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case 14

By Rose Cole,2014-05-15 14:41
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case 14

    case 14

    The Swatchmobile: any colour combination, including black

    If someone asked you what a Swatch watch and a Mercedes-Benz car have in common, you would probably

    answer, „not much‟. Perhaps you‟d think the question was the lead-in to a joke. After all, the Swatch is a

    disposable [***]4050 fashion watch made on assembly lines from plastic parts. Mercedes, by contrast, prides

    itself on making the „best engineered cars in the world‟ – highly complex machines designed by engineers who cut

    no corners and make no compromises.

    An unlikely marriage

    Well, that‟s all true, but the Swiss Corporation for Microelectronics and Watchmaking Industries (SMH) and

    Mercedes do have one thing in common the Swatchmobile. In 1994, the two companies announced that they would jointly develop an innovative, subcompact, economy car designed to reach speeds of up to 130 km per hour

    while getting 115 km per gallon. The idea behind the joint venture was to combine Mercedes‟ knowledge of how

    to design and build cars with SMH‟s knowledge of microtechnology design and automated production. From the drawing board

    Although he was an engineer, Nicolas Hayek of SMH does not design Swatches; nor will he design

    Swatchmobiles. He saw marketing energy and style as his strength. Hayek aimed to employ dozens of designers

and artists as well as engineers to work on the Swatchmobile. „Expect it to be offered in any colour – and any

    combination of colours you want, including black‟, says Hayek.

    The Swatchmobile concept eventually resulted from the work of several dozen young

    jeans-and-sweatshirt-clad engineers who laboured around the clock for three years in a secret garage in Biel,

    Switzerland. Its lightweight plastic body was designed to carry two people and their shopping through dense city

    traffic. It would be about 20 per cent smaller than a typical subcompact you could park it sideways in a typical

    parking space! It would be a super-environmentally efficient car, with a fuel consumption rate half that of today‟s average family car. The two-seater would also combine the safety features of a Mercedes with the funkiness of a

    Swatch watch. According to Hayek, the Swatchmobile will be „an effort to change people‟s habits because it is

    only a two-seater‟.

    To help accomplish all this, the engineers designed a 600 cc, three-cylinder engine that would run on petrol,

    electricity, or a combination of the two and weigh one-tenth the amount of a typical petrol engine while achieving

    equal power.

    Please. Not another European carmaker

    Some saw Hayek‟s ideas as foolhardy. There was already overcapacity in the world car market. Bankers and other

    potential backers were openly critical of the venture. It was one step too far at the wrong time and in the wrong

    market. Some industry observers were not impressed either. Was it one diversification too far for both Mercedes

    and Swatch? How could the flamboyant Hayek work with Mercedes‟ technocrats? Would the Swatch and

    Mercedes brand names fit together?

    However, others thought that the unlikely marriage was the result of market realities. Swatch, following its

    success in watches, was searching for something else on which to put its name. It had tried telephones, pager

    watches and sunglasses all without much success. In the meantime, Mercedes watched its sales plummet 11 per cent in the early 1990s because of stiff Japanese competition in the luxury car market. Mercedes also intended to

    change itself from a luxury carmaker into a full-range producer by broadening its product range to cover

    four-wheel-drive sports/recreational vehicles, people carriers and small cars. The company plans to build 200,000

    small family cars a year in Germany. It had already announced plans to introduce a compact, four-seat model

    called the „Vision A‟ at a price of [***]20,000 in 1997.

    A MORI survey sheds another light on the changing market. The study showed that 85 per cent of drivers still

    saw their car as an essential part of their lives. But security and environmental friendliness topped the new

    car-buyer‟s agenda, especially for women and the young. Top speed dropped was less important. Most wanted airbags, anti-locking brakes and catalytic converters in their next car, and would trade up to get them. The report

    heralded the „light green‟ consumers, who want a car but care about its environmental impact. Moreover, European

    Commission pressure on the motor industry has escalated, and car manufacturers were expected to reduce

    emissions from the current average of 7 litres per 100 km to 5 litres per 100 km by 2005. Many car companies

    were already working on concepts for smaller cars powered with electric engines.

    The Swatchmomerc?

Mercedes set up with SMH a joint-venture company, called Micro-Compact-Car (MCC), to develop the new car.

    Hayek initially owned 49 per cent of the company with Mercedes owning 51 per cent. MCC is headquartered in

    Biel, where it has 80 people on its staff. It also has a technical centre in Renningen, Germany, where it employs

    170 people. The company changed the car‟s name to „Smart‟ – a combination of Swatch, Mercedes, and art.

    However, the Smart car hit serious trouble just as it was about to be launched at the Frankfurt Motor Show in

    September 1997. Hayek bowed to pressure from shareholders, announcing that he would not participate in a

    Sfr200 million capital injection into the Smart joint venture, cutting SMH‟s stake from 49 per cent to 19 per cent.

    Mercedes has since purchased the remaining interest in the company so that it now owns 100 per cent.

    MCC has invested about Sfr915 million for research and development on the new car, and its suppliers have

    invested another Sfr915 million for new plant and equipment. MCC will produce the car in Hambach, France. The

    company planned to have an initial production of 100,000150,000 cars a year and to reach full capacity by 1999.

    At full capacity, the plant will employ 2,000 people and produce 200,000 cars per year.

    The Smart car targets single people aged 1836 and childless, dual-income couples living in urban areas who

    want a second car. The company wants to position the car as a fun but useful means of transportation in crowded

    cities. Although the car is small, it offers the crash protection of a Mercedes-Benz saloon.

    Since the initial conception, the designers have abandoned the electric engine, because of the lack of adequate

    batteries, in favour of a small petrol engine. Instead of using a conventional assembly line, assemblers will snap

    the cars together, much as you would a child‟s toy model car, using five subassembly modules that come from

    suppliers‟ factories located immediately around the assembly site in Hambach. Workers can assemble the car in

    just four and a half hours. Because the car snaps together, the company will offer customers the ability to change the cars‟ features. For example, if after a month or so the customer does not like the car‟s colour, he or she can simply replace the panels with others of another colour. The car‟s overall length is 2.49 metres. Even though it is small on the outside, engineers say it is roomy on the inside. The Smart gets 47 to 49 miles per gallon with its 4454 horsepower engines and has a top speed of 84 mph. Maintenance stops are guaranteed to take less than two hours.

    The company expected to begin selling the car in March 1998. However, the launch was delayed for six months in order to rectify safety and production problems. The Smart car was eventually launched in September

    1998 at a price between [***]11,190 and [***]13,568. The dealer margin is typically 16 per cent. Dealers offer a leasing package that includes the rental of a larger car for two weeks per year when the customer might want more seats and room for luggage. Financing, licensing and insurance are available on site, so purchasing a Smart takes less than an hour.

    MCC began signing up dealers in 1997, with a target of signing up 100 in Europe (excluding the United Kingdom) in the first phase of developing distribution. Although it will give preference to Mercedes dealers, it has also advertised for interested entrepreneurs. Even Mercedes dealers, however, would have to set up separate

    dealerships to handle Smart. The second phase of distribution is scheduled to begin in 2001, covering the United Kingdom, Japan and other right-hand-drive countries and the United States. However, the UK launch was brought

    forward by 12 months due to a sharp rise in „grey imports‟ by independent car dealers supplying Smart cars from

continental Europe. The move was also part of a programme to lift Smart car sales by 20 per cent to 100,000 in

    2000.

    Dealers for the Smart Car will have to invest about [***]6 million to open a „Smart Centre‟. MCC prefers that

    dealers build on land located near suburban shopping centres. The dealer will get an assigned geographic area

    capable of generating 1,000 unit sales per year with sales forecast to increase to 1,300 units per year by 2001. The

    dealer will need a staff of 15 people initially with the expectation that it will sell 1,000 units in the first year.

    The franchise agreement imposes tight restrictions on showroom design and customer service. Dealers who

    violate provisions in the agreement can lose their franchise quickly. The agreement requires that the dealer pay a

    fee of [***]85 per new car and [***]43 per used car to MCC to support marketing campaigns, as well as about

    [***]49,000 to support marketing research.

    Dealers will also have to establish two other locations where consumers can get information about the car.

    One location will have to be in an airport or railway station, and a second location will have to be in a shopping

    centre.

    Prior to the car‟s launch in France, MCC began a [***]59 million „street awareness‟ campaign in October

    1997 that featured promotion teams handing out postcards which merely read, „Reduce to the max‟, without

    mentioning the car‟s name. Early ads just depicted the car operating in urban environments.

    MCC projects that after five years, the typical dealer will have sales of about [***]21.5 million, with a gross

    profit on sales of 15 per cent, and a net return of 45 per cent of sales, about [***]862,750.

    Will the Smart car fly?

    Needless to say, there are plenty of sceptics who do not believe a tiny, two-seater car with almost no luggage space will make it in the highly competitive car market. They question its chances of succeeding against four-seater microcars from Fiat, Volkswagen, Renault and Rover. It would not be easy taking on established rivals like Renault‟s successful Twingo and Volkswagen‟s new City car. Twingo is selling 230,000 a year, about 2 per cent of the west European car market. Ford, which believes that tiny cars will eventually account for about one-third of the market, has a factory in Valencia, Spain, that is already producing 200,000 Ka models per year, and it plans to increase capacity.

    Mercedes has to date invested nearly DM2bn ([***]1.02 billion) in the project. According to Andreas Renschler, chief executive of Smart, the Smart car is not expected to make a profit before 2003. The question is: Does he still believe that Smart can sell 200,000 cars a year and make a profit in five or six years? According to one Mercedes executive, „Smart has been one sure-fire way of losing a lot of money!‟.

    Now, it will be up to consumers to determine whether the sceptics were right. Questions

    1. Hayek was able to make such a great success of Swatch. How transferable is the Swatch brand to other

    products in other markets, including cars?

    2. What is Hayek‟s role in the new-product development process? Assess the effectiveness of the

    HayekMercedes venture. 3. Is the Smart car a market-driven idea? What market research should be conducted? Is there now any

    justification for not basing new products on marketing research?

4. Critically assess the new product launch decisions that MCC has made for the Smart car.

    5. Should Mercedes rethink its ambitions in the small-car segment? What are the chances that the Smart car will

    be a commercial success?

    6. Can the Smart car sustain a competitive advantage in the highly competitive microcar market? What

    marketing recommendations would you make to MCC?

    SOURCES: Tony Lewis, „What‟s safe, green and doesn‟t go too fast?‟, The European (410 February 1994), p. 12; Kevin Done,

    „Mercedes and Swatch in minicar venture‟, Financial Times (23 February 1994), p. 1; „Decision on “Swatchmobile” site‟,

    Financial Times (29 November 1994), p. 3; „Smaller cars, bigger profits? European cars‟, The Economist (9 November 1996), p. 82; Luca Ciferri, „Smart to get first dealers this spring‟, Automotive News (11 March 1996), p. 20; Stefan Schlott, „Get Smart‟,

    Automotive Industries (August 1997), p. 75; Haig Simonian, „Mercedes-Benz may play it smart: Luxury carmaker hints at

    developing tiny two-seater into a “second brand” ‟, Financial Times (6 October 1997), p. 1; „Smart car builds street awareness‟,

    Euromarketing Via E-mail (17 October 1997); „Caught in a moose trap‟, The European (612 November 1997), pp. 28–9; „Final sales countdown looms for Swatch‟s clockwork car‟, The European (410 September 1997), pp. 24–5; „Not so Smart‟, The Economist (6 September 1997), p. 81; Haig Simonian, „Daimler delays Smart car over safety worries‟, Financial Times (19 December 1997), p. 1; „Daimler-Chrysler plays early Smart card in sales bid‟, Financial Times (2 March 2000), p. 4. [***]1 ? Sfr1.52 ? DM1.96

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