UAG and Chrysler Team Up To Bring Smart Car To U.S.: Will Americans Buy It?

This past Wednesday I found myself at lunch with Tony Pordon, Sr. Vice President United Auto Group (UAG) and Smart USA. In addition to a great filet (really, I had something besides veggie hot dogs) I have to say that United Auto Group's Master Franchise of the Smart line is becoming more intriguing (and so is the vehicle).

To begin, I think it is important to explain what exactly the Smart vehicle is. I took this right from the Smart USA website (which is officially a division of United Auto Group). So let me give you a few quick factual details:

Dimensions:

• 8.8 feet long (you can usually fit two smart cars in an average parking space!)
• 5.1 feet tall (the smart still has as much headroom as most luxury vehicles!)
• 5.1 feet wide (two six foot, five inch plus people can sit side by side with plenty of shoulder room to spare!)

Speed/Gas mileage/Pricing:

Max speed of 90 miles per hour. Combined for city and highway, the Smart should run at 40+ miles per gallon (mpg). Pricing is expected to generally be under $15,000 (it will depend on the model). .

My first impression of the Smart: I liked it
As luck would have it, it turned out to be the very day the company was hosting one of its meetings for prospective dealers. I understand those of us attending the JD Powers Roundtable in Las Vegas will get a similar presentation later this week. But I really wanted to see the vehicle. So after I met with Mr. Pordon, he arranged for me to stop by the Ritz Carlton in Dearborn Michigan to see the car firsthand.

What I liked best about the vehicle was the removable paneling. So someone could easily change the color of the vehicle (just by changing the paneling) not to mention creating an incredible simplification for collision work (almost moving the market back to "do-it-yourself.") I've been a big advocate that the vehicle should be more "adaptable" so consumers can customize the vehicle to their liking (and continuously changing preferences). I don't know how much more interchangeable you can get than being able to change the color/body paneling of your vehicle whenever you want?

And when I went to the United Kingdom's Smart website, you can see a number of features that can be added to the vehicle like: dashboard instruments, leather steering wheel covers, alloy wheels, and all sorts of other accessories. Although the accessories are hardly the amount of "bling" that can be added to an Accord or Scion, so the aftermarket manufacturers and retailers are likely going to have a field day with this vehicle.

From a performance standpoint, I cannot comment much. Unfortunately the vehicles were all set up for the meeting in the ballroom of the hotel (and you probably don't want a Floridian taking one of these out on the snow covered streets of Detroit anyway). But the way the vehicle was described to me (by Marty Benke of United Auto Group) it sounds like the vehicle has a continuous variable transmission, acting almost like a "motorcycle" off the line. I can't wait until they begin taking the vehicle out to local markets on a "road show" where I can test drive the vehicle.

UAG plans to bring Smart differently to the market than any other brand
And this is what brings me to how United Auto Group plans to bring the brand to market far differently than any other brand (the primary focus of Mr. Pordon's and my lunch conversation). For example, when they are on the road show, they obviously will require the individual taking a test-drive to provide their drivers' license and email address. So they'll have a substantial number of leads (in each of the primary markets) for their dealers before the vehicle even hits the showrooms. In fact, United Auto Group plans to be the exclusive lead provider for its dealers, something I don't think has been done before (and it could be the start of a new trend among franchises and/or dealer groups).

But I'm getting ahead of myself. In 1Q08 (when the vehicles first hit the showrooms) United Auto Group plans to have 50 Smart dealerships. Some of those dealerships will be owned by United Auto Group, others will be owned by other public and private auto retail groups. I asked Mr. Pordon why United Auto Group would want to give up control of the store and so why they just didn't open all 50 dealerships themselves? Mr. Pordon explained to me that it had to do with efficiency in the market (something I discuss about Daimler's flawed overall approach to the market with the Smart vehicle in the next article).

Mr. Pordon said, why should they invest maybe a million dollars into a new Smart Store in a market like Fort Lauderdale, for example? Maybe another dealer group (some big Mercedes dealer in that market) already has a significant presence, and therefore could invest only $300,000 to create an addition to their Mercedes dealership (known as a "shop in shop" Smart store) and probably be more effective in communicating leveraging their existing presence (advertising) in the market.

He makes a good point. Ultimately the most successful businesses and consumer concepts are those that generate an attractive return on investment. So if a more attractive return on investment could be made by someone else already in the market, it ultimately leads to greater brand success (nationwide) and so everyone wins (especially since United Auto Group gets a cut of every unit sale).

So far, United Auto Group has received over 1,100 requests for dealerships. And like I indicated above, UAG plans to be very different with the 50 dealers they ultimately select. How so, I asked? First, Mr. Pordon said they plan to only take dealers that have demonstrated a dedication to the customer (i.e. if you have a low customer satisfaction index score, you're probably not going to get one). He also explained to me that they plan to keep the investment very low (as I somewhat discussed above) with "shop in shop" store investment costs running anywhere from $300k - $500k, and stand alone stores costing maybe $1 million. The lower your initial investment costs, the higher your chances for success are. And a successful store becomes even more probable if they are able to reach some of their initial targets (right now targeting 300 new units per location).

They're also going to do something different in that Smart USA (drawing on the expertise of Penske logistics) will run the Customer Care Center. So if a customer wants to learn more about the vehicle and calls up, it goes to the customer care center (remember responsible for the lead generation). If a vehicle breaks down, the customer has a 1-800 number they can call to get roadside assistance (sounds almost like a luxury vehicle not a sub $15,000 vehicle!)

All of this sounds pretty exciting, and therefore I think it has a fair amount of potential. Especially if UAG shareholders start running the math of the company getting something like $200 per unit (a guess on my part) 50 stores, and 300+ units being sold per store (so $3+ million in incremental revenues/profits). Although investors should keep in mind that there are costs incurred with these revenues as well.

So what can go wrong? How do they not hit their targets of 300+ new unit sales per store?

What can go wrong? It is a category buster
The reason I went into so much detail (above) about the vehicle's dimensions and characteristics, is because there really is no other vehicle (or even a category) that it fits into. The closest is the BMW mini, but that clearly is in a different price class and offers different functional purposes. The term I heard to describe Smart best was micro car.

And it really is what we call in the industry a "category" buster (if you will). What's a category buster? One that goes outside the lines of current product categories. Jeep and Explorer did this many years ago with the "sport utility vehicle." If you create a new product segment, new uses, it really can be very powerful. Although category busters also usually correspond with higher risk (sometimes the reason there is no segment, is because there is no market for the product).

The Smart (as described above) is tiny. This can create a serious barrier to public acceptance as it could be rather unnerving finding yourself driving one of these on the Eisenhower Expressway (for example) in Chicago, Illinois, surrounded by Class 8 ("big rig") trucks and sport utility vehicles. Management's primary marketing message is 1) innovative, 2) functional, and 3) joy of life. But clearly, emphasizing the vehicles "roll bar" safety technology and overall safety of the vehicle will be the biggest issue Smart USA will need to overcome with the consumer.

Personally, I think it will work. But then again, I thought the Aztec was a great looking vehicle when I saw it in GM's design center. The ultimate test resides with the U.S. consumer. Are they ready for a new product category the micro car? Only time will tell. But nothing ventured, nothing gained.

My concern is how Daimler is introducing the Micro Car (as a separate brand versus a new product segment within existing brands)
Having said that, and while I am beginning to become more excited about United Auto Group's prospects with the Smart vehicle master distributorship, I think Daimler (DCX) is making a BIG mistake in how they are bringing the Smart vehicle to the U.S. (as a separate brand versus a new product segment within existing brands).

I am often asked by investors and industry participants about whether or not Ford (F) or General Motors (GM) are likely to reduce their number of brands, and which ones? I think most of us recognize this is the big problem. Too many (overlapping) brands and distribution points.

My answer is generally the same: I don't know. I can tell you the folks at GM learned very quickly when they shed the Oldsmobile brand how costly such an undertaking can be. And this is something I think we (investors) need to understand. It is not like the automakers are blind and don't recognize the dilemma they are in (as we often assume). It's trying to figure out how to get out of the dilemma that becomes the challenge.

Shedding brands means expensive exit costs to your distribution base (remember you've got franchise commitments) not to mention reducing the number of brands would require you to restructure your manufacturing footprint (although I think most of us agree the latter is definitely a good thing).

But if I could wave a magic wand and create the "ideal" automaker (yes one even better than Toyota or Honda) the company would have three brands: 1) a "good" (or value based) product brand, 2) a "better" ("middle of the road" quality) product brand, and 3) a "best" ("top of the line") product brand. No more, no less.

Instead, what ends up happening is the automakers come out with different brands (i.e. Chrysler, Dodge, Jeep, Plymouth, Mercedes) which often came about from a single product type (small cars, Minivans, Sport Utility Vehicles, pickup trucks, etc) and evolved into a full brand. As a result, you often find certain brands "excelling" in certain product segments (like Dodge with its Minivans). But then they add all sorts of other product segments (like small cars) and sometimes within those brands you get varying forms of good/better/best products. Ultimately this leaves the consumer confused.

What they should have (like I said, imagining we could "wave the wand") is one "top of the line brand" (i.e. Mercedes) where it is clearly communicated to the consumer that this is where they should go for DaimlerChrysler's best minivans, best pick up trucks, best passenger cars. There should also be a brand (let's say "Chrysler") for "middle of the road" consumers, where they can find "average" minivans, trucks, and cars. And then there should be a value brand for each of the product segments (let's say Dodge).

Toyota (TM) comes close with this approach (i.e. Lexus, Toyota, and Scion). But even Toyota has some overlap in "good/better/best" categories. Starting to see what I am saying? This approach creates far less confusion for the customer, and enables a more efficient distribution and manufacturing approach.

I completely understand that this is more theory than reality because the brands are often aggregated (merged through acquisitions). BUT, if I were introducing a new product segment (micro cars) to the market (such as the Smart vehicle) it would not be with the introduction of a new brand. Instead, I would take my base (value) micro vehicle and put it in one brand (say Dodge) the average micro car and put it in another brand (say Chrysler) and my "top of the line" micro cars and put them in a completely different brand (say Mercedes).

Creating a new brand (as tempting and easier as it is initially to help the product stand out in the market place) ADS to the woes I discussed above about the automakers ending up with too many brands and too many distribution points. And this is why (philosophically) I do not like the way Daimler is approaching the introduction of their micro vehicles here in the United States.

Having said that, "it is what it is." And my humble complaints and theories are unlikely to change the course of Daimler's approach to the market. Where I do give Daimler credit, is partnering with a great distribution team like United Auto Group (ranked #3 in the AutoRetailStocks.com index). So the only thing we can do now is sit back and see if American's accept these micro vehicles.

Comments

[Paul Meisel:]

"But then again, I thought the Aztec was a great looking vehicle when I saw it in GM's design center...."

And the lead designer on the Edsel thought he had a winner too.....

2007 Jan 29 02:39 PM

[CrossProfit:]

Cute Paul, very cute!

2007 Jan 30 08:31 AM