Monday, August 18, 2008

Daimler's Smart Car Hits Cruising Speed

Daimler's Smart Car Hits Cruising Speed

Stuttgart - For most of its 10-year history, Daimler's (DAI) Smart car division has had a reputation for making small cars that lose big money. In 2005 and 2006, Stuttgart-based Daimler recorded more than $3 billion in restructuring costs for the division that produced the diminutive two-seater. Frustrated execs at one point vowed to sell the division or kill the quirky vehicle if they couldn't fix the chronic money loser.

Turns out the Smart may simply have been ahead of its time. Suddenly, Smart sales are soaring, even in the U.S., where the brand has been available since January. Smart USA has sold more than 14,000 cars in the U.S.—about double what Daimler expected—and there is a yearlong waiting list. Worldwide, Smart sales are up 57% this year, to 81,300 vehicles, and Daimler has added shifts at its factory in Hambach, France. Daimler doesn't disclose results for Smart separately, but analysts expect operating earnings of about $75 million on sales of $1.5 billion. The 5% margin compares to about 8% for Mercedes cars as a whole.


Gas prices only provide a partial explanation for the Smart's surge. True, the Smart, with a three-cylinder engine and colorful plastic body panels, gets great mileage. At 41 mpg on the highway, the Smart is the most fuel-efficient nonhybrid gasoline car on American roads. A diesel version (not available in the U.S.) gets 71 mpg.

But Smart buyers aren't your average penny-pinchers. Many are affluent, design-conscious folks who have seen Smarts during trips to Europe and own at least one other car. To Daimler's surprise, only 5% of U.S. customers choose the $11,590 base model, instead ordering spiffier versions such as the $16,590 convertible. Though some drivers say the Smart feels like a mouse among elephants on the highway, Ron Moreau, a 74-year-old Williamsburg (Va.) resident, says his two Lexus models have hardly left the driveway since he bought a $16,800 Smart Passion in July. "You don't want to be picking your nose while you're driving the car, because everyone's looking," he says.

Along with BMW's Mini, the Smart is proof that Americans will buy premium-priced small cars. The big change isn't so much gas prices, but a shift in attitudes. Status-conscious buyers now fear that an SUV brands them as contributors to global warming who help prop up petro-dictators. Drivers these days ask themselves, "Do you need to consume two liters of gas to buy one liter of milk?" says Anders Sundt Jensen, head of the Smart brand at Daimler.

Making money on small cars, even expensive ones, remains a challenge. Smart's turnaround is the result not only of strong sales but also of cost-cutting, such as discontinuing a slow-selling four-door model. In the U.S., Daimler outsourced sales to mega-dealer Penske Automotive (PAG) to avoid the cost of a dealer network, so Smart USA has only 25 employees. Smart has spent less than $10 million on marketing, mostly on publicity-generating events such as a convoy to 50 cities where people could ogle and drive the cars.

Of course, there's a risk that Smart sales will fade as the novelty wears off. And competition is heating up. Outside the U.S., Toyota (TM) is poised to launch its stylish iQ, which is a foot longer and can seat three adults. Daimler, though, is betting that the two-seat Smart's upright profile, which puts drivers at eye level with full-sized cars, will give it an advantage over the lower-slung iQ. Says Marc-Rene Tonn, an analyst at bank M.M. Warburg in Hamburg: "The segment is growing fast enough that there's room for everybody."

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