Despite Volkswagen Group's (NASDAQOTH:VLKAY) huge diesel emissions scandal causing people to treat the vehicles akin to the bubonic plague, the German automaker has a collection of brilliant brands. Volkswagen's umbrella covers brands such as Porsche, Lamborghini, Audi, and even Bugatti. And at a time when Volkswagen could use any kind of sales boost in the U.S., in addition to a miracle fix of its diesel emissions scandal, a fairly unheard-of Volkswagen brand could be an answer: Skoda. It might actually be the next brand to introduce an SUV in America.
It isn't rocket science
While entering a mature market such as the U.S., which is loaded with experienced and global automakers competing, is no simple decision, it might be the only option for Skoda as it looks to expand into new markets.
Skoda might be relatively unknown here in the States, but it celebrated its 110th anniversary of producing vehicles last year. It has been at least partly owned by parent company Volkswagen for a quarter century and is now a full subsidiary. In terms of vehicles, it's built its name in a similar fashion as Japanese automakers: focusing on high quality and functionality at an affordable price.
That formula worked extremely well in Europe before Skoda's success expanded into China, but now the automaker is looking for more, and North America is included in its search. While no decision has been made, it makes more sense now than in years past as Volkswagen brand vehicles are struggling amid the parent company's diesel emission woes.
"Skoda could be the cheapest solution" to VW Group's American problems, Ferdinand Dudenhoeffer, director of the Center for Automotive Research at the University of Duisburg-Essen, told the German business paper Handelsblatt.
Could it work?
While the decision to at least try and enter the U.S. market doesn't seem difficult, it would obviously be easier said than done. In fact, Skoda already made one attempt way back in the late 1950s, long before Volkswagen had fully acquired the company, but it pulled out of the market only a few years later, after failing to gain sales traction.
The financial incentive is very real, though. Consider that Skoda's operating profit rose more than 30% during the first quarter of 2016, compared to the prior year, and its margin jumped 170 basis points, from 7.6% to 9.3%. That means Skoda generated margins in excess of the parent VW brand, and on par with VW's premium Audi brand, which generates a significant chunk of the parent company's bottom-line profits. If Skoda could post similar margins in the U.S., it could be a big win for Volkswagen at a time when its mainstream brand is struggling.
There's no questioning that Skoda has potential in the U.S. on paper, but it certainly faces challenges. One of those challenges is something Japanese automakers also face: personality. Sure, Japanese brands and Skoda enjoy a reputation for high quality and functionality at reasonable prices, but these vehicles are often considered "boring'. Skoda will have to preemptively solve a boring personality issue before trying to make a splash in a highly competitive U.S. market.
Another challenge is that sales of SUVs are currently booming in the states. In fact, passenger cars accounted for only 41% of U.S. sales throughout 2016, which is down from 50% as recently as 2013. Unfortunately, Skoda generates a majority of its sales with passenger cars and is only now launching its first large SUV in Europe, dubbed the Kodiaq, next year.
Still, the possibility is real, and Skoda has filed several trademarks with the U.S. Patent and Trademark Office for the names of Superb sedan, Octavia hatchback, and Yeti small SUV -- so don't be surprised if you see Skoda selling an SUV at a dealership near you in the next few years.
Daniel Miller has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.