The Smart Car Stalls
DaimlerChrysler Promotes Tiny Car as Next Big Thing, But Buying Won't Be Easy
By STEPHEN POWER
Staff Reporter of THE WALL STREET JOURNAL
January 11, 2005; Page B1
It has appeared on "60 Minutes," spent time in New York's Museum of Modern Art and caused a stir on eBay. The tiny Smart car has barely touched down in the U.S., but it's already turning heads here.
Normally, that would bode well for the company, Smart GmbH, a unit of DaimlerChrysler AG's Mercedes Car Group, and its plans to turn the brand into the next big automotive hit among America's hip and trendy.
But Smart is having problems shifting out of first gear. Its two-seat model, called the ForTwo, has been buzzing around European cities and intriguing American tourists there for years.
But over here it doesn't meet U.S. environmental regulations, and the company says modifying it requires a costly redesign. Plus, after six years on the market in Europe, the car isn't making money, leading to speculation -- denied by the company -- that DaimlerChrysler might sell or close the unit.
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This week DaimlerChrysler is formally introducing the Smart brand to U.S. consumers at the North American International Auto Show in Detroit, with an eye toward launching a different Smart vehicle -- a sport-utility model called the ForMore. Those plans, however, have hit a snag. DaimlerChrysler decided last month not to show the SUV at the show because the company says it's too early to display a vehicle that isn't scheduled to be sold until the second half of 2006.
The company seems to be giving itself wiggle room to postpone or even call off the launch. Despite a big presence at the Detroit show -- including giant TVs flashing the message "Smart is coming" -- the company's promotional materials include a disclaimer: "product planning and introduction dates are not currently finalized."
Executives also have made contradictory statements on the SUV's future. In one interview yesterday, Mercedes Car Group head Eckhard Cordes said the SUV and other Smart projects have been "put on hold." In a subsequent interview, he said "no new decision" has been made and the company's decision two years ago to bring the vehicle to the U.S. by next year is "still valid." A Smart spokesman says the company has asked some of its suppliers to postpone delivering components for the SUV. It will instead focus on less-costly development aspects, such as safety testing.
Still, it's the tiny ForTwo that DaimlerChrysler builds in Europe that is generating all the buzz here. It measures only about 8 feet long; three lined up are just a bit longer than a single Hummer. On highways, the car can get up to 60 miles on a gallon of gas, giving it the kind of eco-friendly cachet that has drawn celebrities like Tom Hanks and Cameron Diaz to the Toyota Motor Corp.'s hybrid-powered Prius.
DaimlerChrysler repeatedly has said it doesn't plan to sell the ForTwo here. But it's reconsidering that stance -- partly because an American company says it has figured out a cost-effective way to comply with federal regulations that require attaching an antipollution filter to the car's gas tank. The company, ZAP of Santa Rosa, Calif., plans to start selling the ForTwo in the spring through independent dealers, starting at $15,000, about half the price of a Prius. ZAP gets the cars through middlemen who purchase the car in Europe in a process that's known as the "grey market."
Smart ForTwo cars (above); a rendering of an SUV version.
Lifted by buzz around the brand, ZAP says it has about $5 million in orders from car dealers and a letter from the Environmental Protection Agency clearing the way for the car to be sold in the U.S. ZAP Chief Executive Steve Schneider says there's a market among people who want cars that stand out on the road. "You buy that car to be noticed," he says.
How did ZAP get regulatory approval? Mr. Schneider says the company did "some re-engineering" of the cars and used technology for which the firm paid $10 million. He won't identify the technology for proprietary reasons. The EPA didn't respond to calls seeking comment.
Smart spokesman Heinz Gottwick says the company is closely watching what ZAP is doing. "We really want to see what the import guys have managed to do," he says, adding, "Our engineers tell us, 'we don't know the solution.' " The environmental regulation probably wouldn't be a problem for the SUV since it's designed specifically for sale in the U.S. while the ForTwo is the European version.
ZAP's efforts upset DaimlerChrysler officials, who fear Smart's image will be marred if customers buy two-seaters through ZAP and then find they can't get the cars serviced at DaimlerChrysler dealers. "We're not very happy" about the plans, says Mr. Gottwick. But "at the end of the day, if they get [regulatory permission] to bring them in, what can we do?"
The flap over efforts to bring the ForTwo to the U.S. obscures a bigger problem facing the Smart brand: After more than six years on the European market, it has yet to turn a profit. In 2004, Smart sold fewer than 160,000 cars world-wide, well below the 200,000 to 225,000 level that most industry analysts believe it needs to break even.
Reviving Smart is critical for DaimlerChrysler's Mercedes division, which accounts for more than half of the parent company's operating profit in 2003 but has seen its earnings slide recently. While DaimlerChrysler won't disclose Smart's losses, they are significant enough that DaimlerChrysler's outgoing chief financial officer, Manfred Gentz, suggested in a conference call last fall that the company was considering selling or closing the unit. DaimlerChrysler officials have denied such intentions and say they are counting on Smart to lure a younger demographic.
Some analysts see the brand's survival as increasingly dependent on how many ForMores it can sell in the U.S. "It may not be a big event for the U.S. market, but it could be the decisive few thousand units that get them over the water line," says Christoph Stürmer, a senior automotive analyst at the forecasting firm Global Insight in Frankfurt, Germany.
ZAP also has much at stake in selling Smart vehicles. The company, founded as a seller of electric bikes and scooters, has been profitable only once in 10 years and filed for bankruptcy in 2002, though it has diversified into other products and now has more than $20 million in assets, Mr. Schneider says.
Fashion is part of the Smart look -- two-tone exteriors and scratch-proof body panels that can be swapped out to change the car's color. While Smart officials haven't released many details about the SUV's features, they say it will use a Mercedes-Benz engine, have two rows of seats and some cargo space.
DaimlerChrysler's strategy for marketing Smart in America is complicated by the fact that it is generating much of its publicity not through the SUV, but from the smaller ForTwo.
Its promotional effort includes a partnership with Target Corp. in which the smaller car is painted with the retailer's red-and-white bull's-eye logo and displayed outside Target-sponsored events such as the L.A. Film Festival and the Golden Globe awards. The ForTwo is also scheduled to appear this year in the remake of "The Pink Panther," with Steve Martin as Inspector Clouseau. In 2002, a ForTwo was part of an automotive design exhibit at the Museum of Modern Art in New York.
Fleets of ForTwos also served as the official cars of the Boston and New York marathons last year, and will do so again this year. Last summer, the car caught the eye of CBS commentator Andy Rooney. In a piece for "60 Minutes," he drove around New York with a ForTwo loaned to him by DaimlerChrysler, squeezing into the tightest parking spaces, while New Yorkers gawked.
Such enthusiasm helps explain why some entrepreneurs see a lucrative business in the ForTwo. In December, ZAP, the California company, posted a 2003 ForTwo on eBay. Within two days the price climbed to $27,100. EBay halted the auction because the car had not been modified to make it legal for the owner to drive on U.S. roads. The auction is expected to restart after the modifications are completed.
Persuading Americans that the ForTwo is suitable on U.S. highways will be key to how well it sells here. Unlike the Mini, which is made by BMW AG, Smart cars aren't very peppy; the ForTwo has a top speed of about 84 miles per hour. But the car has done well in European safety tests thanks to a rigid frame, reinforced with steel that absorbs much of the impact in a crash.
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