October 31, 2005

Minicar market heats up with rival to Smart

By Todd Benson

SAO PAULO, Brazil (Reuters) - When a little-known company
from California placed a $1 billion order for Smart minicars
from DaimlerChrysler last spring, the struggling auto giant
said thanks, but no thanks.

So the company, an environment-conscious alternative
vehicles distributor called ZAP, went shopping, and found what
it was looking for -- in Brazil. There, a small start-up called
Obvio! was busy developing a sporty and economical minicar for


Desperate for lucrative minicar orders from dealers in the
United States, ZAP gambled on Obvio!'s slick designs and in
September bought 20 percent of the Brazilian company, even
though it has never put a car on the road. ZAP also ordered
50,000 minicars, allowing Obvio! to benefit from Daimler's

"What we're getting here is Italian-style quality that
people know and love -- with Chinese pricing," said Steve
Schneider, ZAP's chief executive. "That sounds like a winning
combination to me."

The Obvio! 828, a three-passenger microcar designed for
city driving, grabbed ZAP's attention first. Modeled after a
similar vehicle briefly sold in Brazil in the 1980s, the 828
will be equipped with a four-cylinder, 1.6-liter,
170-horsepower engine designed to go from zero to 60 miles per
hour in just 5.2 seconds.

Obvio! is also developing a sportier model called the 012,
with extra horsepower and a race-car design. The 828 is
expected to retail for about $14,000, while the price tag on
the 012 should be twice that amount.

Both cars will be small enough to fit sideways in a
parallel parking space, and will be engineered to run on
gasoline or ethanol, or any mix of the two. They will also come
with a personal computer on the dashboard that runs Windows XP,
allowing drivers to download music and digital radio streams.

Obvio! and ZAP, short for Zero Air Pollution, plan to
showcase prototypes of the cars at the San Francisco
International Auto Show in late November, even though the first
vehicles are not expected to be on the road until 2007.


Because they get high gas mileage and are easy to maneuver
and park on narrow streets, minicars are starting to carve out
a niche in Europe. But some analysts doubt they will ever take
off in the United States, where supersized sport utility
vehicles dominate the streets.

Even the Smart car, which was designed with the European
market in mind, has struggled to kick into gear. Since its
debut in 1998, Daimler has lost money every quarter on the
Smart car, forcing it this year to scrap two of its models.

Brazilian history is also littered with examples of failed
attempts to create their own auto product, the most recent
being a short-lived fiberglass car called the Gurgel. Brazil's
auto industry has long been dominated by big multinationals
like General Motors and Volkswagen.

"I hope Obvio! is successful, but I just don't see too many
chances at this working out," said Andre Gomide, who runs a
local news agency that tracks Brazil's auto sector.

Executives at Obvio! are certain they will succeed where
others have not, by keeping a lid on costs and outsourcing the
production process to suppliers who will be required to open a
unit in the Obvio! plant near Rio de Janeiro.

"Obvio! doesn't manufacture anything," Ricardo Machado, the
company's founding partner, said. "The only thing we do is
handle marketing, sales and design."

And to avoid maintaining costly inventories, a practice
that burdens automakers worldwide, Obvio! will only give the
green light to assemble a car once it is paid for.

"The operation guarantees great returns for everyone
involved," said Machado, who is also negotiating with potential
distributors in Europe and Japan.

As for whether Americans are ready to abandon their big gas
guzzlers for minicars, both Obvio! and ZAP are betting that
demand for smaller, fuel-efficient vehicles is sure to grow now
that high oil prices appear here to stay.

In fact, ZAP's Schneider says demand for the off-beat cars
is so hot that he has stopped taking orders for now.

"In the United States, everyone makes a statement with
their automobile," he said. "These vehicles give you the
capacity to be noticed without being too pretentious."