Daimler Finds Being Tiny a Big Issue as It Expands Smart

In 1998, Daimler AG made a brash gamble based on a simple idea: that people in cramped cities wanted a cheap car so small that parking wouldn’t be a problem.

The two-passenger, two-door Smart car hit the market with a $9,150 price tag, measuring 98 inches long, 60 inches wide, and 61 inches high. Sixteen years later and after about 3 billion euros ($4.1 billion) in losses, according to estimates by Bankhaus Metzler, the German automaker figures the diminutive car has a problem -- it’s too small.

In July, Daimler will introduce an upgrade of its ForTwo model, which will be just as compact but about 4 inches wider, and roll out a four-door ForFour to try to reignite interest in the brand.

“The introduction of the new models is a very special and important moment,” Annette Winkler, who runs the brand, said in an e-mailed response to Bloomberg questions about the marque’s future. “Both vehicles stand for a new era at Smart.”

The ForFour is bigger, but not too big, because Daimler plans to challenge other minicars, such as the Fiat Spa’s 500, Volkswagen AG’s Up!, and General Motors Co.’s Opel Adam. The ForFour will be about 11.5 feet long, 10 inches compacter than the original Smart four-seater and about 2 inches shorter than the 500 and the Up!, the best-selling city car in Germany.

More Legroom

The new ForFour’s engine will be in the rear, shortening the hood and offering more legroom. The fewer inches and extra space could be a crucial advantage for Smart. As urban populations grow, global sales of small city cars are expected to increase 35 percent by 2020, to 6.2 million vehicles, according to research company IHS Automotive. Such vehicles have been most popular in Europe, where parking is even harder to come by than in U.S. cities.

“When I drive into the city, I don’t need to worry about searching for a parking space,” said Ralf Waitschies, a travel agent near Hamburg who’s driven Smarts since 2000. “There’s always a spot available.”

The new car is Daimler’s second attempt at a four-door model. A previous version of the ForFour, modeled on Mitsubishi Motors Corp.’s Colt hatchback as part of a joint venture with the Japanese automaker, arrived in 2004. It was pulled off the market in 2006 as Daimler reduced the brand to just the ForTwo. A roadster was halted in 2005, the same year Daimler canceled plans to build a sport-utility vehicle.

Last Chance

This time, Daimler is teaming with Renault SA to design and build the new Smarts (unlike the earlier version, the new four-passenger model looks more like the ForTwo). As much as 75 percent of the parts in the two- and four-seater, as well as in Renault’s Twingo, will be identical, cutting production costs.

The stakes are high for Daimler, according to Stefan Bratzel, director of the Center of Automotive Management at the University of Applied Sciences in Bergisch Gladbach, Germany.

“This is going to be Smart’s last chance,” said Bratzel, who previously worked as a marketing manager for the Daimler brand. “They’ve only got one shot at this and have to get it right this time.”

Broadening Smart’s appeal would support Daimler’s Mercedes-Benz brand, which lacks a mass-market complement that can feed it customers like Volkswagen for Audi and Toyota for Lexus. Increasing sales of Smart’s more-efficient small cars would also help Daimler sell more high-margin models such as the Mercedes S-Class sedan while still meeting tight environmental regulations. Smarts help lower Daimler’s average fleet emissions, which are based on all the cars a manufacturer sells.

Car2Go Drives

In addition to the tighter similarities between the ForTwo and ForFour, Smart has more street presence than the last time it tried to expand. Daimler’s car-sharing service Car2Go has expanded rapidly in the past few years and now operates a fleet of 11,000 ForTwos in 27 cities from Berlin to Milan to Seattle. The service, which offers one-way rentals in urban areas that essentially serve as paid test drives for Smart, targets 1 million customers by the end of 2014.

Any help is welcome for the brand, which never lived up to an original goal of delivering as many as 200,000 autos a year. Global sales, which peaked at 139,000 in 2008, fell to 98,200 last year.

Smart’s Winkler said the brand contributes “positively” to Daimler’s earnings and that profitability will improve. The Stuttgart, Germany-based company declined to comment on the marque’s past financial results.

While a full turnaround is still a work in progress, there’s optimism about the reboot of the brand. IHS predicts Smart deliveries will almost double to 182,900 next year.

“It will be quite a long way before they turn a profit,” said Juergen Pieper, a Frankfurt-based analyst with Bankhaus Metzler. “But expansion is the only way.”

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