The scandal could have an impact on the Czech GDP and industry, but the government and analysts have downplayed the risks
In the last five years foreign investors have created 10 thousand jobs in the Czech automotive industry
The bombshell that struck Volkswagen, which betrayed what many of the world’s consumers had imagined, having previously seen the German car company as a solid stronghold of efficiency and transparency, could have significant consequences for the neighboring Czech Republic. Firstly, because the scandal of the rigged engines reflects on Škoda Auto, which is owned by Volkswagen, and in the past has used the implicated engines of their German parents. More generally, because the tidal wave caused by the Teutonic blunder could well have a negative effect both on the Czech GDP, and that of neighboring Slovakia. The motor industry in both countries has in fact a fundamental importance to the national economy and relies very heavily on the German car industry.
But first things first. After a moment of hesitation and embarrassment, following the shocking news of rigged diesel engines, it became clear that not only Volkswagen but also the companies they owned, Seat, Audi and of course Škoda, were embroiled in the affair.
The company based in Mladá Boleslav has confirmed that in the past, it used one million, two hundred thousand EA189 diesel engines for the Fabia, Octavia and Superb cars. The spokesman Jozef Baláž had to admit it, but pointed out that “all current Škoda models sold in Europe are equipped with engines which respect the Euro 6 emission limits”.
Despite the impressive number, Czech consumers don’t seem to be distressed or affected, and according to the ČTK survey, among retailers of new and used cars, the sales appear to be proceeding smoothly. However, also the attitude of buyers outside the country will prove to be decisive, as Škoda depends crucially on its foreign markets.
In the meantime, the Prague government has tried to minimize the importance in all possible opportunities.
The draft of the Finance bill for 2016 is based on a Czech growth estimate next year of 2.5% of the GDP. Finance Minister Andrej Babiš explained that the national economy rests on a solid foundation, and that the foreign fluctuations should not affect the performance.
Also apparently optimistic overall, is the Minister of Industry and Trade, Jan Mládek, according to whom Škoda Auto has big chance of overcoming the current situation without any major damage. Mládek has not ruled out that the affair could affect the future growth of the Gross domestic product, but has underplayed the consequences. The impact, in his opinion, could range between a 0.1%, to 0.2% decrease in the GDP, considering a possible reduction, albeit temporary, of exports to the German market, the main target of sales of Czech companies abroad.
However, if optimism prevails regarding the government estimates on GDP, as it does in the opinions of the economists referred to by the national media, less reassuring signals have also emerged. Reports from recent weeks, since we saw the bombshell hit us in the middle of September concerning the rigged engines, have displayed early omens not to be taken lightly.
For example, the news in the Czech Republic, of the halt of the Roomster II project, the new model of Škoda Auto, which had received the go-ahead for mass production. The Volkswagen group eventually decided to cancel everything, and it is natural to think that this may be a result of the scandal of the altered software.
It was also revealed that the British agency VCA (Vehicle Certification Agency), responsible for the certification of vehicles, was reluctant to grant approval to the new diesel models of Škoda Auto in October. Eventually, after a few weeks of waiting, causing many to foresee and fear the worst, the Minister of Transport Dan Ťok was forced to intervene personally in order to ask for the definitive green light. The newspapers wrote that the caution from VCA was probably due precisely to the Volkswagen scandal.
There are also doubts about the future ownership of Škoda. Minister Mládek has hinted that Volkswagen, in order to cope with the astronomical fine for the “defeat devices”, or software, and class action about to take place, may decide to dispose of some other makes, and the reference to the Czech national manufacturer was clear: “I am certain that the Czech Republic will continue to produce cars in the future. As to what the brands will be and who their owners will be, it may not be as clear today, as it appeared to be until very recently”.
Even the economists consulted, have remained optimistic, some of whom have speculated that the German company may decide to sell a minority stake of Škoda, a brand that in recent years has proved to be one of the more capable groups of creating a profit, leaving the possibility open of repurchasing the entire property again in the future.
Who risks being hit by the German scandal however, as mentioned before, is also the automotive industry as a whole. “I’m not as concerned about Škoda as I am about our companies which are suppliers of the German makes, because most of the components of German luxury cars come from the Czech Republic”, said Mládek who recalled the economic crisis of 2008-2009, when in the Czech Republic, it was not the automakers, that suffered particularly, but the producers of components for high-end brands.
The fact remains that the data of the Czech automotive sector, and what it entails in terms of repercussions on GDP is still excellent. The crisis is over and the recession has been overcome, the central European tiger has come roaring back, along with neighbours Slovakia.
The two countries have the highest car production figures worldwide: 197 vehicles per thousand inhabitants in Slovakia and 107.5 in the Czech Republic. This data allows Prague to place itself even in 15th position worldwide with 20% of the production of Czech manufacturing and the exports of the country depending on the motor industry. Besides Škoda, the protagonists of these results are Toyota, Peugeot, Citroën and Hyundai for the car manufacturers, plus a host of big names in the components sector.
In the last five years, according to CzechInvest, the national agency for investment, foreign investors have created 10 thousand jobs with the arrival of more than 1.4 billion Euros in the Czech automotive industry. The number of investments in 2014 doubled those of the previous year and the future prospects seem to be rosy. The Czech Autoland looks set to grow even more, with companies intent on identifying new areas where they can set up their factories, and ensure themselves that the workforce required is available. According to a study which was just released from CBRE, the demand for production halls or warehouses from the automotive sector is today at a record level. In the first half of this year, it has made up a third of the total demand, compared with just 15% last year. The increasingly frequent tendency of companies to choose hitherto neglected locations, such as South Moravia and North Bohemia, is becoming more and more noticeable.
The situation is much the same in Slovakia, which shares strategic points attracting investors with the Czech automotive sector. The central location in Europe for one, in addition to qualified personnel, government incentives, a stable environment for doing business, direct access to the European market and adequate transport infrastructure. The three producers who work there, Kia, PSA Peugeot Citroën and Volkswagen (with the announced arrival of Jaguar Land Rover in Nitra pending), have even managed so far, thanks to alternative markets, to overcome the impact of the sanctions on Russia, the country which before the crisis in Ukraine, was the destination of 15% of Slovak exports.
by Daniela Mogavero