Coming to the land of Hummers, behemoth pickup trucks, and tractor pulls is a car just eight feet long, small enough for a New Yorker or San Franciscan to park nose-to-curb on a city street without necessarily drawing a ticket. DaimlerChrysler (DCX) will announce Wednesday that it will launch its Smart brand, famous overseas for the diminutive fortwo model, in the U.S. in 2008, and that Roger Penske's United Auto Group (UAG) will be the exclusive distributor. DaimlerChrysler Chief Executive Officer Dieter Zetsche, while not confirming United Auto Group as the distributor, says going outside the Mercedes-Benz and Chrysler distribution channels makes sense to keep costs down and target distribution. Zetsche, in an interview with BusinessWeek, said going through one of the company's existing dealer networks would not be desirable because it would result in Smart being sold too widely outside its target urban markets. "Cost was one aspect [of the decision]," said Zetsche. "But we want to keep the distribution to metro markets and not have multiple dealers in Nebraska, for example, to support," he said.
ROMAN CANDLE EFFECT? Smart has lost around $5 billion since it was launched in 1998 as a joint venture with watchmaker Swatch. But Zetsche, who has restructured the operation after the company ceased production of a coupe and scuttled plans for a small SUV, says the division will turn a small profit or at least break even in 2007. The U.S. launch of Smart, said Zetsche, is not required for the brand to make money. "It will add to the profitability," he said. Zetsche, since taking over as chairman last January, has been under pressure to fold Smart to focus resources on Mercedes-Benz and Chrysler. But, say company sources, contracts with Smart suppliers and retailers are so onerous and have so many years left on them that it would cost DaimlerChrysler billions to scuttle the brand. The cost of producing the current Smart fortwo runs about $17,000, according to industry sources. Zetsche says that the redesigned fortwo, which will hit Europe and the U.S. next year, has lower production costs.
Pricing of the 2007 fortwo hasn't been set yet. Some analysts, though, believe that while a small number of people would pay $20,000 for the car as a statement of design and fuel economy, it would have to be marketed at around $13,000 to sustain volumes in excess of 30,000 per year. "The Smart fortwo could be a Roman candle in the U.S., causing a sensation that gets everyone jacked up, but then hits a wall of demand after the first wave of cars gets sold if it's not priced sensibly," says marketing consultant Dennis Keene.
DESIGN STATEMENT. The car is is best known for being so small that European drivers often park nose-to-curb, also squeezing the five-foot wide vehicles into the sort of odd and improbably tight spaces that make U.S. tourists stop and stare. The current version contains an 800cc three-cylinder diesel engine that can hit speeds of 135 kilometers per hour and consumes 4.7 liters per 100 kilometers in city driving and 3.6 liters per 100 kilometers on highways.
That same version is now available in Canada, where more than 5,000 have been sold since late 2004. The U.S. will see a gasoline version of the car, and fuel economy hasn't been disclosed yet. DaimlerChrysler Canada prices the car at $16,500 (Canadian) to start for a base model and $19,500 for a loaded version. A convertible sells for as much as $22,500. A U.S. company, Santa Rosa (Calif.)-based Zap, has been selling Smart fortwos that have been adapted to meet U.S. safety and emission regulations for about $20,000.
Zap Chief Executive Officer Stephen Schneider says he has no doubt there is a strong market for the car. "I went to a national dealer meeting and could have taken orders for over 150,000 cars if I could get them," says Schneider. "It's a design icon, different than MINI, but still a design icon," Zetsche is closer to the demands of the U.S. market than his predecessor, Jürgen Schrempp, who gave way to Zetsche last January. Zetsche ran Chrysler Group from November, 2000, through last December, engineering a turnaround tied mostly to the success of new-vehicle designs.
TINY BUT TONY. Despite its lack of financial success, the car and brand, have become crowd pleasers. The fortwo has been recently featured in film as the car driven by Inspector Cluseau in the remake of The Pink Panther as well as in a chase scene in The DaVinci Code. When the company had plans to launch Smart in the U.S. this year, it showcased it at venues such as the Boston Marathon, where the fortwo was mobbed by curious onlookers. Losses and management changes at DaimlerChrysler delayed the decision to launch until now.
Smart originally planned to launch in the U.S. with a small SUV, called the forfour, believing the market for the tiny fortwo was too limited in the U.S's "size matters" car culture. But the recent emphasis on fuel economy and renewed interest in small cars tilted the company's enthusiasm toward selling the car in the U.S. The biggest obstacle to purchase, says marketing consultant Keene, is that some consumers will balk at driving a car so small in case they are in a crash with an SUV or much larger car. "I predict that a lot of young people will buy them as well as lots of urban businesses that want to make a design statement and stand out," he says. United Auto Group, headquartered in Bloomfield Hills, Mich., operates 294 retail automotive franchises, representing 40 different brands, and 27 collision-repair centers in 19 states plus Puerto Rico. A United Auto Group spokesperson had no comment.
Editor's note: A previous version of this story, based on an interview with DaimlerChrysler CEO Dieter Zetsche, said the Smart fortwo would be on sale in the U.S. in 2007. An official company press release later stated that the Smart would go on sale in U.S. in the first quarter of 2008.
Kiley is a senior correspondent in BusinessWeek's Detroit bureau
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