Case 9-1: smart fortwo: One Car for Narrow European Alleys. . . and for High U.S. Gasoline Prices
Mercedes-Benz would be a consistently profitable business, had it not been trying to fix its small car business. The Smart, its iconic, but troubled brand, has been in the red ever since its launch in 1998. In 2005, the Smart cost the company more than $2 billion in charges for job losses and cutbacks: In the process of restructuring to reduce Smartâ€™s fixed costs, the company had to cut 600 jobs in Germany and 100 in France.
However, things are looking up for the smart fortwo. Initially designed as a cute cobble-stone negotiator in crowded European alleys, the little car is planning to help U.S. consumers better negotiate the shrinking gasoline purchasing power of consumers in the land of SUVs. This is a story of market adaptation. Sort of.
The Story of Smart
In the world of joint ventures, the smart fortwo has a distinguished history. The smart fortwo was propelled to stardom in the mini-automobile category in the early 1990s, as a joint venture between Mercedes-Benz and Swatch. Daimler is the luxury automobile manufacturer that has created the Mercedes automobile, the worldwide standard for luxury on the road. Swatch is a creative and quirky company that makes Swatches, watches with colorful designs. The smart fortwo joint venture was created with the purpose of enhancing the Mercedes portfolio with an â€œultra-urbanâ€ automobile that negotiates well narrow European alleys, fits neatly on the sidewalk if the parking spaces are all taken, and otherwise makes the driver look good.
Though small, the smart fortwo protects its passengers well. It has a tridion safety shell, a hard shell that protects occupants in case of impact. It is also equipped with electronic stability control, which prevents it from flipping over, and antilock brakes. It has a high driving position to ensure the greatest visibility on the road. The design team focused on creating an energy efficient automobile using recyclable materials. Compared with the luxury Mercedes line, the smart fortwo is affordable: A two-seat, 9-foot-long smart fortwo costs about $11,000 for the bare model, reaching about $15,000 for convertibles. Its gas consumption is 40 miles per gallon, and it reaches 90 miles per hour on the highway. It seats two and is so small that two cars can fit in a traditional parking spot.
The smart fortwoâ€™s problem, however, is that its market performance has been poor. Although Smartâ€™s global sales have grown steadily since its launch thanks to the introduction of new models, it has consistently missed its targets. The company launched the forfour model to compete in the saturated, highly competitive compact-car segment, but it was quickly discovered that the new model hurt the brand, ultimately resulting in its withdrawal from the market. In a parallel development, the company also intended to build the formore, designed for the U.S. SUV market. However, after steep losses, coupled with additional problemsâ€”Mercedes had to recall 1.3 million vehicles, including its luxury E-Classâ€”the company reconsidered its strategy.
At first, Mercedes-Benz had considered eliminating Smart, but quickly determined that it had too much brand franchise and bailing out the brand was the best option from a shareholder point of view.
Its recovery plans included having Mercedes take over purchasing, sales, and service operations, and creating a better fit with the needs of European consumers. Smart has been testing several prototype models using alternative fuels, including an electric-powered Smart, a compressed natural gas version, and a hybrid model. Smartâ€™s proposition of being the â€œultimate urban solutionâ€ will be even more relevant now that more cities in Europe are looking to introduce congestion charging.
The U.S. Launch
The new fortwo model, launched in Europe in 2007, already complies with U.S. safety and emission standards, and plans are to introduce it in the U.S. in 2008. Smart is not completely without a presence in the U.S. already, however. A company called Zap (zero air pollution), which has no connection to DaimlerChrysler, already started importing the Smart starting in 2007, after working for 4 years to make the cars compliant with U.S. regulations.
The company decided on a distributor in the United States: Roger Penskeâ€™s United Automotive Group Inc., which will serve as the interface between dealers and Daimler, ordering cars for the U.S. market and distributing them to about 60 dealers affiliated and nonaffiliated with the chain.
In the United States, smart fortwo is targeted at younger buyers, urban residents, baby boomers, and retirees. In order to target younger buyers, Penske is following the example of Toyota Motor Corp. and BMW AG, both of which recently launched new small cars, the Scion and the Mini, respectively. Penske will use a largely Internet-based advertising model that will similarly target niche buyers, which include younger buyers and other trendsetting groups.
The company staged a 50-city road tour so people could drive the car and attracted 10,000 test drivers. More than 20,000 people have paid down $99 deposits for the cars through the UAG Reservation Program. The main question remains: How will these drivers share the road with Americaâ€™s large SUVs?
1. What strategies does Smart use in the European market? Is the automobile adapted to consumersâ€™ driving needs in Europe?
2. Why is the Smart not changing to adapt to the U.S. market, dominated by large trucks and sports utility vehicles? Will the lack of adaptation hurt sales in the United States?
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