Smart car: Is it the next Saturn?

smart_nissan_car_front.top.jpgA sketch from Smart USA and Nissan of a car they may develop for the U.S. market. By Alex Taylor III, senior editor at large


FORTUNE -- The news about Smart cars last week was another reminder that when automakers stray from industry practice, they do so at their peril. Sometimes conventional wisdom is the wisest way.

Faced with sinking sales of the original Smart two-door, Roger Penske, the car's U.S. distributor, made a deal with Nissan to provide him with a small car that he can rebrand as a Smart.

It was the most significant statement to date about Penske's unhappiness with Smart, as well as the speed at which Smart's corporate bosses at Daimler are moving to reverse its decline.

It also represents a further retreat from Smart's initial ambitions to revolutionize small car production. More and more Smart is looking like Daimler's version of Saturn's story: The initial reason for its existence will have to be destroyed order to save it.

Smart was the brainchild of Nicolas Hayek, CEO of Swatch watch in the 1980s. Hayek wanted to apply the manufacturing strategies of the Swatch to the car business. After developing the concept, he struck a deal with Daimler to build the car and put up half the capital. By the time the car launched in 1998, Daimler owned the company and designed the car, and Hayek was out.

The tiny, turnip-shaped cars were an immediate hit in Europe, especially in cities where drivers could squeeze them into small parking spaces. But the euphoria didn't produce any profits. Daimler couldn't charge enough for the cars to compensate for the specialized engineering and low volume and lost more than $5 billion on Smart in a four-year period.

Gradually, Smart's independent operations were taken over by Daimler's parent company in 2006, and Smart became a division of Mercedes-Benz passenger cars. Despite Smart's setbacks, dealership mogul Penske was attracted to the brand, and in January 2008, he began distributing Smart cars in the U.S.

The cute-looking two-seaters enjoyed an initial boost of popularity when gasoline prices were high, and sales totaled 24,622 the first year. But the early enthusiasm cooled when customers discovered that the made-in-Europe Smart was relatively expensive at a starting price of $13,990 and wasn't much fun to drive. Smarts tended to blow around on the highway, and the automated manual transmission produced jerky shifts.

Smart's abbreviated length of under nine feet -- three feet shorter than a Mini -- also didn't provide much of a parking advantage in the U.S., where, unlike Europe, leaving cars on sidewalks is frowned upon.

And despite their tiny size, Smarts aren't that fuel efficient. The Smart is rated at 33 mpg city/41 mpg highway, while the Honda Fit, which is nearly four-and-a-half feet longer and carries four passengers, gets 27 mpg city/33 mpg highway.

Once the cute wore off, Smart sales plummeted. Only 422 were sold last-month. With his bullet-proof reputation for business acumen in danger of shattering, Penske scrambled to find a solution.

He found it at Nissan. Earlier, Nissan and its French partner Renault had agreed to share their small car with Smart for the 2013 model year. Penske decided he couldn't wait that long and made his own deal with Nissan. The Japanese automaker will provide a four-door hatchback to Smart based on a subcompact platform and it will go on sale a year from now.

Penske will invest more than $25 million to modify the Nissan vehicle so that it has the Smart brand look. The car won't make much money for him, but it will give his dealers a second product to sell.

History repeats itself

Smart's transformation from boutique manufacturer of purpose-built vehicles to the rebranding of cars developed by others follows the same road as General Motors' Saturn.

When the one-time manufacturer with its own plant in Spring Hill, Tenn. couldn't make it by itself, it turned to marketing cars developed by another GM affiliate, Opel. The scheme didn't work, and Saturn was closed as part of GM's bankruptcy.

Ironically, Penske had tried to take over Saturn but Nissan pulled out of a deal to supply him with cars. Smart's current U.S. sales boss Jill Lajdziak, is also well-versed in Saturn parallels, having run Saturn before its demise.

Saturn never made a dime for GM during its 20-year life and may have burned through as much as $15 billion. Although Smart no longer breaks out its financial results, it is unliky that it's ever been a single euro in the black.

Daimler needs Smart for now to help it meeting government standards for C02 emissions and fuel economy. But nobody associated with the brand can help but wonder whether Smart will be able to avoid Saturn's fate. To top of page

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