The Smart Car Failed In The US, Now It’s Betting On China

Created by a Swiss watch company
and a German automaker, the tiny Smart car was meant to be
a revolutionary new idea in urban mobility. But more than 20 years
after its creation, the Smart car is struggling. Its parent, the massive German
automaker Daimler, doesn’t report Smart’s finances, but analysts estimate
the brand is losing hundreds of millions of
dollars a year. Now, Smart has a new direction. It is going electric and
partnering with Chinese automaker, Geely. The hope is the deal
will help Smart slash its onerous labor costs and give it exposure
to the world’s largest auto market. Industry watchers say it might
be the best chance to save the Smart brand and let
it live up to its potential. The Smart car was the
result of a collaboration between Mercedes-Benz and Swatch, the
watch brand which helped revitalize the deeply troubled Swiss
timepiece industry in the 1980s. In 1989, Swatch
founder Nicolas Hayek had an idea for a very
small, very affordable and highly efficient vehicle, that was, in his
words, “big enough to hold two people and a case of beer.” The car was meant to appeal
to young urban buyers and had features suggestive of the bright,
colorful swatch watches Hayek helped to make so famous. For example, the car was supposed
to have swappable panels so drivers could customize
its look. At first, Hayek tried to partner
with Volkswagen, but that deal fell through and then
Hayek turned to Mercedes-Benz. Mercedes had been working on
similar concepts from micro cars since at least the 1970s. The first Smart model debuted in
1997 at the Frankfurt Auto Show and production started in 1998. The company began selling cars later
that year in nine European countries. In 2008, a dealer
group headed by mogul Roger Penske began selling the smart
car in the U.S. based on success the group had
seen selling the car in Europe. The thinking was that at least
some Americans would also want a fuel efficient car at
a relatively low price. We went back and we sell
these vehicles today, The United Auto Group in the UK. We’re looking at the fortwo as
really a very, very strong residual vehicle. Fuel economy is one, but residual
value and low cost of ownership and certainly urban friendly
will make a huge difference in this product
in this marketplace. It came at the right time. Fuel prices rose to record highs
in 2008 and the Great Recession struck just as the first cars
were making their way across the Atlantic. The timing of this. The Smart debuted in the U.S. in 2008. That was right about the time that
fuel prices were about to go haywire. Also, it was right about
the time that the economic downturn in the US. So the Smart
at the time seemed like a very shrewd, very relevant,
new brand and vehicle introduction in
the U.S.. Penske became the sole distributor
of the brand for several years before handing the
business off to Daimler. In 2011, sales fell
to 5,208 cars that year, down from 24,622 in 2008. There were larger industry
trends working against the car. As the U.S. emerged from the
recession and gas prices fell from record highs, U.S. consumers flocked to sport utility
vehicles and crossovers to an unprecedented degree. Consumers are a lot more
interested in crossover, SUV type vehicles right now, and
modern crossover SUVs have very, very little fuel
economy difference compared to comparable of sedan vehicles . People really like the ease of getting
in and out of a vehicle that sits up a little higher
and has a higher roof. You know, people really like having
a hatch that is inherently more practical than a sedan. All smaller cars started to struggle
in this new landscape, but the Smart car seemed
a particularly tough sell. The only model Smart
sold in the U.S. was the fortwo. As the name suggests,
it had just two seats and very little in the
way of trunk space. While this made it extremely
maneuverable and easy to park, these were big sacrifices customers didn’t
have to make buying a subcompact car from another
manufacturer with comparable fuel economy and a similar price. The Smart was really pretty unsuited
for the rest of the country. This is a car that
costs about the same as other compact cars. In the end, the
fuel economy ended up nearly not being much better at all
than other larger four-door compact cars. This was
a pretty out-of-step crop. It only had two seats, it was
perceived by many to be unsafe just because of its small size,
never mind what the marketing told them. And the car
was underpowered, it had this terrible transmission. It simply required way too
many sacrifices that the consumer from an American perspective,
far too little benefit. In early 2019, Smart said it
would pull out of the U.S. after years of
increasingly dismal sales. The brands sold just 1,276
units in the U.S. in 2018, down from a
mere 3,071 in 2017. Mercedes-Benz told CNBC it chose to
pull the Smart brand from North America for a number
of reasons, including a declining micro car market in the U.S. and Canada and high compliance costs
for a low volume model. The company will continue to
provide warranty and service support for the Smart models
sold in the U.S. In Europe, Smart cars have sold
in far higher numbers, but it still has not been enough
to make money for Daimler. The margins on small economy cars,
even chic, eco friendly ones, are as thin as blades of grass. It’s all about the sharing
of technology, the sharing, the things that, you know, you see
underneath, that you don’t see normally underneath the bodywork
things like engines, gearboxes, platform architecture. And 90,000 units is not very
much to drive that from, especially in the lowest price
category of the entire industry. At least one analyst who
follows Daimler estimates the brand loses about $500 million
on Smart per year. I mean, manufacturing cars is damn
difficult and it’s very, very hard to make money. So, you
know, the bigger the car is, normally the more money you make
you make with it and the smaller the car is, you
know, the price drops down. And when it comes to the size
of a Smart, it’s very, very hard at the selling price of,
you know, $12,000-$15,000, maybe $18,000 to really make money
with such a product. And we’ve seen that
over and over again. Smart’s particular trouble is that it
relies on high cost labor, say analysts. Up until 2019, all
Smart cars were manufactured at a purpose built factory Smartville
in Hambach France, near the French-German border. What Smart does have in its
favor is a strong brand message. The cars are innovative. They’re a fancy design,
a colorful design. So I would say in general they
have a good, you know, they have a good brand
image, good heritage. Saving on gas and reducing
carbon emissions is a powerful selling point for some
customers around the world. For example, in Daimler’s home
country of Germany, one-third of voters under the age of 30 voted
for the Green Party in European elections in 2019. Europe always had much
more focus on, you know, on clean mobility. The, you know, the rules are
much, much stricter for fuel economy in Europe. Everything’s much more CO2
based in Europe. And hence, the vehicle fleet is
also very, very different to the fleet in the U.S. And there
is China, which developed what are regarded as perhaps the world’s
most ambitious plans to promote electric vehicle adoption
around the world. Smart announced its 50/50 partnership
with Geely in 2019. One of China’s largest automakers,
Geely already owns Swedish carmaker Volvo and has spun
out Volvo’s Polestar performance sub-brand into a standalone
nameplate for fully electric, high-end vehicles. Like the high-end Polestar cars,
Daimler and Geely’s Smart cars will be fully electric and
will be manufactured in China. If it goes as planned,
cheaper Chinese manufacturing will help Smart lower its labor costs and
make money off its cheaper cars. The partnership will also give Smart
a chance to compete in the massive Chinese auto market, the
largest in the world. 28 million new automobiles sold
in China in 2018, and there are already more electric cars
in the country than in every other country combined. It really opens up the Chinese
market with 23-25 million units annually in a couple
of years time. By far the
largest market globally. We talk about tier one cities
with huge traffic, so a small, Smart car can really make sense. Such a massive potential appetite
for a small electric vehicle could finally give Smart the market
it needs to realize the goals of its inventor.

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