Is Smart Still a Smart Idea for Mercedes, for the U.S.?
Date posted: 01-04-2005

Just weeks before Mercedes-Benz was to officially launch its Smart brand and unveil a prototype of its first vehicle for the all-important U.S. market, plans appeared to be in turmoil.

Earlier in the fall, Smart's U.S. general manager, Scott Keogh, absolutely, positively confirmed that the 2005 North American International Auto Show in Detroit in January would serve as the launching pad for Mercedes' newest brand. Further, it would be the stage for the worldwide debut of a thinly veiled prototype of Smart's first vehicle to be sold in the U.S., the Formore. Scheduled to go on sale in the second half of 2006, the vehicle would be the fourth model for the brand that has been selling in Europe since 1998.

In the weeks leading up to the big unveiling, word began to leak out of Germany that the Formore concept may not, after all, be shown in Detroit — too early with its launch just under two years away, one side was arguing. Not soon enough to lay groundwork for the brand, the other was insisting.

"I think Smart is a smart idea," says Susan Jacobs, auto analyst with New Jersey-based Jacobs and Associates. "Small vehicles with appealing styling — like the Mini — are going to be popular with young buyers. So if Mercedes can bring these vehicles in at an affordable price — $15,000 or less — it has an opportunity to capture the baby boom echo kids as they come into the market. Strategically, for Mercedes, having a foot at that end is smart."

On a macro level, however, Mercedes-Benz is reconsidering and rethinking more than just the launch of the brand and the unveiling of a concept in the U.S. It is reexamining all aspects of the money-losing Smart.

Smart was conceived in the 1990s by Mercedes-Benz in Europe as a vehicle to draw young, hip, urban drivers into Mercedes. It also was an experiment in how to manufacture and retail cars in an innovative manner. (Does Saturn ring a bell?)

In the beginning, in fact, the Swatch watch company was a partner in the venture, which generated the idea to sell the Smart cars in displays like Swatch watches are sold. Indeed, some Smart dealerships in Europe are glass towers that display the colorful Smarts on various levels, like watches.

But Smart has never delivered the sales Mercedes expected, nor has it ever earned a profit.

The original target of 300,000 sales a year has been scaled back to 155,000 in 2004. And the goal to make a profit has been pushed back two years to 2006, the year it is supposed to go on sale in the U.S.

The impact of Smart's losses is being felt companywide. In December, DaimlerChrysler's Mercedes Car Group shocked investors by reporting profits lower than its U.S. sister, the Chrysler Group, in the third quarter. DaimlerChrysler finance chief Manfred Gentz blamed the continued losses at Smart for the poor third-quarter earnings results and said all options would be considered when deciding the future of the brand. The company later denied it would shut down Smart.

Earlier in the fall, rumors swirled that French automaker PSA Peugeot-Citroëen was about to take the failing Smart off DaimlerChrysler's hands. DaimlerChrysler management quickly tried to squelch. Supposedly top management at Mercedes has assured the folks at Smart that it has no plans to dump the brand and, instead, has plans to grow it, including possibly selling it in China.

To complicate matters further, as Smart's U.S. staff names the 80 dealers it has appointed here to carry Smart and gears up for the 2006 launch of the Formore, a Northern California company has won approval from the Environmental Protection Agency to sell Smart's Fortwo two-seater microcar in the U.S.

Electrical vehicle maker, Zap, of Santa Rosa, Calif., claims it now has $2.9 million worth of orders for the two-seaters, the first of which was put on eBay. Zap does not buy Smarts through DaimlerChrysler but through a partnership with an individual who obtains the cars from dealers in Europe and imports them to the U.S., where they are modified to meet U.S. crash and emissions standards.

If plans proceed in the U.S. as originally conceived by Mercedes, Smart will have 80 dealers in about 50 of the nation's largest cities. The first vehicle will be the Formore, a small four-door, four-seat (thus the name) all-wheel-drive utility that is built in Brazil.

In addition to the two-seat Fortwo microcar, which is sold in neighboring Canada, Smart recently launched in Europe the Forfour. It has plans for larger, more powerful future generations of its various models by the end of the decade.

But like plans for the U.S., those plans could be in question