DaimlerChrysler's Smart Move

DaimlerChrysler (NYSE: DCX  ) announced that it will spend roughly $1.2 billion to fix its Smart car unit. The plan involves ceasing production of Smart's four-seater model, which was once the vehicle the company hoped would bring the Smart unit into the black. DaimlerChrysler also announced that it will cut 300 jobs from Smart's headquarters in Boblingen, Germany.

Many critics and shareholders have complained that DaimlerChrysler should simply sell or destroy Smart, since it has failed to generate a profit since its inception in 1998. But I believe that the company is making the right decision in fixing up the pint-sized ride. By eliminating the unsuccessful four-seater model, DaimlerChrysler will be able to reduce fixed and material costs. This plan is essentially a compromise: By downsizing its workforce and simultaneously infusing capital, the company should be able to use its resources more efficiently. The two-seater fortwo model makes Smart unique, and by consolidating its resources into this product, the company should be able to gain prominence in this niche of the automotive industry.

For years, there has been speculation about whether DaimlerChrysler will bring the Smart car to the U.S. While the company has not made any formal announcements about U.S. operations, it has also made no secret of its active research into the possibility. Rising gas prices have regenerated interest in fuel-efficient cars, making this a perfect time for Smart to penetrate the U.S. market.

In an interview with The Wall Street Journal in January, new chief executive Dieter Zetsche explained that if DaimlerChrysler does decide to bring the Smart Car to the U.S., it won't make the mistake it made in Europe of establishing a separate dealership network. Instead, it will showcase the Smart car in Mercedes dealerships.

This is wise for two reasons. First, separate facilities are costly to maintain. Secondly, and perhaps more importantly, combining showrooms allows Smart to leverage the Mercedes name and position itself as a premium efficiency model. This strategy has proven highly effective for BMW with its Mini brand.

There are no guarantees that DaimlerChrysler will be able to turn around its Smart unit and make it profitable, but it does seem that the company has learned from the unit's mistakes and is ready to implement a potentially winning strategy. As consumers become more concerned with fuel efficiency, it's increasingly likely that in the long run, Smart will prove profitable for DaimlerChrysler.

Fool contributorTarek Sultaniis a freelance journalist. He holds no financial position in any of the companies mentioned in the article.

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