Awaits consolidation process in ASEAN market

Guardian.co.uk, By Christiaan Hetzner

FRANKFURT, March 20 (Reuters) - Volkswagen AG's Czech brand Skoda said it has postponed its plans to enter the ASEAN market, which includes Malaysia, Thailand, Indonesia and the Philippines and has annual sales of about 1.8 million vehicles.

"We have put the issue aside for now in order to wait for a certain consolidation process. The market needs at least a year to correct itself before we can see which players remain in the game," Skoda Auto Chairman Reinhard Jung told Reuters ahead of his company's annual news conference, scheduled for Monday.

He said he had hoped to have made progress already in finding a local partner with existing capacity where Skoda could assemble cars from knocked-down kits, but competitors pushing volumes "at any price" have made a market entry an "incalculable" risk for now.

Volkswagen said last week it believes the 10-member ASEAN region offers "enormous" growth potential and its board mandated management as early as 2004 to hold talks over a strategic alliance with Malaysian carmaker Proton.

Talks broke down in November 2007, however, leaving VW searching for an alternative.

Efforts are complicated by major differences between the markets, with Thais mainly buying pickups, while MPVs are popular in Indonesia. Import duties of up to 80 percent would allow sustained growth only through local assembly.

A production specialist, Jung said all international expansion projects already approved would be executed as planned, such as the full-scale manufacture of the Octavia model later this year in the Kaluga plant it shares with VW near Moscow.

Skoda needs to extend its production footprint because output is still concentrated in its three main factories in the Czech Republic, where the appreciation of the crown to a record high against the euro last year meant Skoda's operating profit in 2008 dropped by a fifth to 565 million euros ($774 million).

Later this month, Skoda and VW will celebrate the start of production at their new Pune site in India, which will eventually build 110,000 vehicles per year, including the Skoda Fabia, destined exclusively for the domestic market.

SALES DROP

Skoda has been a success story for Volkswagen, quadrupling its volumes since joining the group in 1991. Last year deliveries to customers rose 7.1 percent to 675,000 cars, thanks to strong growth in the Ukraine, Russia and China.

It remained the third-biggest earnings contributor in 2008 among Volkswagen's passenger car operations, and the margin was a very healthy 7.0 percent -- nearly twice as high as that of the VW brand and second only to the group's premium marque Audi.

Skoda also has a disproportionately high number of low-emission models and Jung expects to fulfil the upcoming, stringent EU regulations: "We will meet the 120 grams C02/km target by 2012 without a problem and even come out below it."

He hopes to win market share and grow absolute volume this year in certain markets, like China, where sales should rise by half to 90,000 cars, and to at least maintain levels in Russia. The increase in import duties in Ukraine could also later help Skoda sales there since it assembles cars locally via a partner.

Jung said Skoda could not offset a weaker western Europe, and as a result overall volumes at the brand would fall sharply.

"I hope that we don't lose more than 10 percent," he said, against the global market that is seen dropping by 20 percent.

This year's launch of its Yeti compact sports utility vehicle (SUV) in the summer should help.

"We were a bit sceptical whether we were on the right path with a compact SUV a year or so ago when larger models were trendy, but we're certain the Yeti fits better than ever in the SUV segment and are optimistic it will make a splash," he said.

Skoda, which built its first car over a century ago, is the Czech Republic's largest exporter.