Reference no: EM131283966

In the summer of 2006, DaimlerChrysler announced that the company's Smart car would be offered for sale in the United States the following year. Launched in Europe in 1998, the diminutive Smart had never turned a profit for its parent company. When Dieter Zetsche became DaimlerChrysler's CEO at the beginning of 2006, the Smart car issue was one of his top priorities. At the time of the announcement, the Smart saga had been 15 years in the making.

In 1991, Nicolas Hayek, chairman of Swatch, announced plans to develop a battery-powered "Swatch car" in conjunction with Volkswagen. At the time, Hayek said his goal was to build "an ecologically inoffensive, high-quality city car for two people" that would sell for about $6,400. The Swatchmobile concept was based on Hayek's conviction that consumers become emotionally attached to cars just as they do to watches. Like the Swatch, the Swatchmobile (officially named "Smart") was designed to be affordable, durable, and stylish. Early on, Hayek noted that safety would be another key selling point, declaring, "This car will have the crash security of a Mercedes." Composite exterior panels mounted on a cage-like body frame would allow owners to change colors by switching panels.

Further, Hayek envisioned a car that emitted almost no pollutants, thanks to its electric engine. The car would also offer gasoline-powered operation, using a highly efficient, miniaturized engine capable of achieving speeds of 80 miles per hour. Hayek predicted that worldwide sales would reach one million units, with the United States accounting for about half the market. In 1993, the alliance with Volkswagen was dissolved. In the spring of 1994, Hayek announced that he had lined up a new joint venture partner. The Mercedes-Benz unit of Daimler-Benz AG would invest 750 million Deutsche marks in a new factory in Hambach-Saargemuend, France.

In November 1998, after several months of production delays and repeated cost overruns, Hayek sold Swatch's remaining 19 percent stake in the venture, officially known as Micro Compact Car GmBH (MCC), to Mercedes. A spokesman indicated that Mercedes' refusal to pursue the hybrid gasoline/battery engine was the reason Swatch withdrew from the project. The decision by Mercedes executives to take full control of the venture was consistent with its strategy for leveraging its engineering skills and broadening the company's appeal beyond the luxury segment of the automobile market.

As Mercedes chairman Helmut Werner said, "With the new car, Mercedes wants to combine ecology, emotion, and intellect." Approximately 80 percent of the Smart's parts are components and modules engineered by and sourced from outside suppliers and subcontractors known as "system partners." The decision to locate the assembly plant in France disappointed German labor unions, but Mercedes executives expected to save 500 marks per car.

The reason: French workers are on the job 275 days per year, while German workers average only 242 days; also, overall labor costs are 40 percent lower in France than in Germany. MCC claims that at Smart Ville, as the factory is known, only 7.5 hours are required to complete a vehicle-25 percent less time than required by the world's best automakers. The first 3 hours of the process are performed by systems partners.

A Canadian company, Magna International, starts by welding the structural components, which are then painted by Eisenmann, a German company. Both operations are performed outside the central assembly hall; a conveyer then transports the body into the main hall. There, VDO, another German company, installs the instrument panel. At this point, modules and parts manufactured by Krupp-Hoesch, Bosch, Dynamit Nobel, and Ymos are delivered for assembly by MCC employees. To encourage integration of MCC employees and system partners and to underscore the need for quality, both groups share a common dining room overlooking the main assembly hall.

The Smart City Coupe officially went on sale in Europe in October 1998. In an effort to create a distinct brand identity, a separate dealer network was established for Smart. In retrospect, this decision turned out to be an expensive one. Sales got off to a slow start amid concerns about the vehicle's stability. That problem was solved with a sophisticated electronic package that monitors wheel slippage. Late-night TV comedians gave the odd-looking car no respect and referred to it as "a motorized ski boot" and "a backpack on wheels."

The sales picture was brightest in the United Kingdom; the brisk sales pace in Britain was especially noteworthy because MCC was only building left-hand drive models (the United Kingdom is the only country in Europe in which right-hand drive cars are the norm). Industry observers noted that Brits' affection for the Austin Mini, a tiny vehicle that first appeared in the 1960s, appeared to have been extended to the Smart. Despite this success, MCC reduced its annual sales target from 130,000 to 100,000. Robert Eaton, joint chairman of DaimlerChrysler, went on record as being skeptical of the vehicle's future. In an interview with Automotive News, he said, "It's possible we'll conclude that it's a good idea but one whose time simply hasn't come."

In 2000, amid growing interest in the brand, the Smart exceeded its revised sales target. Wolf-Garten GmbH & Company, a German gardening equipment company, initiated a program to convert the Smart to a lawn mower suitable for use on golf courses. Both convertible and diesel-engine editions were added to the product line. In 2001, executives at DaimlerChrysler initiated a program to research the U.S. market to determine prospects for the Smart. The

announcement came as Americans were facing steep increases in gasoline prices. Between 2001 and 2006, several other small cars in the $10,000 to $14,000 range were introduced in the U.S. market, including the Chevrolet Aveo (manufactured by Daewoo), the Toyota Yaris, and the Honda Fit. In addition, Toyota had successfully launched the Scion, and BMW's new Mini was also proving to be hugely popular with U.S. drivers. "The Smart brand is capable of sustainable profitability, and it will be profitable in 2007 and beyond. We are working on a cost basis that is almost 50 percent lower than it used to be. The production time at the Hambach plant in France and the assembly time for the new car are 20 percent shorter than with its predecessor."

Ulrich Walker, chairman and CEO, Daimler Northeast Asia, president and CEO, Smart One challenge in bringing the Smart across the Atlantic would be the euro's strength relative to the dollar. To further complicate matters, the DaimlerChrysler merger ended with the sale of Chrysler to a private equity group. Going forward, Smart would be under the ownership of Daimler AG. Moreover, distribution and promotion would be critical to a successful U.S. launch. Auto racing legend Roger Penske, chief executive of Penske Automotive Group, decided to gamble on the Smart. He snapped up the rights to serve as the sole U.S. distributor for the tiny car. Penske had assembled the second-largest auto retailing group in the United States by selling luxury cars and imports. The network included more than 300 franchised dealers in the United States and Europe. Penske's team set the goal of selling 16,000 Smart cars in the first year; as gasoline prices rose to $4 per gallon, the minicar's appeal seemed obvious.

The company sold 24,622 cars in 2008. In 2010, as gasoline prices moderated, car buyers began gravitating back towards large vehicles. Smart's sales fell from 14,595 cars in 2009 to 5,927 in 2010. Early in 2011, Penske Automotive Group announced that it was terminating its distribution agreement for the Smart and returning distribution to Mercedes-Benz USA. A company spokesperson attributed the move to a change in organizational structure for the Smart brand in Germany.

Meanwhile, Smart USA and the Strawberry Frog advertising agency launched a social media initiative to leverage the exploding popularity of Facebook and Twitter. The brand's Twitter handle is @smartcarusa; followers are reminded that "Smart is against dumb, mindless consumption." Sample tactics include "The Great Dumb Trade-In" and retweets of owner comments about their vehicles.

Smart USA's "Against Dumb" page on Facebook has more than 42,000 "likes." The company has also mobilized street teams and produced viral videos. Scott Goodson, the founder of Strawberry Frog, sums up the brand this way: "The Smart car is about living a flexible, agile life. Less is more." Asked how she would measure the success of the "Against Dumb" movement, Kim McGill, Smart's vice president of marketing and advertising, said: If it makes people just think about it, that will be a success. . . .

We need to get people thinking of buying not for that one time, but buying for what we need most of the time. If we can get more people talking in that direction, it will be nothing but positive for this brand. To learn more about the Smart, visit www.smartusa.com.

Discussion Questions

1. What is Smart's competitive advantage? Brand promise? Positioning?

2. Assess the U.S. market potential for the Smart. Do you think the car will be a success? Why or why not?

3. How does the Smart compare to the Honda Element, Toyota Scion, or Kia Soul? Are these models targeting the same consumers as the Smart? In view of the Japanese carmakers' success with these brands, do you think the Smart's U.S. launch is too late?

4. As noted in the case, Penske Automotive Group is no longer the distributor for Smart USA. How will this affect Smart's fortunes in the United States?

5. Evaluate Smart USA's social media strategy. What additional channels or tactics would you recommend?