. Skodas planned new models and technologies, such as cars powered by CNG,
may provide a boost in sales and market share, as well as entry into new global markets.

As average incomes continue to grow in emerging markets and as world markets recover, the question is
whether Volkswagens strategic approach to push Skoda cars upmarket, localise production and cut costs,
will increase sales revenue and profit margins enough to meet its challenging targets for 2018. These
changes in operations may be difficult to implement in some of its key markets in the face of increasing
competition and political and economic risks, such as the introduction of government austerity measures
and conflict between Russia and Ukraine.

Adapted from:

Forbes
Bloomberg
Reuters
The Guardian
Economist Intelligence Unit
Prague Post
Business Case Studies
Skoda/VW company reports

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Appendix 1

KODA Product Portfolio 2014 / 2015

KODA Citigo

The smallest KODA model, with its fashionable three or five door body, is especially ideal for the city.
Since its introduction in 2011, it has won the hearts of many city-dwellers, mainly due to its agility,
economy and safety. Thanks to its many surprising details, the KODA Citigo is a modern everyday car
that also offers an enjoyable driving experience. An attractive, sporty Monte Carlo version of the KODA
Citigo was introduced for the first time in 2014.

KODA Fabia and KODA Fabia Combi

With more than 3.5 million cars sold since 1999, the KODA Fabia is the brands second-highest-selling
car after the KODA Octavia. Its outstanding features make it one of the most popular models in its class.

The new KODA Fabia, a newly developed compact car from Mlad Boleslav, celebrated its double world
premiere at the Paris Motor Show in October 2014, when it was presented in both hatchback and estate
versions at the same time. The latest generation of the Fabia model, this successful KODA compact car,
with its clearly defined and sporty proportions, is extremely eye-catching. The Fabia incorporates the
advanced safety and comfort elements and infotainment systems of higher class cars. The new KODA
Fabia is lighter, more economical and offers more interior space than previous models, and boasts the
largest luggage compartment in its class.

KODA Roomster

As the name suggests, the spacious luggage compartment of the KODA Roomster is its most important
feature and the key to its success with customers. Its hallmark is the clean design and versatile interior.
Since its market launch in 2006, KODA has also been represented in the compact MPV category.

KODA Rapid and KODA Rapid Spaceback

The KODA Rapid bridges the gap in the model range between the KODA Fabia and Octavia. The
interior features a range of clever details and provides a generous amount of space. With specific versions
for India and China, the KODA Rapid is a key model in the KODA growth strategy. The Rapid
Spaceback joined the Rapid range in autumn 2013 and is the first KODA model with a hatchback body in
the lower medium class. Introduced in 2014, the Monte Carlo edition Rapid Spaceback responds to
increased customer demand for exceptional looking KODA cars.

KODA Yeti

The Yeti is Skodas entry into the compact SUV (sport-utility vehicle) sector. The model underwent
significant modernisation in late 2013 and is now available in two variants. The Yeti model is intended
primarily for the city, while the more adventurous Yeti Outdoor is aimed mainly at off-road use. The range
of sporty Monte Carlo models was also expanded in 2014 to include the KODA Yeti Monte Carlo.

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KODA Octavia and KODA Octavia Combi

The KODA Octavia and KODA Octavia Combi are the most successful models in the history of
KODA. A completely new model, introduced by KODA at the end of 2012, follows in the footsteps of
previous generations of the KODA Octavia. In the last two years, a range of derivatives and variants
have been introduced to round out the line-up of this key model series.

In June 2014, the KODA Octavia G-TEC was launched the first Octavia with a standard drive train
powered by compressed natural gas (CNG). Another key addition to the Octavia range in 2014 was the
KODA Octavia Scout. This exceptional and versatile vehicle is highly driveable, even on poor surfaces,
has a distinctive look, excellent climbing power, traction options and an ultramodern four-wheel drive
system. Since autumn 2014, the four-wheel drive option is no longer exclusive to the Octavia Combi
model, but is also available in the other Octavia models.

KODA Superb and KODA Superb Combi

The KODA Superb offers extraordinary quality for its class at an attractive price. The vehicle is also
spacious and technologically advanced. The bodywork is both sporty and elegant at the same time.
Significant modernisation of the KODA flagship model to reflect the new design language took place in
spring 2013. In addition to the improved look and new equipment features, new engine and gearbox
combinations were also added. 2015 saw the launch of the all new Superb range. The new model will
include a plug-in hybrid powertrain to lower emissions.

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Appendix 2

Skodas Balance Sheet and Profit and Loss Accounts: 2013 and 2014

Balance sheet (CZK million)

31.12.2014 31.12.2013 2014 / 2013

Non-current assets 105,139 87,923 19.6%
Current assets 71,730 64,078 11.9%
Total assets 176,869 152,001 16.4%
Equity 100,001 90,316 10.7%
Non-current liabilities 18,407 12,594 46.2%
Current liabilities 58,461 49,091 19.1%
Total liabilities 176,869 152,001 16.4%

Profit and loss account (CZK million)

2014 2013 2014 / 2013

Sales revenue 299,318 243,624 22.9%
Cost of sales 254,944 209,538 21.7%
Gross profit 44,374 34,086 30.2%
Distribution expenses 13,466 13,067 3.1%
Administrative expenses 6,939 6,679 3.9%
Other operating income 5,130 6,024 14.8%
Other operating expenses 7,501 7,827 4.2%
Operating profit 21,598 12,537 72.3%
Financial result 249 413 > 100%
Profit before income tax 21,349 12,950 64.9%
Income tax expense 2,928 1,564 87.2%
Profit after income tax 18,421 11,386 61.8%

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Appendix 3

Skodas largest global markets by region and country

Deliveries to customers by region in 2014

0 50,000 100,000 150,000 200,000 250,000 300,000 350,000 400,000 450,000

Central Europe

Eastern Europe

Western Europe

Rest of the World

China

2014 2013

Deliveries to customers largest markets

Deliveries to customers (vehicles) Change in %

2014 2013 2014 / 2013

Total KODA brand 1,037,226 920,750 12.7%

China 281,412 226,971 24.0%
Germany 149,538 136,415 9.6%
Russia 84,437 87,456 3.5%
Great Britain 76,027 66,029 15.1%
Czech Republic 70,200 60,042 16.9%
Poland 46,650 38,710 20.5%
France 21,054 20,400 3.2%
Austria 20,487 20,073 2.1%
Netherlands 18,567 13,597 36.6%
Switzerland 17,820 16,984 4.9%
Belgium 17,807 15,482 15.0%
Spain* 17,783 13,421 32.5%
Slovakia 16,402 14,827 10.6%
India 15,538 22,563 31.1%
Israel 15,118 14,387 5.1%

* excluding the Canary Islands

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Appendix 4

Factories producing Skoda cars

Portfolio of models manufactured worldwide (1.1.2014 - 31.12.2014)

Roomster

Octavia

Superb
Citigo

Rapid
Fabia

Seat
Yeti
Mlad Boleslav (Czech Republic)
Kvasiny (Czech Republic)
Bratislava (Slovakia)
Kaluga (Russia)
Nizhny Novgorod (Russia)
Aurangabad (India)
Pune (India)
Anting (China)
Yizheng (China)
Ningbo (China)

End of case study

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