Created by a Swiss watch company and a German automaker, the

tiny Smart car was meant to be a revolutionary new idea in urban

mobility. But more than 20 years after its creation, the Smart

car is struggling.

Its parent, the massive German automaker Daimler, doesn't report

Smart's finances, but analysts estimate the brand is losing

hundreds of millions of dollars a year.

Now, Smart has a new direction.

It is going electric and partnering with Chinese automaker,

Geely. The hope is the deal will help Smart slash its onerous

labor costs and give it exposure to the world's largest auto

market. Industry watchers say it might be the best chance to

save the Smart brand and let it live up to its potential.

The Smart car was the result of a collaboration between

Mercedes-Benz and Swatch, the watch brand which helped

revitalize the deeply troubled Swiss timepiece industry in the

1980s. In 1989, Swatch founder Nicolas Hayek

had an idea for a very small, very affordable and highly

efficient vehicle, that was, in his words, "big enough to hold

two people and a case of beer."

The car was meant to appeal to young urban buyers and had

features suggestive of the bright, colorful swatch watches Hayek

helped to make so famous.

For example, the car was supposed to have swappable panels so

drivers could customize its look.

At first, Hayek tried to partner with Volkswagen, but that deal

fell through and then Hayek turned to Mercedes-Benz.

Mercedes had been working on similar concepts from micro cars

since at least the 1970s.

The first Smart model debuted in 1997 at the Frankfurt Auto Show

and production started in 1998.

The company began selling cars later that year in nine European

countries. In 2008, a dealer group headed by mogul Roger

Penske began selling the smart car in the U.S.

based on success the group had seen selling the car in Europe.

The thinking was that at least some Americans would also want a

fuel efficient car at a relatively low price.

We went back and we sell these vehicles today, The United Auto

Group in the UK.

We're looking at the fortwo as really a very, very strong

residual vehicle.

Fuel economy is one, but residual value and low cost of

ownership and certainly urban friendly will make a huge

difference in this product in this marketplace.

It came at the right time.

Fuel prices rose to record highs in 2008 and the Great Recession

struck just as the first cars were making their way across the

Atlantic. The timing of this.

The Smart debuted in the U.S.

in 2008.

That was right about the time that fuel prices were about to go

haywire. Also, it was right about the time that the economic

downturn in the US. So the Smart at the time seemed like a

very shrewd, very relevant, new brand and

vehicle introduction in the U.S..

Penske became the sole distributor of the brand for several

years before handing the business off to Daimler.

In 2011, sales fell to 5,208 cars

that year, down from 24,622 in

2008. There were larger industry trends working against the car.

As the U.S. emerged from the recession and gas prices fell from

record highs, U.S.

consumers flocked to sport utility vehicles and crossovers to an

unprecedented degree.

Consumers are a lot more interested in crossover, SUV type

vehicles right now, and modern crossover SUVs

have very, very little fuel economy difference compared to

comparable of sedan vehicles .

People really like the ease of getting in and out of a vehicle

that sits up a little higher and has a higher roof.

You know, people really like having a hatch that is inherently

more practical than a sedan.

All smaller cars started to struggle in this new landscape, but

the Smart car seemed a particularly tough sell.

The only model Smart sold in the U.S.

was the fortwo. As the name suggests, it had just two seats and

very little in the way of trunk space.

While this made it extremely maneuverable and easy to park,

these were big sacrifices customers didn't have to make buying a

subcompact car from another manufacturer with comparable fuel

economy and a similar price.

The Smart was really pretty unsuited for the rest of the

country. This is a car that costs about the same as other

compact cars. In the end, the fuel economy ended up nearly not

being much better at all than other larger four-door

compact cars. This was a pretty out-of-step crop.

It only had two seats, it was perceived by many to be unsafe

just because of its small size, never mind what the marketing

told them. And the car was underpowered, it had this

terrible transmission.

It simply required way too many sacrifices that the consumer

from an American perspective, far too little benefit.

In early 2019, Smart said it would pull out of the U.S.

after years of increasingly dismal sales.

The brands sold just 1,276 units in the U.S.

in 2018, down from a mere 3,071 in 2017.

Mercedes-Benz told CNBC it chose to pull the Smart brand from

North America for a number of reasons, including a declining

micro car market in the U.S.

and Canada and high compliance costs for a low volume model.

The company will continue to provide warranty and service

support for the Smart models sold in the U.S.

In Europe, Smart cars have sold in far higher numbers, but it

still has not been enough to make money for Daimler.

The margins on small economy cars, even chic, eco friendly ones,

are as thin as blades of grass.

It's all about the sharing of technology, the sharing, the

things that, you know, you see underneath, that you don't see

normally underneath the bodywork things like engines, gearboxes,

platform architecture.

And 90,000 units is not very much to drive that from,

especially in the lowest price category of the entire industry.

At least one analyst who follows Daimler estimates the brand

loses about $500 million on Smart per year.

I mean, manufacturing cars is damn difficult and it's very, very

hard to make money. So, you know, the bigger the car is,

normally the more money you make you make with it and the

smaller the car is, you know, the price drops down.

And when it comes to the size of a Smart, it's very, very hard

at the selling price of, you know, $12,000-$15,000, maybe

$18,000 to really make money with such a product.

And we've seen that over and over again.

Smart's particular trouble is that it relies on high cost labor,

say analysts. Up until 2019, all Smart cars were manufactured at

a purpose built factory Smartville in Hambach France, near the

French-German border.

What Smart does have in its favor is a strong brand message.

The cars are innovative.

They're a fancy design, a colorful design.

So I would say in general they have a good, you know, they

have a good brand image, good heritage.

Saving on gas and reducing carbon emissions is a powerful

selling point for some customers around the world.

For example, in Daimler's home country of Germany, one-third of

voters under the age of 30 voted for the Green Party in European

elections in 2019.

Europe always had much more focus on, you

know, on clean mobility.

The, you know, the rules are much, much stricter for fuel

economy in Europe.

Everything's much more CO2 based in Europe.

And hence, the vehicle fleet is also very, very different to the

fleet in the U.S. And there is China, which developed what are

regarded as perhaps the world's most ambitious plans to promote

electric vehicle adoption around the world.

Smart announced its 50/50 partnership with Geely in 2019.

One of China's largest automakers, Geely already owns Swedish

carmaker Volvo and has spun out Volvo's Polestar performance

sub-brand into a standalone nameplate for fully electric,

high-end vehicles.

Like the high-end Polestar cars, Daimler and Geely's Smart cars

will be fully electric and will be manufactured in China.

If it goes as planned, cheaper Chinese manufacturing will help

Smart lower its labor costs and make money off its cheaper cars.

The partnership will also give Smart a chance to compete in the

massive Chinese auto market, the largest in the world.

28 million new automobiles sold in China in 2018, and

there are already more electric cars in the country than in

every other country combined.

It really opens up the Chinese market with 23-25 million units

annually in a couple of years time.

By far the largest market globally.

We talk about tier one cities with huge traffic, so a small,

Smart car can really make sense.

Such a massive potential appetite for a small electric vehicle

could finally give Smart the market it needs to realize the

goals of its inventor.