Smart SUV Might Not Materialize
DaimlerChrysler may drop its SUV version of Europe’s popular Smart Car in favor of a two-seat model. That’s bad news for Zap, which is planning to sell the same car.
April 1, 2005
DaimlerChrysler, which had been planning to build an SUV version of Europe’s popular Smart Car for U.S. drivers, indicated Friday that it may offer a two-seat model instead.
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The company’s management discussed a new plan for the Smart Car division on Thursday and expects to submit it to DaimlerChrysler’s supervisory board by the end of April, the company said. The plan would include “intensified development” of a new version of the two-seater, called the ForTwo, to meet requirements for the U.S. market. The implication is that the company would offer the ForTwo instead of an SUV.
Americans have been clamoring for the fuel-efficient Smart Car since it came out in Europe in 1998, but have not been able to buy it because the ForTwo doesn’t meet American safety standards.
“The ForTwo was frankly not something we thought we would bring to the U.S.,” Mark Ramsey, product manager at Smart USA, said in February. He said the car was never intended for an American market, but the company was “pleasantly overwhelmed” by the response.
The cars are only about 8 feet long—3.5 feet shorter than a Mini Cooper—and 1,600 pounds, with Swatch-designed styling and a shape like a walnut. And they get mileage comparable to hybrids: 60 mpg for the gas version and 70 mpg for the diesel version.
DaimlerChrylser’s announcement could be bad news for Zap, a California company that has been planning to sell the ForTwo on its own. Zap, founded in 1994, has sold more than 85,000 electric vehicles in more than 60 countries, but has yet to make a profit. The company filed for bankruptcy two years ago after sales suffered from numerous knockoffs of its electric scooter. Its stock, ZAPZ, is now traded over-the-counter.
Zap then came up with a new strategy based on the Smart Car. The company imported 100 Smart Cars from European dealers and converted them to meet American safety standards. It plans to sell the ForTwo coupe and convertible models with both diesel and gas engines. The company expected to make a profit this year solely on Smart Car sales.
The road has been bumpy and this last obstacle—competition from DaimlerChrysler—could end Zap’s bid for success.
But Steven Kim, director of investor relations at Zap, is optimistic. The details of the new business model have not been fully worked out or approved, and Mr. Kim said he doesn’t think DaimlerChrysler will enter the market before 2007 or 2008. “We fully realize the fact that they may come into the market in 2007 or 2008, when they have newer versions out,” he said. “That gives us some time. And they did indicate in the press release that they are looking for strategic partnerships. We’re obviously hoping that we’re being considered.”
Online effort
Zap tried twice last year to launch the sale of Smart Cars on eBay. In May, the bidding went higher than $30,000, and in December, it breached $27,000. But both times, the car was pulled from eBay before the auction was completed. In May, the Smart Cars hadn’t yet received Environmental Protection Agency (EPA) approval. Zap got the approval in November, but the specific car it was selling in December hadn’t yet been converted.
Zap then unveiled the Americanized cars to the media in February, saying it had converted all 100 cars and would sell the first on eBay that month, with the rest being distributed to dealers across the country. The auction never materialized, and on March 6, the company told Red Herring that it had hired a new advertising agency, and had decided to hold off plans for eBay to go with “a more formal marketing launch.”
Despite Zap’s troubles, the company announced on March 22 that it had more than $200 million in purchase orders for the cars. Now this.
Zap in January acknowledged that competition from DaimlerChrysler was a possibility, but said it expected the car manufacturer to start with the SUV—called the ForMore—possibly adding the ForTwo a year or so later. Zap expects to profit from competition-free ForTwo sales, using the car to help build the Zap brand, and then moving to other cars if DaimlerChrysler eventually decides to sell the car in the United States. That strategy could work, but Zap has yet to sell a single Smart Car, and it appears its window for avoiding competition from DaimlerChrysler could be closing.
But Mr. Kim said to expect Zap to deliver its Americanized ForTwos any day now. The retrofitting process took longer than Zap expected, causing the delays, but the company is working out financing to buy more Smart Cars. Within the next two months, “we’ll start bringing over these cars and delivering by the hundreds,” he said.
Next year’s model
DaimlerChrysler previously said it plans to launch the Smart Car in the U.S. by 2006, and so far, DaimlerChrysler has not said whether the new model would postpone the launch. The company had originally said it was developing the ForMore for the U.S. launch. Mr. Ramsey had speculated that other vehicles, such as the ForTwo or the ForFour, might also be included, but DaimlerChrylser had never announced which current Smart Car models would be brought to the U.S.
If the new business model is approved, DaimlerChrysler will set a goal of making the Smart division financially sound and breaking even in 2007. Despite intense popularity, the Smart division has never made a profit, which Mr. Ramsey attributes to the high cost of launching and manufacturing five different models at once.
The new business model includes a “restructuring program,” which would result in a 30 percent reduction of fixed costs in two years, including layoffs. The company would also sell the three-cylinder gasoline engine in the ForTwo to other manufacturers, which will result in economies of scale that will lower its cost.
Aside from the ForTwo and ForMore plans, DaimlerChrysler intends for production of the Smart Roadster to halt at the end of the year, and it will continue cooperation with Mitsubishi Motors on the ForFour vehicle, taking steps to improve its profitability.
DaimlerChrysler said the exceptional expenses of the restructuring would equal €1.2 billion ($1.55 billion), which would reduce profits.
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