MCI | Distinguished Guest Livetalk | Klaus Zellmer | CEO Škoda Auto a.s.

It's actually my honor to be here, talking to students who build our future. Thank you for the invitation. I'd like to introduce Škoda. I spent 23 years with Porsche, two years with Volkswagen, and now almost a year with Škoda. It's a truly fascinating brand. Škoda is 128 years old, one of the three oldest car companies. It started as a bicycle manufacturer by Laurin & Klement. A funny story: one founder bought a German bicycle that didn't work, complained in Czech, and the Germans replied that they don't speak Czech, so he decided to build his own bicycles. They built motorbikes and then cars. Today, we have the battery electric Enyaq, and two and a half weeks ago we showed journalists our future electric vehicles. We have three plants in the Czech Republic, 12 model lines, two plants in India, and we just sold our plants in Russia, which halved our profit in 2022. The car market is changing with the shift to electromobility, regulation like the 2035 ban on new ICE cars, and changing consumer behavior. Our strategy is our navigation system: we want to be the most attractive brand for contemporary explorers, top five in Europe by 2030, and the leading EU brand in India and ASEAN. We want to be desirable and accessible in mobility, not just selling cars but selling mobility. We need to improve our digital performance – Chinese consumers are 60% likely to change a brand for better digital. Our efficiency plus program aims for 10% return on sales. In Q1 we sold 200,000 cars, up 12.6%, turnover up 30%, profit up 60%. In Austria, Octavia is the best-selling car. Škoda is part of the Volkswagen brand volume group, and we share platforms for scale. For internationalization, India is key; we develop cars in India for India and produce them there – the bait must be liked by the fish, not the fisherman. We are setting up production in Vietnam and exporting from India. We have renewed our brand identity, integrating the hashtag into the logo, and we launched an emotional campaign video. Our electric lineup includes the Enyaq, a small entry EV, a Combi, and a space EV bigger than the Kodiaq. But we also need ICE cars because EVs don't pay for the transformation yet. We will continue to offer ICE cars until 2035, but it's up to consumers. We are working on battery systems; 95% of battery cells come from Asia, and we need European production for independence. ESG is important: we are reducing CO2 footprint 50% by end of decade, have 35% renewable energy in production, and our component factory is CO2 neutral. We are implementing circular economy. In closing, we offer the best of both worlds – ICE, hybrid, and BEV. Thank you.

I would say the biggest challenge for us conventional car manufacturers is speed. Speed to market. That affects costs and being there for consumers with the most recent products. For us to develop a car from scratch takes 52 months. Chinese manufacturers have cut that in half. With battery electric vehicles, the speed of innovation is high – battery technology changes quickly. If it takes 52 months, you miss three innovation cycles and risk hitting the market with an old battery. So it's speed. The bottleneck for speed is regulation, the lack of focus – for example, EU7 emissions regulation draft for 2025 doesn't even have technology to meet it. Europe needs to be careful: energy prices, subsidies, and enabling business. The US has the Inflation Reduction Act with $385 billion to attract investment. Europe woke up late and is still discussing a green deal industrial plan. If you are too slow, you are too expensive and late with the right product.

Our challenge here is a good point. We have an order bank so big that our production capacity, even 24/7, is not fast enough. But we have just made an adjustment. The supply chain is more stable now, driven by the COVID side effects mainly – semiconductor shortages. We are catching up. Now we are less than 12 months, not 18. That number was right a couple of weeks ago, now 12 months. We are working continuously to be faster. Volkswagen has the same suppliers and challenges, they just had a smaller order bank.

The first one: is a car in future more like an iPhone on wheels? I take that. Absolutely yes. Why do companies like Google or Apple have an eye on cars? Because it's a cocoon with a consumer fully focused on driving – or in future being driven autonomously. That cocoon is an isolated business environment where you can generate turnover and profits. There's huge potential for artificial intelligence: if you allow us to share your location, we could offer you a deal at a McDonald's when you're nearby, or sell you autonomous drive mode for a trip. After sales could be huge. For example, Nespresso charges 80 euros per kilo of coffee because it's convenient and the consumer has the urge. Similarly, we can sell convenience and time. The margin on autonomous driving features is enormous. We can also monetize data and services. So, after sales will be super interesting for profit generation.

This is why car manufacturers are so keen on keeping control of what happens in the car. You know, we could just hand it over to Apple and say we don't need to carry it, and Mr. Zellmer knows about the potential risks behind our software company within the Volkswagen group. We need it because we need to stay on the steering wheel in this business environment going forward. Now after sales, why is it so important? Because when was the last time you took your electric lawnmower to its service or your fridge? When was the service last? When did you need parts for that? And now cars are a bit different from that, but we estimate the reduction of after sales potential in the service area is 30 to 50 percent per car. Now the profits for afterthoughts are huge. Some car companies and some dealerships don't make any money selling cars; they generate all their money from after sales. So we need to compensate for that part of our business, and this is part of our transformation. It's convenient, and it's George Clooney. We need to promote it. It'll be convenient. And Klaus Zellmer, right?

Yeah, it is a provocative question. Obviously I can't say yes to that, and I'm deeply convinced it's not a yes, because it's not the car manufacturers, it's human mankind who has decided on their free will and on their freedom to move to choose the method of getting around, which at a point of time was cars. Now we're changing that, maybe not fast enough, maybe it takes longer, but you can't say politicians and car manufacturers are the ones that have to make the change happen. At the end of the day, it's human mankind, it's consumers, it's customers for a certain price point, for their convenience, for their preference. We have to do that now. We all share that burden and that responsibility. I'm completely with that gentleman, but I wouldn't say you can blame one or the other. And you can't say if I blame one or the other, then I also would have to have the possibility to say you change it, you politician, you single car manufacturer, you change. You can't do it without eight billion people that live on the planet sharing the same climate. So we need to do it as human mankind, and we're working on that. As I said, many people say it's not fast enough, we're always open for proposals to accelerate. We're very aware of everything that has to be done. Now talking about the car industry being the biggest polluter, matter of fact, let's say CO2 is the driver for climate change, I think we all agree on that. Now the influence of the car industry on CO2 emission is six percent. So you reduce the six percent by half, okay, there's still a lot of other things that we need to do as well in terms of CO2 reduction, which is our heating systems at home, the industry, there's so many fields that we need to tackle. I'm not saying we shouldn't tackle them, I'm not saying we're hiding away from our responsibility, I'm just saying it's not as easy as this provocative question suggested.

Yeah, I mean the first half of the question: will it have a dramatic effect on our future? Absolutely, 100% yes. You don't need to find a parking space even if it's your own vehicle, you leave the vehicle, the car finds its spot somewhere, and through your Apple Watch you say 'Hey, I need you in five minutes,' it's gonna pop up in front of your store and you're gonna hop in and drive off. And also logistics, like factories, we have many people who have to from the final assembly line of a car you have to drive it somewhere, put it on a truck, etc. That can all be done automatically. But those cars, they're going to move around with hopefully not with their own will but with their own program. So it's going to have a dramatic effect also on ownership. But will people refrain from owning a car? No, I think it's still potentially even more your private space, your space where your sunglasses are, where your luggage is, where you put your coffee cup, and so on. So I think there is space for private ownership, but it will be limited or less because the convenience of a car that you hop into and get out is so big that of course public transport will change. People will enjoy that cocoon given at a reasonable price. You could have exactly the same effect today if you just take a taxi everywhere you go, but that gets a little expensive. Other than that, it's fine. I lived in America for a while, I only ever got around with Uber, which was reasonably priced, very convenient, didn't have to talk to the driver, didn't have to explain where I want to go, no shortcut issues. Completely easy. I got out of the car, I loved the fact that he gave me a sweet or chewing gum and put water in the car, he got five stars and he was happy too, he got a big tip. You could do that today as well, but not everybody is doing it. So I think there's a big effect, but it's not black or white.

I think it's the opposite. I think if you want to survive, you have to have a strong brand. You know, we could all be sitting here in white trousers and white t-shirts and white shoes, but we don't want to be the same. We want to have a certain freedom to choose what I identify myself with. I want to show my personality with my individual expression, not a uniform expression that we only see with soldiers. So I'm deeply convinced that there is the opportunity to have an individual choice, and people who request individuality. But if you don't have a strong brand that expresses something or provides something that you identify with, then that is a problem, then you're going to be reduced to a commodity. Which is, I always like the example of public transport buses. I mean, all of us use those, I could never tell you what brand it was, was it MAN or Scania? No idea, I don't care. I often don't even look at aircrafts, is it an Airbus or a Boeing? Unless it's a 747, then you know that's very unique. But then you're a commodity. Now in order to survive as somebody who provides commodity, you need to have perfect quality and lowest cost, which none of the currently existing brands have. This is why you have to add some emotional motives to survive in this market going forward, and this is why brands are more important in the future. But there will be other parts of the business where brands do not play a role, but this is for people who just rationally want to get from A to B, like with public transport today.

Never say never. But seriously, we currently do not have a concrete plan since you do not know how that cookie crumbles. We do not know how the whole Russian development will end. So we have not signed the possibility in our sales contract that we can acquire our assets back in, let's say, five years, because the problem is once you have left your factory behind, in a year or two years time we want to get back in there and produce cars, everything is old, the software is not up to date, the infrastructure is not up to date. And the other thing, why did we sell it? We could just have kept it and left it, but the Russian legislation dictates that you pay the people employed in that factory even during war times. So for a year we were paying 4,000 people, which of course you can't do until eternity. So the minute you realize this is not coming to an end soon, you have to drop it, and we dropped it. And of course someday we might be able to import cars, Skodas, because the brand is established and loved in Russia, but it will be an import that we would start with. Will we ever produce cars there? I don't know.

Yeah, very good question. Seat, of course, as we all know, is the bigger umbrella where Cupra is underneath. Now Cupra is in the future probably showing best how we differentiate between Skoda and Cupra. If you take a Cupra Formentor, if you take the Cupra Born, or if you take the Tavascan that you might have seen, it's more edgy, it's more aggressive, it's more extroverted. We are more timeless, we're more quiet, less in terms of the design language, less loud, quieter. And that approaches different target groups. Now we're all on the same platform, and this provides scale, and scale provides cost advantages. So this is what we're trying to do. In the past, there was a lot of badge engineering, so you basically took the body and the platform and changed the bumpers front and back and the logo. Now this is not what we want to do going forward. What we want to do going forward is to put our fishing rod not in the same pond at the same spot, but into different ponds. We want to incrementally grow the business and concentrate on external competition and not substitute internally. This is what we're trying to do. This is why we have defined different target groups for us with the modern solid design language. We're catering for a different target group than what Cupra for example does with approaching younger target groups. And if I look at Cupra, average age of new car buyers, they're very successful there, they're much younger people buying Cupra than Volkswagen or Skoda, which is great.

Yeah, if I get your question right, what are we going to do to decrease our dependency on Asia? Is that okay? Now, there is currently a competition going on between certain central European countries for the allocation and investment of about 4 billion Euro to build a so-called gigafactory. The gigafactory is a cell factory, so the actual cells are being produced there. What I showed was the battery system, so the cells come to Mlada Boleslav, we put them into a battery system and put that into a car. The cells to produce them in Europe, the main cost driver is not personnel cost, interestingly enough, because this is a typical high cost driver. It's electricity cost. I can give you, because we're currently applying to get that gigafactory invested by Volkswagen group in the Czech Republic, and we're heavily involved in that. The final output of that gigafactory with a disadvantage of one cent per kilowatt hour electricity cost puts you in a disadvantage from a cost point of view of 50 million euro a year. In other words, if you have electricity that you use to build battery cells in China, currently six to seven cents per kilowatt hour, and we have the same here in Europe in the Czech Republic, if you get a very good price it's 16 cents, it's a 10 cent difference, which puts you at a minus 500 million a year when you start producing the first battery cells. And that's the challenge. Now the EU has realized that that is a disadvantage, they have realized that this might drive investment into other parts of this world, and they have set up partly for that the Green Deal Industrial Plan. And I told you about where we stand there: we're too slow. It's too slow for industries that have to make those decisions. And as a company, of course you want to invest where the production facilities are because the CO2 footprint increases massively if you produce battery cells in China or in North America and bring them over to Europe. That's ridiculous to do that. That's why you have to produce them here, but in order to produce them we have to have something that puts you in a competitive environment, and this is the big challenge. But we're fighting for that.

Yeah, that's almost a religious question. Because this is where the beliefs drift apart. You might have seen recently Mercedes announced that they will stick together with Google and Apple to let them use data from the car to then have the software stack and the IT infrastructure to explore and exploit those potentials, while General Motors just announced that they will not allow any Apple CarPlay in the cars anymore because they want everybody to use everything General Motors provides. And that's why I'm calling it almost a religious question: what do we believe in? Now how do we prevent people who use Apple CarPlay from us using the business potentials? It's actually quite simple: we wouldn't allow those companies to deeply go into our functions of the car which would then influence braking, safety, state of charge of the battery, stuff like that. Now when we talk about autonomous drive as a function on demand that I can sign up for, this is core of our business, and we are the ones who have to make sure that this is safe. So you have to limit the access of external players to that. And I think the biggest potential in future for cars is of course this intelligence data driving business, but it actually functions on demand that you can then release for customers in the car if they pay.

I was in a management conference conducted by Dr. Diess for VW group top managers in Igls in Austria, and we had Elon Musk in our management conference, and he asked him exactly that question: what car manufacturer will survive the disruption that is currently happening in transforming the industry? And Elon Musk said: 'How many horse carriage producers are now car producers?' How long is that ago? That's two years ago. So how many companies producing horse carriages are now selling cars? Actually, if we dig deep, I'm sure we will find the roots of some car companies in that, but this is a sentiment that provokes. Now the question was also: have we been too slow, have we missed the train? I think you can always look down on somebody and say 'Hey, you failed.' You have to see that a greenfield approach, and this is the benefit of startups, this was also the benefit of Tesla, and I have all respect for Tesla, I'm not saying I don't have respect, but it's easier. A greenfield is easier: you start from scratch with software, you start from scratch with everything. A car manufacturer today, we have Skoda, 45,000 people working for Skoda. You can't start on a greenfield. If you're responsible for 45,000 people, you have to start with what you have, and to change what you have into something that you want is a lot more demanding and complicated and slower. Now the big question is today, I think there's enough potential for us to use internal combustion engine technology to make money and then transform, but the challenge is huge and it's a difficult task. I don't know how many car manufacturers will survive or not, no idea. I hope we will survive, and I think we have a good plan, and I hope you saw that we're heading the right direction. We have a navigation system with a strategy. I think we're doing the right things. Big question again is speed: are we fast enough to then hit the market? If you look at BYD, you can read that in the Chinese party program that they released 10 years and 5 years ago that they will skip internal combustion engine development cycles for actually going straight into battery electric vehicles. You could read it, we read it, we knew they're going to go full steam into that direction, and they're doing so because they don't have... or they're more radical about that. BYD started off as a battery manufacturer, they have mines, so they have the rare earth, they know how to produce batteries, and then they started bringing that into cars, and they're doing a great job. We have respect for them. I think there's also similarities to the academic business. When we were starting off, we felt the burden. Now there is a university next to us with 5,000 employees, faculty, staff, administration, management. How in the world if you start off with one or five or 25 or 125 employees, how could you make a contribution which the other 5,000 are not doing? Then you step by step found out it's about agility, it's about innovation, it's about understanding a market, it's about whatever, and you do not perhaps have the asset yet, but you do not have the burdens on your shoulders. Absolutely.

Very, very interesting question. I asked myself that of course often. What is the difference? I think I would more talk... I was always two years, I was also two years board member for Volkswagen in Wolfsburg. Now, the sheer size of Volkswagen group and Volkswagen in Wolfsburg creates complexity that is very difficult to handle. Volkswagen has got 68 factories that produce cars, different models, hundreds of different models, and so the complexity is something that you do not have at Porsche and you do not have at Skoda, where it's easier to handle, it's easier to steer. It's almost like a speedboat versus a big cruise ship. And that environment of course requires a different management style. Now if I talk about similarities between Porsche and Skoda, many people say there's no similarity, one is upmarket, one is entry market. The spirit that I feel with the Skodians is very similar to Porsche, since 128 years generations of families working at Skoda, whole families, people meeting at Skoda, getting married, kids working there. The identification with that brand and with that company is huge, and identification creates motivation. And that's what I feel very much: there's a can-do attitude, they never give up on anything, they always find a way, sometimes find ways that are a little bit cheating, but okay, we got there. So there's this drive, agility and pragmatism. I feel that in both companies. Obviously the enthusiasm at Porsche is even bigger. I mean, I met Porsche employees, they had the Porsche gratitude tattooed on their arms, that's how far it goes. And this is a company that is still governed by its original family, by Wolfgang Porsche as the head of the supervisory board, and by Milpies and Hans-Peter Porsche and Oliver Porsche. When you have the chance as somebody working for Porsche to meet the generation following the founders, and their spirit, they're not only driven by profitability, they're driven by the spirit, by the dream that has come true from the grandfather that has built this. It creates a different atmosphere, a different motivation.

Yeah, we're really covering a broad spot here. Yes, I do. I'm deeply convinced that human touch in the customer interface provides value. And you know that direct sales that Tesla takes as an example, you can conduct your sale digitally, then you go somewhere, they drop a car, you sit in a car, you drive off. Great, reasonably impressed, very powerful cars. But there's something missing. And I'm deeply convinced that as human beings, we like a human touch. If any of you guys have ever lost their luggage and have to phone up a call center where you only end up in answering machines, you know the value of somebody who says 'I understood your problem, I'm going to take care of your problem within the next hour, I'm going to phone you, I'm going to tell you what exactly is going to happen, you'll love it.' And you'll be willing to pay for that. So this is why independent entrepreneurs and car dealerships will still be, from my point of view, very valuable in this whole chain until we actually sell the cars. Now the way they operate will change because with all the data business that we will have going forward, you need a direct connection between the consumer or your customer and the ones who govern the data, who handle the data. And that cannot be the dealer. The dealer will not handle individual data from cars; that will have to be done by the OEM. If it's done by the OEM, you have to have the possibility to use that data and provide services. So there has to be a direct link between the car, the consumer, and the one who governs the data. And this is why the legal relationship or connection has to be established between the OEM and the consumer. Currently we're talking about an agency system which combines all aspects: you have entrepreneurs, you have the personal touch, but you have a possibility to establish that connection directly to consumers. And many dealers find that deeply disturbing because you're taking away their entrepreneurial freedom, but this is the way we need to establish that connection, otherwise we will not be competitive.

Yeah, a good question. I was misleading here. Of course we will sell cars in South Africa and North Africa, mainly in North Africa, but we will not have the strategic lead. Volkswagen will have the strategic lead since they have substantial factory assets in South Africa, so they will govern that like we govern India and the ASEAN market. But of course we're ready to go there too, but with all the challenges that we all know about.

That's a difficult one. The closest in terms of my management time at Skoda is certainly the Russian business, to actually say 'yeah, we need to pull the plug' because you know that there's a... I mean those factories are worth a billion, and you write them off basically because selling them, we couldn't find somebody paying a billion. So that was a tough one, also because of the people. We had employees in Kaluga, 4,000 people and their families, so we also had to find an investor who signed the obligation to keep them and work with them for a certain period of time, which was very important for us as well. But that was probably a very difficult and big one because obviously you, when the question was very good that you asked, but just to do a little bit of waiting and then you have your assets and then you start off when the situation has calmed, but at a certain point of time you have to say we can't wait anymore.

Innovation: related to people. Performance: utmost importance. Europe: bureaucracy. Emotion: our biggest driver. Sustainability: hygienic factor. Work-life balance: [laughter] Next one: essential. The question is how you define work but essential. Yeah, there's no contradiction. Culture: defines us. Dreams: important energy. Constant fight: passion. Driver: India. Challenge: democracy. Overrated. Transformation: biggest challenge. Competition: I like it. Generation said: difficult to work with. China: Love and Hate. If you're old: necessary. Networks: more necessary. Climate: our task. Welfare state: what welfare state? Wildfire now at the social welfare state? Oh sorry. Essential for our civilization. Africa: hard not to crack. Technology: enabler. Climate supercluers: big risk. Germany: tradition. Freedom: I tend to say overrated. Family: underrated. Future: all ours.

I quickly have to explain why I say freedom is overrated, and I can't let you now go and think I'm a monarchist or a dictator or something. And democracy overrated. Life has become so complex, so complicated to take every individual's personal situation into account. It's probably a luxury we will not longer have. Now why do I say that? If you look at China, why is China where China is? Because they're ruthless, they're very straight, and they were driven and they're focused and they're very much based on execution. Is that the system I want to live in? No. Do we have to adapt some of that? Absolutely yes. And if we take climate change and the things we have to do now, I talk about Germany, it takes in Germany 20 years for the authorization process to build a railway. 20 years. Because everyone adjacent, or windmills, we've switched off our nuclear power plants, great, windmills, yeah we need them, but not in my front garden, I don't want to see them, and the poor birds. And this is where I say democracy and freedom, you can't just say what everybody wants to hear. It's an asset, it's our culture, we need to defend it. I think it has come to a point where for the greater good of everybody, we will have to give up some of the freedom that every individual can glue themselves to the street and say I have a statement to make here. That's what I'm saying. So I hope that comes across credible and believable.

I'm gonna wear it on LinkedIn. Cool, yeah.