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. Last Updated: 07/27/2016

Smart Car Unit to Be Shrunk

FRANKFURT -- How did a pint-size car named Smart manage to make DaimlerChrysler look, well, dumb?

On Friday, the company announced that it would drastically scale back its troubled Smart division, eliminating two models and cutting 700 employees, at a cost of up to 1.2 billion euros ($1.55 billion).

DaimlerChrysler's move came after years of losses as it struggled with Smart's high production costs and cumbersome distribution network, which had been kept separate from existing Mercedes dealerships.

DaimlerChrysler's missteps, critics said, hobbled what should have been a car that is perfect for its times: fuel-efficient and tiny enough so that two could fit into the parking space of a single full-size American car.

"To make a two-seat car, stripped down for urban environments, was an absolutely great idea," said Ferdinand Dudenh?ffer, the director of the Center for Automotive Research in Gelsenkirchen. "But then they made a lot of mistakes and wrong decisions."

DaimlerChrysler's chairman, Jurgen Schrempp, said the company considered shutting down Smart altogether, but concluded that this salvage plan, which aims to make Smart profitable by 2007, would be less costly.

Several analysts bluntly questioned DaimlerChrysler's decision, saying they saw little prospect of Smart's ever making money, particularly since the Stuttgart-based company plans to keep selling a money-losing, four-seat version of the original two-seat Smart.

"They're sticking to their old strategy," said Arndt Ellinghorst, an auto analyst at Dresdner Kleinwort Wasserstein in Frankfurt. "This is the easy solution for Schrempp, and a bad solution for shareholders."

DaimlerChrysler insisted that the cutbacks would not affect a possible introduction of the two-seat Smart in the United States. The company is developing a new version that will meet American safety requirements. Smart's problem, the company said, is its high cost, not lack of appeal. In Canada, where Smart has been available since October, the sales, at 3,000 cars, have exceeded expectations.

In Europe, the market for so-called city cars is already fiercely competitive and about to get more so, with the introduction of three vehicles from Peugeot, Citro--n, and Toyota.

Smart's roots go back to 1993, when DaimlerChrysler's predecessor, Daimler-Benz, began studying the viability of a mini-car. Daimler introduced its first model, the City-Coupe, in Western Europe in 1998. Smart soon became a quirky presence on the serpentine streets of European cities. In Rome, where the car is especially popular, it can be found wedged into comically tight parking spaces.

But Smart's perky image has not translated into volume sales. DaimlerChrysler sold 167,900 cars in 2004, 15 percent of total Mercedes sales.

Part of the problem is price. At 9,000 euros ($11,664), the Smart is not cheap for its size. "Their competitor is a Fiat, a Peugeot, a Toyota," Mr. Ellinghorst said. "That is why they are having such pricing problems."

Moreover, because DaimlerChrysler set up dedicated dealerships, it focused on major cities, neglecting rural and suburban areas where Dudenh?ffer contends it could have found additional customers.

DaimlerChrysler's efforts to expand the Smart brand have misfired. A roadster version sold poorly, and was widely derided by auto critics as looking like a toy.

Most of Smart's losses are from the four-seat car; Cordes said the two-seater was profitable "on a cash basis." But he said the cost of scrapping the larger model would be greater than trying to make it profitable.