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Bayerische Motoren Werke AG
When Daimler (DAI) introduced its tiny Smart two-seater in 1998, it was convinced that a high-end micro-car for crowded urban areas was an idea whose time had come. It had—just not for Daimler. Three years later, BMW (BMW) rolled out its own diminutive model, an update of Britain’s vintage Mini, which soon surpassed the Smart and evolved into a family of roomier small vehicles. In addition to losing control of an urban car market it helped create, Smart has racked up more than €4 billion ($5.3 billion) in losses, according to estimates by Sanford C. Bernstein analyst Max Warburton. “Smart had the wrong strategy,” says Ferdinand Dudenhoeffer, director of the Center for Automotive Research at Germany’s University of Duisburg-Essen. “The niche for two-seaters isn’t that big. They lost a lot of time while Mini systematically expanded its model portfolio.”
Until recently, Daimler has relied almost exclusively on Smart’s diminutive flagship model, the fortwo, to power sales. That’s kept the car’s size in the spotlight, requiring the brand’s marketers to continually reassure buyers that it’s a robust vehicle rather than simply trumpeting its fun-to-drive features. At the North American International Auto Show in Detroit in January, the Smart display showed a mockup of its steel frame to highlight the car’s overall safety; Mini’s display featured its new roadster, mounted on airborne roller coaster tracks, to trumpet the controlled thrill of its handling.
The fortwo’s design requires a lot of specialized engineering that has raised its cost and complexity compared with most small cars. The Smart starts at $12,490. The Hyundai Accent, which offers twice the passenger space, starts at $12,545. The Smart is “hugely complex for the price point,” with a semiautomatic gearbox, turbocharged engine, and electronic stability system, Warburton says. “It’s got the specs of a supercar, not cheap urban transport.”
Now Daimler, the parent of Mercedes-Benz, is preparing to enlarge Smart’s lineup. A battery-powered version and an electric-powered bicycle (two-wheelers remain a popular form of urban transport in parts of Germany) will be introduced this year, while a new generation of the fortwo model and a new four-seater—the product of cooperation with Renault—are due in 2014.
Daimler hopes the expanded Smart lineup will allow it to tap the growing market for city-savvy subcompacts, which IHS Automotive (IHS) forecasts to rise 29 percent by 2015. It also needs small vehicles to meet tighter environmental rules for car manufacturers and feed younger customers to its Mercedes brand, which in 2011 fell to No. 3 in luxury cars behind Volkswagen’s (VOW) Audi.
BMW’s Mini outsells Smart about three to one. The brand now earns about €200 million a year vs. annual losses at Smart of about €100 million, figures Jürgen Pieper, an analyst with Bankhaus Metzler in Frankfurt. BMW and Daimler don’t break out earnings of the brands.
Smart’s narrow product offering has kept it off the shopping list of would-be customers such as Christian Stiglmayr. The 47-year-old psychologist from Berlin bought a Mini convertible in September after also considering Fiat’s (F) new 500 hatchback. Smart didn’t make the cut because he needed a back seat for his two kids. “I wanted something sporty and nimble,” says Stiglmayr. “The Smart’s just too small.”
Mini, which is based in Oxford, England, will add a roadster and a coupe-like crossover this year, taking its lineup to seven models. It’s also expanding its John Cooper Works high-performance models, which offer larger engines and gear such as spoilers. Up to 10 design variations, both bigger and smaller than the current vehicles, are possible, says Kay Segler, Mini’s chief. “Mini is a brand and not just a model, like it was when it was first introduced in 1959” under the Austin and Morris nameplates, says Segler. “We’re the first premium car brand in the compact segment. That’s the main difference to our competitors.”
Mini had record sales of 285,060 last year, up 22 percent. Smart deliveries rose 4.6 percent, to 101,996 cars, 24 percent below its 2008 peak. The brand, which originally aimed for annual sales of 200,000 vehicles, isn’t expecting growth until new models arrive in two years.
Ahead of the expansion, the Smart brand is focusing on becoming better known. It’s conducting product tours in such cities as Los Angeles, San Francisco, and Portland, Ore., and sponsors beach volleyball to encourage test drives. Daimler is also tightening Smart’s relationship with Mercedes by selling the cars at the luxury brand’s dealerships—a change from the past, when the brands were intentionally separated. The shift draws younger clients to Mercedes outlets and helps dispel safety concerns about the tiny Smart. “[It’s] a win-win situation for both,” says Annette Winkler, Smart’s chief executive officer. “There’s a link for the customer, that Mercedes is behind Smart. They immediately know we offer a very safe car, without further explanations.”
Smart also expects a boost as Daimler’s Car2go car-sharing business expands. The unit, which already offers per-minute one-way rentals of Smart vehicles in Austin, Tex., plans to expand to more than 10 cities in North America and more than 40 in Europe by 2016. And Smart officials are eyeing variants beyond the basic two- and four-seater models. Says Winkler: “The demand for urban mobility solutions is stronger than ever, and that turns out to be very positive for Smart.”
The bottom line: Daimler’s Smart car has been hurt by concerns over sturdiness and limited product line. BMW’s larger Mini outsells it three to one.