Volkswagen in a conflict with Skoda

The logo of Skoda is seen during the 87th International Motor Show at Palexpo in Geneva, Switzerland March 8, 2017. REUTERS/Arnd Wiegmann

Volkswagen managers and unions are looking to restrain competition from lower-cost stablemate Skoda, move some of its production to Germany and make the Czech brand pay more for technology they share.

While VW tries so hard to cut jobs and to spend less at German factories, Skoda’s superior car reviews and profitability have made the brands’ rivalry within the Volkswagen empire more intense.

VW now wants to cut down everything they see as Skoda’s unfair advantages – putting together German technology and cheaper labor – and verify the top-selling brand’s primacy before new electric cars launch.

The fight between VW and Skoda is bringing back to life the tensions at the heart of the Volkswagen group between profits and jobs, and between central control and autonomy for its 12 vehicle brands.

One manager said that they could just be setting up an ineffective internal conflict instead of trying to beat Tesla.

Under 26 years of VW group ownership Skoda has bloomed into a successful mid-market carmaker, slowly but safely winning business from rivals – including VW – and even doing better at operating profit margin then Audi last year.

At the same time, VW is facing thousands of job cuts as management moves to trim excess capacity at German factories. Its powerful domestic unions see Skoda’s success as both a bad and a good thing – a threat and a potential lifeline.

It seems that VW workers representatives are now demanding that some of Skoda production gets transferred to their underused German plants, a source close to the supervisory board.

With this they aim to offset declining output of the VW Passat and aging Golf that could otherwise threaten more jobs.

Furthermore, they are making a case about Skoda paying higher royalties to use VW’s main common vehicle platform. The so-called MQB architecture also underpins mid-sized models from the group’s Audi and SEAT brands.

The government will try to make sure that VW investment plans are being followed through and that production is not going to move outside the country.

VW’s works council declined to comment on Skoda warning that a production shift could cost around 2000 jobs.

VW brand Chief Executive Herbert Diess is leading a parallel management effort to protect future VW models from direct competition with cheaper Skodas.

They are looking to create more difference between VW and Skoda

“The future positioning of brands is being looked at, but discussions are still ongoing.

We are expecting the tensions to rise around the Nov. 17 supervisory board session due to approve annual investment budgets across the world’s biggest carmaker.

Skoda’s operating profit more than doubled over three years to 1.2 billion euros ($1.4 billion) in 2016, lifting its profit margin to 8.7 percent – second only to Porsche within the Volkswagen stable.

The VW brand, whose margin dropped to 1.8 percent after earnings fell by a third, still outsells Skoda globally but is growing more slowly in Europe.

Skoda’s healthy profits partly reflect the shared car platform’s economies of scale. Designed by VW engineers in Germany, MQB has been rolled out progressively since 2012.

But Skoda gets more boost from cheaper labor. Manufacturing wages average 10.10 euros per hour in the Czech Republic, but most of its European cars are assembled, compared with 38.70 euros in German industry.

Nobody knows how will VW group CEO Matthias Mueller take care of the dispute. The strength of the German unions, which hold half of the company’s 20 board seats, means Skoda’s success might be seen more as a problem than a model to emulate.

The German state of Lower Saxony, which engages another two board seats, is also preoccupied with maintaining VW jobs.

Unease at VW’s Wolfsburg headquarters has been joined by car reviews in which its models have sometimes lost face to cheaper Skoda cousins sharing the MQB platform.

The new Skoda Kodiaq sports-utility vehicle (SUV) is priced 1,500 euros ($1,765) below the VW Tiguan yet trumped the German brand in a quality survey by Auto Motor und Sport magazine.

Competition for resources among VW brands is something that everyone is used to. Unions demanded for VW to lead development of emerging-market cars, but Skoda was the one that was allowed to take the charge.

Now the group’s 20 billion euro push to launch 50 electric cars by 2025 brings a lot of tensions as VW managers are scared their battery-powered models may also be undercut.

“The electric vehicle market is a new ball game where you cannot simply maintain the brands’ positioning,” said one. “Customers need to see that you are making changes.”

VW and Skoda both plan to introduce coupe-styled electric SUVs in 2020 boasting the same 500 km (300 mile) range.

Any renegotiation of platform cost-sharing could also affect each brand’s contribution to the new MEB platform being developed for electric cars.

On the other hand, VW trimming the rivalry in public. With a combined lineup approaching 100 vehicles, brand CEO Diess said, there is always some risk of stepping on toes.

“There will always be some substitution,” he told Reuters. “But some internal competition is also helpful.”