smart May Be Riding High in Canada but Sales Suffering in Europe
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smart Two-Seater to be Sold in U.S. by Californias ZAP
While a novelty in Canada, where DaimlerChryslers diminutive smart fortwo (lowercase intended) has been making tiny waves among the nations trendsetters since its September launch, Europeans havent been buying enough of the two-seat, rear-engine runabouts to make the brand profitable.
And thats after six years of sales, and an almost cult-like following in major European metropolitan centers such as London, Rome, Paris and Munich. Where parking is at a minimum and fuel costs make Americas two-dollar per gallon gasoline seem bargain basement low, the smart fortwo with its 72 mpg city and 91 mpg highway fuel economy rating makes sense.
smart added spice to the lineup with the addition of a stylish roadster in 2003 and the new forfour sedan in September, and for the most part sales are starting to escalate with October experiencing the brands best global sales results ever, with 15,200 units delivered for a 44 percent improvement compared to the same time last year. In total, smart has sold 113,400 cars this year, mostly in Europe, Japan, Taiwan and now Canada.
If sales continue to grow then profits should follow, but so far the brand has only been a drain on its parent, DaimlerChrysler. smart was to break even this year, yet the opposite has occurred and losses have grown deeper.
Making matters worse, DaimlerChryslers premier Mercedes-Benz brand is suffering losses as well, partly due to a significant new product launch throughout 2004 and improvements made in product quality. The positive spin is that this 30 percent loss should turn around once current owners trade in their old M-Bs for new ones, but sales have not been at record highs so future profits remain questionable. Also adding to the setback, is the euros strength against the U.S. dollar, which has been on a downward slide throughout this year.
What to do? While DaimlerChryslers almost retired CFO Manfred Gentz commented that DaimlerChrysler was “taking a hard look at the smart business”, during an October 28th interview, most analysts believe the brand will see stronger profits once its forfour arrives in North America in 2006, along with the formore mini sport utility which follows suit in all of its global markets. But still, Gentz, the DCX executive who was also instrumental in pushing for the automaker to stop funding Mitsubishi Motors Corp. earlier this year, was clear during his interview that eliminating the smart brand altogether was not out of the question, by adding, “We have to consider all possible alternatives”.
So why the sudden panic? Actually, the CFOs concerns about smart are no surprise to anyone, especially investor analysts. While DCX wont divide up smart financials specifically, analysts believe the microcar division has cost the automaker approximately $1 billion in initial investment and since its inception in 1998 has run up tab of over $2 billion in losses.
Obviously Gentz believes that the problem is critical, or he wouldnt have timed it so poorly. DaimlerChrysler is currently trying to drum up support from U.S. Mercedes-Benz dealers, readying them for the launch of the forfour and formore SUV in 2006.
According to a Detroit News report, new smart boss Ulrich Walker sent out a memo to his employees just after Gentz made his statement to assure their job security, stating that no plans had been made to sell off or shut down the division.
“Smart still isnt making money — thats true,” Walker said in his letter. “But its existence is not in question. Juergen Schrempp (DCX CEO) and Eckhard Cordes (Mercedes boss) made that clear to me yesterday.”
Walker considers the problems short term, attributing them to lackluster sales the brands home market of Germany, plus higher than average sales and marketing costs.
While this might be true, Walker is definitely under the gun to produce results. With a new breakeven line being drawn at year 2006, he has his work cut out for him. Therefore his statement to his employees read, “Its self-evident that we have to look at all possibilities to make Smart profitable”.
While DaimlerChrysler cannot currently afford to assist smart to the same level it aided Chrysler Group in recent years past, the success of the latter has those within the automaker bullish over the microcar divisions long-term potential. Chrysler Group, due to strong sales of its new 300 sedan, Dodge trucks and Durango SUV, and Jeep Liberty and Grand Cherokee, has been supporting Mercedes-Benz redevelopment as of late, an investment the German automaker feels certain will pay off in the long run. smart, however, is an unknown entity.
So why hasnt DaimlerChrysler offered its tiny fortwo city car here in the U.S.? Some market analysts believe it would be popular, at least as a novelty, over the short haul in trendy hotspots such as Florida and California. DCX has said the microcar isnt right for the U.S. market, and would rather wait until 2006 before launching its forfour and formore models.
But American consumers biting at the bit to get hold of the tiny fortwo may have the opportunity after all, at least those living in California. ZAP, a golden-state company, obtained regulatory clearance to sell the smart fortwo in the U.S., and has aspirations of finding good homes for up to 15,000 of the two-seaters.
In a statement, Alex Campbell, spokesman for the Santa Rosa, California-based distributor said, “You look at all the interest in hybrids and cars like the Mini Cooper, and we saw that there was a market here for these automobiles.”
Campbell may be right, and if he proves a business case for the fortwo in the U.S. he may cause DaimlerChrysler to reconsider its initial plan.
And it would seem that any incremental sales would help smart right now, especially if a third party such as ZAP is fronting the sales and marketing costs. While minicar sales seem like pure potential in the U.S. and Canada, the European small-car segment has been on a backward slide since 2001, dropping by about 500,000 units to approximately 3.8 million vehicles. Why the lack of interest? Its more about Europes love affair with new compact minivans, dubbed mini-MPVs across the Atlantic. Mazda is quite certain that well also fall for these fuel and space efficient people haulers, and therefore will be offering its 6-occupant Mazda5 next spring.
But smart has no such vehicle even on the drawing board, despite that a mini-MPV seemingly would be ideal for the economy brand. For the time being DCX is asking more of its European franchises to sell the smart brand, hopefully increasing visibility of the tiny cars and therefore improving sales.
Another solution would be to develop more new models under strategic partnership deals, such as the smart forfour/Mitsubishi Colt production facility in the Netherlands. This would lower development and production costs.
So whats the argument for keeping the DaimlerChrysler division? According to chief executive Jurgen Schrempp, the smart brand is necessary to expand the companys presence throughout Asia and other emerging markets. That philosophy sounds dangerously similar to the one that spurred on the companys relationship with Mitsubishi Motors despite heavy losses, but at least this time the German automaker will maintain 100 percent ownership of the smart brand, instead of having funds drained by a partner only 37.3 percent owned by DCX prior to Mitsubishis recent restructuring.
It is entirely possible that a new partner will emerge to assist smart into these emerging markets, and Schrempp seems will to look at all options. “Its self-evident that we have to look at all possibilities to make Smart profitable,” he added. While an ambiguous statement, it could hint at more than one might initially think.
For the time being, the smart fortwo is selling reasonably well in Canada and may do likewise in select U.S. jurisdictions under ZAP. While it wont be enough to stop the bleeding, the divisions recent successes should bolster confidence for its long-term outlook.
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