WILL Mercedes Benz pull the plug on Smart? The German group's trendy but costly small car division is coming under pressure like never before.
According to investment banker Morgan Stanley, the scale of losses at Smart is now so great the group should consider the nuclear option and shut it down.
Losses at Smart are running at something like £270m per year - meaning every car sold by a Smart dealer costs the company £1,862.
According to Morgan Stanley: "Smart is losing more on a per-car basis than any other volume brand in recent history, with the exception of Rover."
And when it started hemorrhaging that kind of cash, BMW couldn't wait to find the exit.
Mind you, Smart still has some way to go before it reaches Rover's crippling levels. According to BMW, every Rover sold cost Munich £3,449 in 1999.
When it walked away from the stricken British company, BMW's share price shot up and hasn't looked back.
According to Morgan Stanley, Mercedes could give itself a similar shot in the arm by ditching the Smart brand.
Extracting itself from Smart and re-structuring would cost Mercedes 2.7m euros - a third of the group's cash reserves - but that prospect could be more appealing than continued losses.
Doing so would add three euros a share to Morgan Stanley's 38 euro price target, the bank said in a note to clients.
"We estimate Smart car is losing 400 million euros per annum pretax - a loss of nearly 2,700 euros per unit. On a per vehicle basis, we estimate Smart car losing almost four times as much as Fiat Auto lost in 2002, at the depth of its financial crisis," Morgan Stanley said.
"To break even at current levels of pricing and cost structure, we estimate Smart would need to more than double volume to 330,000. Seen another way, at current levels of volume, Smart would need to raise prices by roughly 24 per cent to eliminate its losses."
It set out four options:
* closure;
* restructure;
* find a partner to share the cost;
* sell the business as a going concern.
So how has a brand with such a strong image found itself in such dire straits?
The Smart was originally conceived as a joint project between Mercedes and Swatch, the Swiss watch firm, but when the timepiece company began to have second thoughts the Germans took full control.The first Smart city car, built at Hambach, in France, was a truly revoluntionary product built on a space-frame safety cage with interchangeable bodywork.
The French factory out- sourced many of the Smart's key components. Only six per cent of the car was manufactured on site.
But high pricing meant the little car struggled to hit ambitious production targets of 200,000 vehicles per year - although the marque enjoyed remarkably strong brand loyalty.
In a bid to diversify the brand, Mercedes introduced a brace of sports cars and the larger Smart ForFour, manufactured on a joint platform with Mitsubishi Motors in Holland.
But the ForFour has still to establish a firm footing in the marketplace and the core brand city car has found itself under pressure from newer (and cheaper) rivals like the Kia Picanto and the Fiat Panda. Worse still, all these rivals have four seats not two.
Eckhard Cordes, the new head of Mercedes-Benz, has conceded that there is a crisis at Smart and recently announced a review of its prospects.
However, Cordes has no intention of throwing in the towel.
Speaking at the Detroit motor show recently, he conceded the North American Smart launch was in danger and said he wanted answers to the group's problem child within three months.
"What drives me is profit. At the end of the day, if you want to survive, you must be profitable. You can't afford to have any hobbies," Cordes said.
In the short term, this could mean developing newer and cheaper Smart products and a sharp reduction in spending.
It's ironic that Smart should be causing such angst at a time when Chrysler- traditionally the group's biggest problem - is doing so well.
Fuelled by hot new models like the Chrysler 300 sedan and minivans whose rear seats fold flat, Chrysler is set to generate more operating profit and have a higher margin in the fourth quarter than Mercedes.
Mercedes earnings and margins have slumped amid flat markets, model changeovers, currency fluxuations and steep spending to fix quality problems that hurt customer satisfaction and jeopardise its ability to get premium prices.
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