FRANKFURT (Bloomberg) -- Volkswagen Group will build a Seat SUV at a plant run by Czech brand Skoda, using lower labor costs to accelerate a turnaround at its only unprofitable division.
"There was capacity available in Kvasiny [Skoda's Czech plant] and we're glad we can use it. It's a very cost-efficient factory," Jurgen Stackmann, Seat's CEO, said.
The decision confirms a report from Automotive News Europe sister publication Automobilwoche in March that quoted company sources as saying the SUV would be built in Kvasiny.
Seat plans to add the compact SUV to its lineup in 2016 to tap growth in a market segment the division estimates has increased more than 40 percent in the last five years in Europe. "It's an extremely important step for us to be present in the compact SUV segment," Stackmann said.
With the SUV design complete, the unit is now focusing on engineering preparations for production in the north-central Czech town of Kvasiny, where Skoda builds its Yeti compact SUV.
"Next to labor costs, capacity utilization is a significant factor," Daniel Schwarz, an analyst at Commerzbank in Frankfurt, said. "Volkswagen's modular production technology gives it the flexibility to optimize capacity use more than at other carmakers. They can produce Audi models at Seat factories and now, it seems, Seat vehicles at Skoda."
Expanding sales across Europe and abroad is vital to restoring Seat's earnings. The carmaker, which hasn't been profitable since 2007, narrowed its annual loss to 152 million euros ($207 million) in 2013 from 156 million euros a year earlier as deliveries rose 11 percent to 355,000 cars, driven by demand in Germany and the UK.
The Kvasiny plant also builds Skoda's Superb sedan and station wagon, and the Roomster minivan. Labor costs in the Czech auto industry were 11.50 euros an hour in 2013, according to data from German industry association VDA. That compares with 26.66 euros in Spain and 48.40 euros in Germany.
A Skoda spokesman declined to comment on the number of jobs to be added in Kvasiny or provide an investment figure related to the Seat SUV.
The SUV is expected to be based on VW's MQB platform that underpins the Seat Leon, along with other group models such as the VW Golf, Audi A3 and Skoda Octavia.
Stackmann, who succeeded James Muir as head of Seat in May 2013, is betting on the revamped compact Leon vehicle line to increase sales further in 2014 and establish a second pillar for the marque in addition to the Ibiza subcompact. Seat added a Leon station wagon variant, dubbed the ST, at the end of 2013, and is rolling out a sporty Cupra version this quarter.
"We just added a third shift for production of the Leon family to keep up with rising demand," Stackmann said. "Customer response for the ST is exceeding expectations."
Seat also makes the Toledo sedan, the Altea compact minivan and the larger Alhambra minivan, and it's considering additional vehicles.
"It's important that our sales growth be sustainable," Stackmann said. "We're looking at both options -- developing more variants of existing models and bringing out new ones -- to broaden Seat's product line further."
The division is weighing whether to begin producing cars in China, the world's largest car market, in an expansion outside Europe. Seat is also planning to add to its presence in countries including Mexico, Turkey and Algeria to reduce dependence on western Europe, its main sales region. Even so, increasing Seat's presence in major European markets such as Germany, the UK and Spain will remain key for Seat's turnaround efforts.
The division estimates Europe's current SUV market at about 1 million vehicles annually.
"The brand is on a very good path, but a lot more hard work will be needed," Stackmann said.
Parent Volkswagen reiterated its support for Seat last month, dismissing doubts over the brand's future. "Spain and Seat are and remain cornerstones of our global growth strategy," VW CEO Martin Winterkorn said in a statement on May 22.
Automotive News Europe contributed to this report