Behind The Smart-Nissan Alliance

Smart USA, which markets the tiny smart Fortwo city car, has been facing an uncertain future in the U.S., as sales have tanked since its splashy debut in 2008. Part of the problem is that it has just one model for sale -- but help is on the way. By the end of next year, it will add a five-door small car that will be built by Japanese automaker Nissan. Smart itself is owned by German carmaker Daimler.

The U.S. distributor announced that Nissan will build the as yet un-named small car last week, which will be based on the same engineering platform Nissan has developed for two small cars it plans to launch in the U.S., each priced at about $10,000. The new Smart car will also compete against the Ford Fiesta, Honda Fit, and Toyota Yaris, according to company officials.

A Smart spokesman said that the new model will undergo substantial design to "make it a Smart," as opposed to a twin of one of the Nissans.

Why would Nissan help out Smart? Back in May, Daimler announced a plan for cooperation between the German maker of Mercedes-Benz vehicles and French automaker Renault SA, which is the controlling owner of Nissan. Daimler has proven especially bad at making small cars, and Smart has lost money every year it has been in existence. So, Renault-Nissan will be the lead developer of the future small cars, building on their track record for profitably making small cars for Europe and Asia.

The next Smart, though, will have a legacy of failure to overcome, even though the company says its owners and prospects have been clamoring for a model with a backseat. The current Fortwo is a tiny car that seats just two and struggles to hold a week's worth of groceries.

But for decades, car companies have tried to buy vehicles from other companies and badge them as their own in order to fill a gap in the showroom. It never works. The public is almost always hip to the shell game, and nearly always expresses profound indifference.

For instance, Volkswagen wanted a minivan, so it buys Town & Country vans from Chrysler and badges them Routans. Few care and sales are anemic. Suzuki buys Frontier pickups from Nissan and badges them Equators. It sold 118 of them in September. Mitsubishi bought Dakota pickups from Chrysler starting in 2006, calling the trucks Raider and stopped in 2009 because no one wanted them. Saab sold a 9-7 SUV that was a rebadged Chevy TrailBlazer and 9-2 that was a re-skinned Subaru Impreza that were only marginally more successful. And in the early and mid-1990s, GM's whole Geo line of cars sold at Chevy dealerships were rebadged Toyotas, Suzukis and Isuzus. In none of the above cases were the vehicles anything more than gap-fillers in the showrooms, and in most cases they were sales fiascos. Only the Geo line did any business worth talking about, and that is only because they were sold through Chevy's vast dealer network to people who needed cheap generic wheels. Geo was the auto industry equivalent of the McDonald's Cheeseburger value meal.

If the Smart brand has one thing going for it, it is personality. It is the kind of personality that needs to be developed in the Smart design studios from a blank piece of paper the way the Fortwo was done. Daimler got the idea of launching the Smart in the U.S. when it found that a number of buyers were importing them through Canada. Before it committed, it displayed the car at crowded venues like city marathons and auto shows to measure the public's reaction. Despite the American appetite for big SUVs, enough city-dwellers in New York, San Francisco, Boston, Miami, Washington D.C. and the like expressed enthusiasm to make a business case.

But it hasn't gone well. U.S. sales peaked at 24,622 in 2008, the year of the brand's U.S. introduction. Gas prices for much of that year topped $4 a gallon. ForTwo sales sunk 41 percent last year as the economy collapsed and gasoline prices fell again. Through September, sales are down another 62 percent this year, to 4,779.

The Fortwo seems to have rapidly soaked up most of the demand for such a small car. One of the problems is that for such a diminutive vehicle, its 36 combined miles per gallon is underwhelming. For a car so short that it can be legally parked nose-to curb in some areas, the expectation for gas mileage is above 50 mpg. Daimler uses a 1.0-liter three-cylinder engine that is pretty old by today's standards. The turbo-diesel available in Europe is not sold in the U.S.

Customer satisfaction may not be high either. CSM Worldwide released survey results in August that showed that fewer than 20 percent of Smart owners in New York and San Francisco, two key markets for city cars, would buy another smart. Smart says it is studying the validity of the survey.

Smart USA chief Jill Lajdziak says she is confident that consumers will not be disappointed. "The new vehicle will expand Smart USA's product lineup, offering five-seat capacity while maintaining the core principles of efficiency and conservation."

For the new car being built by Nissan, which is meant only for the U.S., Smart USA, a division of Penske Automotive, has merely signed a Memorandum of Understanding. That means that the final decision still has to go through layers of approval before getting the go ahead. A smart official says that the project anticipates approvals from both sides, so the development of the vehicle is going ahead.

Still, it's not a lot of time for designers and engineers to create huge amounts of uniqueness apart from the Nissan products if the car is to go on sale a year from now. Suppliers of interiors alone typically need more than a year to finalize designs so they actually have time to create the tooling necessary to make the bit and pieces. A year's time leaves time to perhaps pick from Nissan parts bins to outfit the car. That doesn't sound like the unique approach smart buyers have been looking for.

One of the other challenges Smart will face is pricing. If Nissan intends to price its version of the car around $10,000, that would be well under than the starting price of the Fortwo. Savvy consumers will price the Nissans against the Smart offering and then opt, presumably, for the better deal and better dealer.

"The Smart move smacks of desperation in an effort to save the nameplate," says Daniel Gorrell of auto industry marketing consulting firm AutoStrategem. "Smart is faced with the problem that the brand's limited equity is tied to the iconic shape of the little Fortwo 2-seater, and the purchased Nissan vehicle does not seem to support that image."

Then again: When Daimler was creating Smart cars from a blank sheet of paper, it did nothing but lose money, endangering the future existence of the brand at all. Perhaps a Smart produced by Renault-Nissan, yet still owned by Daimler and sold by an American company will be better than no smart at all.