As the input costs of energy and raw materials surge the pressure on producing a profitable City Car or Small Car programme increases. The historical business convention for small (and now low cost cars) is a marriage of:
b) cost-down by VMs and OEMS
c) margin 'claw-back' from options & accessories
d) deal financing.
Now a case-study of business re-modelling, back in 1993 Daimler took over the faltering SwatchCar initiative created by Swatch and VW, renaming it Smart and putting it under the control of MCC (Micro Car Company). Turning convention on its head, through the exploration and set-up an avante garde approach to supply-chain, logistics, design, engineering, production and retail. Keen to avoid the heavy fiscal demands of conventional factory set-ups, and change the very nature of manufacturing responsibility, Hambach was chosen by MCC as the heart of a business-partner network of Tier 1s and Logistic firms that fed a lean assembly line with a unit production rate of 4.5 hours per unit. That delegation of responsibility was core to the project, more than simply a new car, it was an attempt to literally break the Budd-derived mould of auto-manufacture.
The undertaking, whilst remarkable, has come at a price, and for the investment community the tie-up of capital in something with such a long gestation period, exacerbated by the initial slow market take-up (20K units sold in 1998 as opposed to a predicted 200K), has proven painful when the typical ROI period for the sector is 5-6 years on a new car and 10 on plant. But at last after previous break-even false-dawns, the project at last became cash-generative in 2007. But, although beyond the usual pay-back period, Wall Street, The City, Stuttgart and now Kuwait's KIA will recognise that with Hambach came not just a new vehicle model but a complete new operational model.
The auto-industry might state that the 15 year wait was simply the result of adding the 2 conventional ROI lead-times and the investment community will state that the project did not deliver to the original schedule and was a heavy drag on the previous Daimler-Chrysler results. However, whilst factually correct, both parties will recognise that MCC & '>smart' eventually (and very timely to the Green agenda) delivered a revolutionary product and revolutionary industrial framework; both of which are now ready to pay large dividends – literally and metaphorically.
The Germans (Daimler and its forebear VW) always recognised the enormity and impact of the game-changing smart-car, its ripples to be felt throughout a large part of the 21st century's first half, setting a new template by popularizing the acceptability of the 'radical' in the embracing of intelligent and green metro-based personal transport.
>smart's official entry into the US (migrating popularity from Canada and Mexico) as gas hits $4 a gallon will be the true test of >smart's marketing capabilities, but Daimler has been intelligent enough to create a sociological lead by allowing grey-imports in more the more high-minded progressive states with eco-populism such as Nevada & Arizona, before launching the car to the higher-minded eco-mobile masses of New York, Boston, Seattle, San Diego etc.
[And beyond the ICE norm, a micro-hybrid version on the cards bridges conventional ICE toward the 100 electric smartcars test-vehicles 'percolating' in congestion-charged London demonstrate. [NB. the 'micro-hybrid' is in reality infact simply a 'stop-start' engined variant, accusations of PR 'green-washing' perhaps don't go amiss.” ]
But the US market is an important element to this Phase 2 of >smart. The project's original investment costs recouped and project learning done, we are now entering the growth and rewards phase, the generation 2 car demonstrating concept and product's maturity and itself as the very archetype of the global City Car.
And that's the critical advantage point to Daimler. Although facing partial competition from Toyota's new iQ concept, Daimler has set the very template of the lightweight urban vehicle, the unique idiosyncratic tall 2 seater package and modular design - which can be stretched to 2+2 & 4 seater to mimic Mitsubishi's iCar & VW Up variants – provides the perfect base and 'palette' (ie interchangeable skin panels) for a rapidly changing, urban centric world.
It is a formula that should well serve >smart, but very importantly it has the major potential to also serve other automakers and critically forms an operational and platform basis for new automaker entrants such as Project Better Place. And Micheal Dell's recent announcement of MSD Automotive Partners could be an ideal upscale US outlet for >smart derived premium city & (retirement) village cars. After all he has mentioned much about looking at the whole value chain, and use of up-stream Hambach might compliment MSD activities downstream.
Thus Daimler and Hambach - and copy+ models thereof - could potentially 'own' the market for the purist of City Cars in the triad regions of Europe, US, Japan and beyond into the premium sub-segments of Asia (obviously not competing head-on with Asia's indigenous low cost-structures and mainstream local brand loyalty.
In this mould Daimler becomes what investment-auto-motives calls an 'Originator-Deployer', able to utilise centrally built-up core competencies for itself and chosen others who seek ready-made advanced emissions and crash compliant platforms. [Daimler also has this opportunity in its high-end luxury vehicle activities}. Thus it may act as a veritable 'City Car Broker' allowing Daimler to subtly control portions of the marketplace and potential competitors.
Itself and others (especially 'new automakers') recognise that the creation of the car and manufacturing system was a hard fought, now won, battle by Daimler. That 1994 seed of change has now grown into a tree that can bear fruit.
In terms of engineering and public acceptance, although there were aberrations in the form of the For Four model and once planned ForMore X-over, Daimler has managed to grab the intellectual high-ground of City Car design. Other alternatively packaged City Cars are engineering-wise viable and as we see by the activities of BMW and VW there is a real sense of urgency to cross-pollinate motor cars and motor cycles to come-up with lightweight merged products (akin to TATA Nano's engineering philosophy) and could (re)produce anything from a Tandem Quad (re-inventing the Messerschmit) to the renewed bubble car (per a new 'Front Door' Heinkel & BMW Isetta). But no other configuration would have the public acceptability of >smart, and all know that.
So why re-invent the wheel when it could be licensed, leased or indeed bought by another automaker or Tier 0.5. Wouldn't the likes of Magna International or Wilbur Ross' International Automotive Components group look to obtain a decisive and lucrative slice of such a promising business operation?
So as we look forward to forecasts of Daimler's future, the progress made since the unshackling of Chrysler may only be a taste of things to come if the German giant can truly squeeze the innate value held within Hambach. In an industry where large premium cars equal sector leading returns, a new era for an alternative profitability model at the other end of the product spectrum, may be under way by the very same protagonist. A new paradigm. As mentioned, it's been a long time coming but now here once Daimler has milked the cash-cow for itself it may be passed onto Green pasture anew.
In Daimler's recent Investor & Analysts' Technology Day Dieter Zetsche, his management team and analysts all quietly realised that for MBC that the new C-Class, GLK and next year's E-Class were the prime income drivers, promoting Mercedes' product mix sweet spot over the next few years. Given MBC's contribution - most evidently seen in FY07 and Q108 - the question posed by Morgan Stanley' s Adam Jonas was poignient. Although framed as [the possible mis-alignment] of “Wall Street's Timeline expectations vs Daimler's Timeline expectations“, the real question was “how will Daimler support its 10% RoS in the longer term” given passing of the product sweet-spot?
The answer may not lie wholly in the technically imbued and updated products themselves, but if played properly, substantial long-term real value extraction will come from Stuttgart and Alabama, but also from Hambach.