Background Overrun by the Competition: Skoda's Defeat in China

After years of success, Skoda is withdrawing from the Chinese car market. These explanations raise questions. A look at Skoda's history and successes in China.

Skoda is giving up in China. After two decades and several years of record sales, sales in the world's largest car market will be discontinued in the middle of this year, company spokespeople confirmed to the Reuters news agency.

The explanations given by analysts in the People's Republic are similar: electrified too late, not localized enough, ultimately no longer competitive. Chinese competitors such as BYD or Li Auto are too strong.

From a Successful Model to a Strategic Task

None of this is wrong. Nevertheless, the withdrawal without a fight from what is probably the toughest competition on earth leaves an uneasy feeling: the Volkswagen Group has sacrificed a strong brand (Skoda) here. In future, the resources are to be used for the VW brand's race to catch up. "Success by Volkswagen, defeat by Volkswagen", commented the Chinese financial portal Guoji Jinrong Bao. That probably sums it up quite well.

Since the market launch of the first Skoda model in China, the Octavia, in 2007, Skoda has positioned itself in China as a low-cost Volkswagen. According to the marketing, anyone who buys a Skoda gets VW technology at a lower price than the main brand.

Successful Model in Europe

In Europe, this model still works very well today. Skoda is one of the most successful volume brands on the continent, with a return of around 8.5 percent and a cash flow that would make many other VW Group brands blush with envy.

Customers pay about the same as a VW, usually less, but get more space in return - such as a larger trunk or more legroom. Even with electric cars, Skoda is more successful in Europe than the VW Group itself.

With Enyaq and Elroq, the brand has two successful e-models that don't want to come across as modern or hip, like the VW electrics. This is particularly popular with families, but also with fleet operators in Europe.

Limits of the Successful Model

Why doesn't this successful model also work in China? The answer lies in the margins. Skoda can be profitable in Europe because it has a cost advantage due to its production in Eastern Europe, especially in the Czech Republic, and the administration there. Even with a slight price reduction compared to the better-known Volkswagen brand, this is a solid business model.

For a while, Skoda was able to transfer this same business model to China. Based on Volkswagen platforms, on which Skoda only put its own "hats", with identical cost structures to VW, the Chinese business also ran brilliantly for a while.

Although the cost advantage here was never as strong as in Europe, the appeal of the Volkswagen brand was sufficient. The promise of a "low-cost Volkswagen" won over many customers.

Skoda Produced Over Three Million Cars

Nevertheless, Skoda experienced its peak in China between 2016 and 2018. With annual sales of over 300,000 units for three consecutive years and a peak of 341,000 units in 2018.

Models such as the Octavia, Superb and Kodiaq were strong in their segments and were able to attract more than three million Chinese customers in total. However, with the rise of e-mobility in China and the subsequent increasingly fierce price war among manufacturers of cars with combustion engines, margins shrank. Suddenly, those few percent less that could be achieved compared to VW became a problem. At the same time, the failure to develop an independent China strategy paid off.

Skoda Sales: Down 80 Percent in Four Years

The decline began in 2019 and accelerated thereafter, from 282,000 sales in 2019 to 173,000 (2020), 71,200 (2021) and finally 44,600 in 2022. A total decline of more than 80 percent within four years.

In 2023, Skoda was then only able to sell 23,000 units in China. Last year, it had reached 15,000. This was probably the latest point at which Wolfsburg decided that it was not worth saving the second brand in China in addition to the VW brand.

Building your own electric platform would have been expensive, as would using a third-party platform. Either way, it would have been very difficult to be as successful as before in the Chinese market, which has been shaken by "involution" - i.e. an extreme price war.

No Independent Products for Skoda

While VW Passenger Cars continues to fight for the market in China, relying on numerous partnerships with e-car start-ups and suppliers of batteries, chips and assistance systems, the Group is consistently pursuing an "in China, for China" strategy. Skoda, on the other hand, was sacrificed like a pawn on a chessboard.

In order to survive in China, Skoda, like VW, would have needed a larger product range of even better electric cars. But despite all its success, Skoda was not granted this in Wolfsburg, even in Europe. Yes, success by Volkswagen, defeat by Volkswagen is probably the most apt analysis of this sadly ended chapter in German automotive history in China.

What lessons can be learned from this? Above all these: It is no longer enough just to see China as a market and to operate with the same business models that work elsewhere. China has become a technology-driven car market in which it is not enough to be cheaper than someone else. And it is certainly no longer enough in China to rely primarily on combustion engines and see the development of electric cars as a kind of interesting experiment. Successes like the Enyaq remain the exception in this environment.

Hopes Rest on India

Skoda is now moving on. Business is going well in India, they say. Originally, Russia could also have stepped in to take over the abandoned market in China, but unfortunately this did not happen due to the war in Ukraine.

But whether it was wise in the long term to sacrifice the Chinese market with a view to margins remains to be seen. Skoda joins the list of China losers for the time being. Alongside Mitsubishi, Jeep, Suzuki and Renault. The brand has certainly not become any stronger as a result, and there are fears that it might have been smarter to take on the challenge of China.