The Last Laugh

In the television spot, a very British executive -- French cuffs, chalk-striped suit, posh accent -- is looking impressed as he's shown through an automotive assembly factory. Everything is state of the art, with robots working efficiently on the gleaming shop floor as a doughy-faced Czech explains the factory's rigorous quality control. "Most impressive," says his lordship, pantomiming a round of applause for some of the workers. "Well done," he tells them. Then he turns and says, confidentially, to his host: "And I understand you also make those funny little Skoda cars here." It's an ad campaign that has particular resonance in Britain, where a comedy genre has grown up around Skoda jokes (What do you call a Skoda convertible? A dumpster.), which arose during the 1980s when Skodas were being exported all over Europe by a Czechoslovak government starved for hard currency. Like the Yugos that still are an occasional blight on American roads, Skodas were ugly, uncomfortable little boxes that provided no-frills transportation from Point A to Point B -- when they were working, anyway. And, to hear some tell it, they worked only rarely. But the Soviet system is more than 10 years dead, the Czech and Slovak republics have undergone an amicable divorce, and something very interesting is happening in the drab industrial city of Mlad Boleslav a few dozen miles from Prague. There, in a sprawling complex filled with the most modern machinery, workers in self-directed teams are producing record numbers of new cars. Gleaming new Skodas pop up everywhere in western Europe, from London to Lillehammer, Belfast to Bonn, and not many people are making jokes about them anymore. The company that produces them has become, in the words of one analyst, "the perfect template of an eastern European firm doing well." The only problem the company has, says Karl-Gnter Bsching, director of production for Volkswagen AG-owned Skoda Auto a.s., is that it can't make the cars fast enough. "Every time I talk to Mr. [VW Chairman Ferdinand] Piech," Bsching says with a chuckle, "he asks me what I'm doing to increase capacity." Marketing -- as in the case of the very successful ad that appeared on British television -- is part of the story, to be sure, but Skoda's turnaround also has something to do with the cars and the way they're made. In the UK, where "those funny little Skoda cars" came in for the most abuse in the waning years of the Soviet Union, Skoda has placed at or near the top of the prestigious J.D. Power & Associates customer satisfaction survey in each of the last three years. The new Skoda Fabia subcompact won German newspaper Bild am Sonntag's coveted Golden Steering Wheel as best car in its class and was named European car of the year by the UK's What Car? magazine. BBC Top Gear magazine said the Fabia "feels like it is in a class above the rest." Also, because Skodas and many of their components are manufactured in one of Europe's cheaper labor markets -- Skoda production workers earn 16,000 Czech koruna a year, or about $6,000 -- the cars come to market at roughly 20% of the cost of their German-made cousins in the VW line, and they're priced 10% or so lower than Seats, made by VW's Spanish subsidiary SEAT SA. Put it all together, and you've got a company that's on a revenue roll. Sales hit 110.4 billion koruna (approximately US$2.95 billion) in 1999, with net profits up by 17.8% to a record 2.64 billion koruna ($71.6 million). Unit sales were up by 6% despite horrid conditions in the Czech market, with the company selling 385,330 vehicles, roughly half of them in western Europe. The crucial ingredients to this success, says Skoda Chairman Vratislav Kulhanek, are simple: "quality in all processes with the result [being] excellent products and value for the money." Stylish sedans to homely boxes The guide at the Skoda Museum in Mlad Boleslav strolls past relics of the automaker's century of existence, rattling off her practiced spiel without pause until her guest interrupts her. He's noticed that all the cars made before 1938 are right-hand drive, but that changed suddenly at the end of the 1930s. "Why?" the visitor asks. She blinks, then smiles. "Oh, that was because of the Nazis. They made us drive on the other side of the road," she explains before continuing through the museum. It's impossible to resist the temptation to wonder what might have become of Skoda had Europe and the world not been engulfed in war. By the late 1930s the company had become as famous an example of Czech engineering prowess as Skoda Plzen, the mighty armaments maker that shared its name. Skoda Auto was selling its cars anywhere that mattered, including the U.S. (In fact, a photograph in the museum shows a fat-fendered Skoda making its stately way down Fifth Ave. in New York.) But the supposed distress of ethnic Germans in the Czech Sudetenland -- and the presence there of a certain arms maker named Skoda -- made Czechoslovakia irresistible to Hitler and his war machine. When Czechoslovakia became part of the Soviet bloc, Skoda went from producing smart, stylish sedans and coupes to pumping out ugly steel boxes that somehow always managed to look gray, regardless of their stated color. It was these homely boxes that eventually were sold to the West just as a flood of Yugos and Ladas were starting to appear. And so the jokes began. Back on track Karl-Gnter Bsching, Skoda's production manager, is a dapper, affable, courtly man with impeccably cut white hair and a quick smile. Yet despite the smile, there's something that Bsching never laughs about, and that's the reputation of the company whose production he oversees. "Skoda was a joke," Bsching says earnestly, "and it should never again be a joke." A longtime Volkswagen employee, Bsching is an example of the brainpower the Wolfsburg headquarters was willing to send to the Czech Republic to make sure that VW made the most of its investment of roughly $700 million to acquire controlling interest in Skoda in 1991. (VW bought the remainder of the company earlier this year.) The result, Bsching says, has been "a mixture of Czech skills and ability to improvise and German organization." What VW pushed through at Skoda was a rationalization of its production processes to go along with what was happening at all the other plants in the group. Within days of the agreement between Volkswagen and the Czech government, Skoda production personnel were traveling to other VW plants to observe the VWproduction method so they could benchmark against it. Volkswagen also recognized that investment was necessary, so more than a billion dollars was spent on capital investments between 1991 and 1998. Most recently, Skoda has spent nearly half a billion dollars to build a new engine plant on its massive Mlad Boleslav campus. An additional $1.7 billion is to be invested by 2003, with an emphasis on technology and new-product development. Another vital component, Bsching says, was the workforce, which had to cope with the transition from working for a state-owned company to working for a firm that was deadly serious about competing in the global marketplace. "You could say that the employees before 1989 [and the fall of the Soviet-backed government] were used to another philosophy of work, which means they [had] to change this work philosophy," Bsching says. "And, of course, this change had to happen above all in their minds. The basic idea was to bring to people's minds quality, quality, quality, quality, and then the costs. "Then there was another point, and that was the identification of the employees with the firm, which had to be deepened. This is a process that has actually taken place in their minds, in my opinion." Kulhanek, the company chairman, agrees, calling Skoda the best company in the Czech Republic because of the "internal motivation and loyalty" of the workers. The company also set about overhauling its supply chain. When Skoda first implemented the VW grading system, only 1% of the company's suppliers earned an "A" grade. Skoda personnel worked closely with the suppliers to help them improve their quality and reliability so that the cars bearing the company's name didn't break down. Today, 71% of all suppliers earn top grades. Making that process attractive to the suppliers was not only the desirability of continuing to sell to Skoda, but also the chance to make sales to other divisions of VW. To track quality, Skoda implemented what it calls the Skoda Production System, which tracks such things as cost, quality, team cooperation, and absenteeism, and displays the results on the shop floor for all to see. Teams that perform particularly well are rewarded, such as one group that received a trip to Japan to study methods used by an auto plant there. One huge stumbling block faced by Skoda was that its car models were old and, in many ways, far below the technological standards of the rest of the cars made in Europe. The first move was to introduce the Felicia in 1994, which helped the company break even the following year. In 1996, the midsized Octavia hit the market to glowing reviews and robust sales, helping Skoda ring up aftertax profits of roughly $30 million in 1997. But the crowning achievement was the introduction of the Fabia in 1999, which helped drive sales volumes even higher. Remarkably, the company that was selling only 172,000 cars a year as recently as 1991 sold 385,000 in 1999 and expects to sell close to 450,000 this year. And these soaring volumes come despite the fact that employment at the company has increased by less than 30% in that time. How do Skoda's 21,472 workers feel about being employed by the company? Says Bsching: "I hear very often from employees that you really are somebody in the Czech Republic if you are at Skoda." Proud past, positive future Josef Urban is annoyed. The look on his face says that he is more than a little tired of all these smug western reporters who come here to Mlad Boleslav to talk about how bad things used to be in the company for which he's worked for 35 years. To him, the Skoda jokes were never funny. "Every reporter who comes here asks the same question and wants the same answer," he says. "But I'll give the answer I always give. "What you have to remember," he says, "is that we made the best cars we could under real socialism. What you also have to remember is that we were able to sell those cars in the West." The setting is the test track outside Werk MB, the factory that produces Skoda's big-selling Octavia. Urban runs this shop, which has been called the most advanced automobile factory in the world. In fact, he has just led a tour through that factory, his face aglow as he talks about what they do there. He explains that this four-year-old plant, designed to produce between 300 and 350 cars in a day, is now putting out 500 cars per day. And if demand for one particular model should spike, the plant is flexible enough that it can be retooled to produce any vehicle in the Skoda line. At each stage in the production process, teams of eight to 12 workers go through their tasks under the guidance of a leader who is elected by the team and whose ultimate responsibility is simple: to ensure 100% quality in the work they're doing. To promote flexibility and to reduce repetitive stress injuries, all the team members are cross-trained. The factory tour completed, Urban has led his small entourage outside into the bright sunlight. "Yes," he says, smiling, "things have improved, but what has really improved is that Skoda can expand. We can invest a lot in our future. But nothing is falling from the sky. We earned it by our own hard work." Urban gives a brief glance over his shoulder as a new Octavia, having successfully negotiated the plant's test track, pulls back into the assembly hall with a clean bill of health. Maybe it's destined for Germany, where the company is stealing market share from its Wolfsburg-made cousins. Or for Spain, where it's competing successfully with Spanish-built siblings from the VW group. Or maybe that particular car is headed for the UK, where so many jokes have been made about Skoda over the years. "Am I proud?" says Urban softly as he looks back at his visitor. "It's my job. Of course I am proud."