Mercedes' tiny Smart takes on big boys in China

By Fang Yan and Terril Yue Jones

BEIJING (Reuters) - Dong Han is an ideal customer for Mercedes Benz's booming car sales in China. A 27-year-old advertising agent with a double-income household and no children, she's upwardly mobile and highly conscious of style.

But it's not Mercedes' SLK sports car or top-end S-class that strikes her fancy. Like a fast-growing number of affluent, hip Chinese, Dong is enamored with Daimler's <DAIGn.DE> other brand, Smart, the tiny but nimble, colorful two-seater that looks almost more toy than transport. "When I test drove the Smart, I loved it right away and made up my mind. It's special," said Dong, who goes by the English name of Kathy. "Not many people drive this kind of car, so it gets noticed. People don't know much about the car and ask me about it, and I quite like that too."

Smart, along with the compact A class and B class, is part of Mercedes' drive to transform itself from a luxury car maker into a full-range producer.

The division tallied 5,440 sales in China in the first half of this year, surpassing its entire 2010 total, and challenging sales in the United States, which have stalled after a promising start.

That makes China, now the world's biggest auto market, a must-win play for Smart, which currently counts Germany and Italy as its biggest markets.

To be sure, the vast bulk of Daimler's sales in China are luxury Mercedes sedans with the distinctive three-point star. Mercedes sales have skyrocketed more than eightfold in the last five years to more than 147,000 units in 2010, mostly thanks to increasingly wealthy Chinese consumers who prize the big luxury cars for which Mercedes is best known. But small, quirky models such as BMW's <BMWG.DE> Mini and Volkswagen's <VOWG_p.DE> Beetle have been gaining ground, winning over well-heeled young professionals and entrepreneurs in big cities. Annual sales in China of the Beetle jumped tenfold from 2005 to 10,000 units in 2010. Deliveries of Minis came to 9,800 units, up from fewer than 500 in 2005, according to J.D. Power and Associates. "These kinds of vehicles are typically targeted at people who want to distinguish themselves from mainstream car buyers," said Klaus Paur, managing director for Greater China at industry consultancy Synovate Motoresearch. "They want to reflect their personality and make a statement to others: 'Look at me, I am modern, dynamic and trendsetting'."

With its diminutive size and plastic exterior, Smart has to overcome worries over safety, especially in wild Chinese traffic.

"I'm not worried -- I saw they've done lots of tests," said Dong, albeit a bit vaguely.

Roger Ruan, a 28-year-old who runs his own business in Nanjin, had a more convincing experience.

He wanted to buy a Smart for his wife but worried about the safety of the two-seater. Then he saw a news report about a highway pileup in which a Smart had slammed into a big truck in front of it, and was then rammed by a large car in the rear.

"The Smart car driver was a pregnant woman," he said. "I was stunned; she wasn't hurt at all."

He went to a dealer and ordered a white Smart immediately.

The Smart ForTwo, the smallest car for sale in the U.S. market that year, received the top rating of "good" by the Insurance Institute for Highway Safety for front and side crash protection for 2008-2010. In an IIHS frontal crash test with another vehicle in 2009, however, the Smart fared poorly.

The European New Car Assessment Programme, meanwhile, gave Smart a four-star rating out of five.


When Daimler brought the Smart to China in April 2009 it was no sure bet. The global auto industry was sputtering amid a steep downturn and the Chinese government had to resort to aggressive stimulus measures to keep its automakers afloat.

Smart is cute, no question about that. But the two-seater, more than three feet (one meter) shorter than a Mini and almost five feet shorter than a Beetle, has little cargo space, cannot go particularly fast and is not geared toward distance driving.

"When we made this decision, we were not 100 percent sure whether this will work," Mercedes-Benz China president and CEO Klaus Maier said.

And initial market reception was far from positive.

Deliveries totaled just 1,800 units in 2009 -- a fraction of the 12,300 flagship Mercedes S-class models delivered in the same period. But sales took off after Maier got U.S. basketball superstar Kobe Bryant, a household name in China, to do a commercial fitting his 198-cm (6 ft 6 in) frame into a Smart. "We were not so sure he would really fit into the car, but we were positively surprised," chuckled Maier.

The success of the campaign featuring "Kebi," as Bryant is known in China, is part of what's fueling Smart's surge in the world's most populous country. A low sticker price, high fuel economy, and small parking profile also add to the allure.

At 115,000-225,000 yuan (about $17,800-$34,800), Smart is a cheaper alternative to a Mini or Beetle, which go for as much as 410,000 yuan and 300,000 yuan respectively. Shanghai resident Afei Yan and his wife only drive their Buick Regal to important business meetings after the couple bought two Smart cars last month. "The beauty of Smart is that it's so small, but you don't feel that way once you get in. Also, for one Mini we can get two Smarts," said Yan, a 30-year-old entrepreneur who runs his own machinery manufacturing business.

"My wife and I now drive our Smart every day to work, to visit friends and even for shopping trips to Carrefour over the weekends. It saves us a lot of trouble finding a parking place and our fuel bill is also getting a lot smaller." Their monthly fuel cost for the Smart is about 1,500 yuan per month now, half of the amount when Yan drove the Buick. Maier wants to make the two-seater available in up to 60 Chinese cities within 24 months, including third-tier cities, unlikely locations for showrooms when he brought the car to China two years ago.

"But third-tier cities in China are 2.5 million people, quite large for Europe," Maier notes.

Currently, Smart has 32 sales outlets in 25 cities in China. Maier expects China will be one of the top global markets for Smart down the road -- along with Germany and Italy -- where 16,000 and 14,000 of the micro cars were sold, respectively, in the first half. "I could imagine in four or five years we will come up to a level like Germany and Italy," he said.

(Editing by Ken Wills and Lincoln Feast)