DETROIT — The Smart minicar brand will be profitable next year, setting the stage for its rollout in the U.S. market in first-quarter 2008, says DaimlerChrysler AG Chairman Dieter Zetsche.

“The time is right for Smart, and Smart is right for the market,” Zetsche says of the car that is only 8.2 ft. long.

The confirmation ends speculation that Smart, a money-loser since its debut in Europe in 1998, could be sold or discontinued under Zetsche, who last September assumed leadership of Mercedes Car Group (which oversees Smart). Zetsche took over as chairman of the DC board of management in January, while continuing to run Mercedes.

The U.S. market will receive the second generation of the diminutive Smart Fortwo that currently is on sale in Europe, Asia and Canada.

The first redo of the Fortwo, the car that launched the Smart brand, will debut in Europe in first-quarter 2007 and end its global rollout with the U.S., its 37th market, a year later.

Zetsche describes the pending Fortwo as “all-new,” but with enough carryover to make it “significantly” less costly to produce than the original. The lower breakeven point goes a long way to establishing a business case to sell a 2-seater expected to top out at $15,000, and which must absorb the added expense of currency exchange and shipping costs from a French assembly plant.

Distribution, which includes marketing, advertising and selecting the dealer body, falls to a third party: UnitedAuto Group Inc. dealership chain, of Bloomfield Hills, MI, and its chairman, Roger Penske.

Zetsche says the auto maker had three choices for distribution: Mercedes, Dodge or a third party.

It was deemed an awkward fit to pair entry-level Smart with luxury Mercedes, which is positioned even higher in the marketplace in the U.S. than it is in Europe.

In the case of Dodge, there was the risk of Smart becoming the fifth wheel; the Fortwo getting short shrift from sales staff handling a full Dodge lineup, including the all-new Caliber and Nitro.

Further complicating the decision is that Smart is a brand for urban areas and would be difficult to sell across a nationwide network. Mercedes — and Dodge even more so — have networks geared for large volume and higher-priced cars, with large overheads to support.

“We wanted a system more economical, more suited to this,” Zetsche says, adding the search for a third-party distributor delayed the decision to announce entry into the U.S. market.

While a number of candidates were considered for the distribution and marketing arm, Penske's outfit was the first choice, Zetsche says.

UAG is creating a wholly owned subsidiary to manage Smart in the U.S., responsible for purchasing the vehicles; importing them; arranging service transportation to dealers; choosing the dealer body; and setting up a master parts warehouse to ensure customer service capability.

The U.S. operation will be managed by CEO David Schembri, who was an executive at Mercedes-Benz USA when initial studies examined bringing the brand to the U.S. Schembri left Mercedes in 2005 for Mitsubishi Motors North America Inc., but departed Mitsubishi this year.

Penske says he expects 30 to 50 dealers to sell Smart initially. He does not say how large the dealer body may get, but says he wants to ensure the entry cost for dealers is reasonable and they can operate profitably.

The plan is to take the next 12-18 months to identify key markets and the best dealers. If the handpicked dealerships (customer service index scores will be among criteria) are not already part of the DC family, they must be standalone, Penske says. Dual-franchised dealers would need separate showrooms for Smart.

A nationwide, around-the-clock SOS technical helpline will be established for the security of buyers traveling in areas without a dealer presence, Penske says.

In March, DC announced the new business model for Smart is a return to its roots: the unique Fortwo that started the brand.

Expansion with the larger Forfour and a utility vehicle for the U.S. turned out to be a “journey that was not taking us anywhere,” Zetsche says.

Killing the Forfour and restructuring Smart resulted in a $1.3 billion charge in 2005.

Limiting the scope of the brand to one vehicle (the 2-door Fortwo available in two trim levels and a cabrio), is a profitable business model, Zetsche says.

The brand will start to earn money next year, he says.

The second-generation Fortwo will bow in the U.S. with all three versions.

All U.S. models will be powered by a new 64-hp engine, in naturally aspirated and turbocharged versions, supplied by Mitsubishi Motors Corp. It is expected to achieve about 40 mpg in combined city and highway driving.

That differs from the Canadian market, where the current Fortwo is available only with a diesel engine. The second-generation model will be offered with a choice of diesel or gasoline engine.

Penske says UAG already is exploring the addition of a diesel-powered Fortwo for the U.S. in the future, as well as studying the viability of a hybrid version.

Zetsche says the pending Fortwo was designed with the U.S. market in mind and meets all regulations and requirements, both safety and environmental.

Neither Zetsche nor Penske will provide anticipated volume for the U.S. but they take some confidence from the Canadian experience, where 2005 sales were forecast in the 1,500 range and ended the first full year on the market with 4,080 units sold.

With 915 sold in 2004 and 1,524 deliveries through May this year, Smart has sold a total of 6,519 units in Canada, according to Ward's data.

Globally, Smart has sold more than 750,000 units since its inception, Zetsche says.

The plant in France currently has capacity for 140,000 units, with the ability to increase that by 30%, Penske says.

Zetsche says there are no plans to build Smarts in the U.S.

Feedback from showing the Fortwo at the 2005 North American International Auto Show in Detroit confirmed the time was right to bring Smart to the U.S., Zetsche says.

What UnitedAuto Group Will Do for Smart:

  • Create a wholly owned subsidiary to manage the brand in the U.S.
  • Select the dealer body.
  • Purchase and import the vehicles.
  • Arranging service transportation to dealers.
  • Set up a master parts warehouse to ensure customer service capability.
  • Handle marketing and advertising.

From Smirks to Smarts

The idea of bringing Smart to the U.S. was met with smirks in 2000, but conditions have changed, making an urban car appealing, says DaimlerChrysler AG Chairman Dieter Zetsche.

He cites increased congestion in many cities; a shortage of parking spaces; and higher gasoline prices.

The business case, deliberately conservative, is not dependent on gas prices remaining high — but certainly benefits from current levels, with little reason to believe they will fall, he says.

In addition to high fuel economy, the tiny car has significantly lower emissions than most models on the market.

Adding Smarts will help Mercedes-Benz meet corporate average fuel economy (CAFE) requirements, Zetsche says.

Although equipped with many safety features, (including an array of airbags, antilock brakes and electronic stability control), and having performed well in crash testing, Penske says he knows there will be an educational process to convince consumers the tiny vehicles are safe.
By Alisa Priddle