The $12K Smart car's wheeler dealer

Roger Penske adds the Smart car to his $17 billion automobile empire - and rewrites the rules of the auto business, reports Fortune's Alex Taylor.

By Alex Taylor III, Fortune senior editor

(Fortune Magazine) -- The term is antiquated these days, but "industrialist" would appear to be tailor-made for Roger Penske. Through his eponymous holding company, he runs a string of businesses that conjure up images of shabby factories, dirty coveralls, and greasy lunch buckets: truck leasing, logistics, component manufacturing, auto retailing, and car racing.

Penske seems like a throwback to an earlier era of industrial titans like Henry Ford and Walter Chrysler, when American business was more about nuts and bolts than symbols and software.

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Former driver Roger Penske still spends a lot of time at the racetrack.
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The Smart has the potential to become the hippest car introduced in the U.S. since the original Volkswagen Beetle.
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MICROCAR
Swatch watch
Founder Nicholas Hayek dreamed up the Smart and got Mercedes to build it. He pulled out after heavy losses.
Smart cars
Nearly 10,000 have been sold in Canada since 2004.
Question No. 1
Potential buyers first ask, "Is it safe?" Smart says a stiff safety cell surrounds passengers.
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So much for appearances. Penske, silver-haired and 70, has become the exclusive American distributor of the strangest, the most citified, and potentially the hippest car introduced in the U.S. since World War II: the tiny, egg-shaped Smart.

Just getting potential customers to consider the car will be a challenge. The Smart is smaller than any car most Americans have ever seen - eight feet shorter than a Ford Taurus. So Penske is launching the vehicle in an unusual way that combines the Internet with old-fashioned tire kicking.

On top of that, he has developed an ad hoc build-to-order delivery system that, if applied to higher-volume vehicles, could slash thousands of dollars off the cost of a car. In other words, he's rewriting the rules of the auto business as he goes.

Penske (PEN-skee) has been a maverick his entire career, shaping his blue-collar businesses into a mini empire on wheels. Starting with a Chevrolet dealership in Philadelphia in 1965, he has built Penske Corp. into a $17 billion amalgamation of public and private transportation enterprises. Its crown jewel is Penske Automotive Group (Charts, Fortune 500), the country's second-largest network of car dealers.

Now that he's eligible for Social Security, Penske could be spending more time at his summer place on Nantucket or cruising on his 150-foot yacht, Detroit Eagle. Not a chance. Penske has no interest in retiring and in fact keeps looking for more mountains to climb.

"I love to work," he said during an interview with Fortune in New York City. "If you are having fun, it is no problem going into your office."

He hopes customers will find the Smart fun too, as well as cool and urban. Built by Mercedes and introduced in Europe six years ago, the car has enjoyed moderate success in countries where gas costs up to $9 a gallon and small cars can park on the sidewalk.

Think of it as a conventional car with the engine compartment sawed off in front, no back seat, and a vestigial trunk. The Smart seats two people in closer proximity than they are used to and propels them at a top speed of 90 miles per hour with a three-cylinder engine that produces 70 horsepower and gets about 40 miles to the gallon. Prices start at $11,960 for a stripped two-door and go up to $16,590 for a convertible version.

Penske expects to sell 20,000 to 25,000 Smart cars in its first year - a drop in the automotive bucket for an industry of 16 million vehicles. Penske Corp. owns a single Toyota (Charts) dealership in Los Angeles that sells more cars.

But he says he's intrigued by the opportunity to do things differently with the Smart. "This has refocused me on the way we'll look at the auto business in the future," he says. Other auto retailers are skeptical because conventional minicars like the Honda Fit and Nissan Versa, with rear seats and trunks, deliver only slightly worse fuel economy than the Smart.

But they are watching because of Penske's track record.

In Penske's case it's an actual track record. An amateur sports car driver in the 1960s, he gave up a chance to race at the Indy 500 to pursue a business career. Since then, he's become the most successful team owner in Indianapolis history and has branched out into NASCAR and the American Le Mans series.

He spends 30 to 35 weekends a year at the track. "Racing has given us brand recognition, with 14 Indianapolis wins, that you couldn't buy through any advertising agency," he says.

Racing has also helped make Penske a superstar in Detroit, where his wattage and personal wealth outdo those of other auto executives. Back in 1992, Chrysler's Lee Iacocca asked Penske to succeed him as CEO, but Penske declined because he wanted to run his own businesses. Now Penske Corp. is worth more than several Chryslers.

All Penske businesses are characterized by fanatical attention to detail, intense employee involvement, and unstinting customer service - even if the customer is the Pentagon.

One example will suffice: In the early 1990s Penske owned a company that supplied diesel engines to the military. When he heard that the engines were clogging with sand during Desert Storm, he worked over a weekend to modify the air intakes and shipped 200 new ones by Monday morning - all without a purchase order from the Defense Department.

One of his favorite sayings is, "Effort equals results." Employees have a hard time equaling the effort of the boss. Penske puts in 17 to 18 hours a day, six or seven days a week, 51 or 52 weeks a year. "I'm motivated by challenges," he says. "It is like racing. We don't need to win - although we do from time to time - but just the fact that we are competitive is a motivator for me."

Getting involved with a high-profile consumer product like the Smart is new for Penske, but characteristically, he has plunged in. He personally negotiated with Daimler (Charts) chairman Dieter Zetsche over the deal to distribute the car. He drove a Smart the 200 miles between Laredo and Victoria, Texas, last summer.

"I just wanted to see what it is like on the highway going 75," he says. "I wasn't tired, I wasn't fighting a car that was moving all over the highway. At 65 to 75, it is very drivable."

To launch the Smart, Penske has taken some pages out of the guerrilla-marketing playbook and added some formations of his own. He put up a website (http://www.smartusa.com/) to lure potential customers and drew a million hits. From those he culled some 90,000 people who requested additional information and qualified them as "insiders." When the insiders were asked to put up $99 to reserve a car, some 31,000 responded by early September.

To further prime the pump, Penske outfitted three large tractor-trailer trucks - the same kind he uses for race teams - filled them with cars and technical displays, and took them on a 50-city tour so that potential buyers could kick the tires and take test drives.

Four or five other Smart cars followed the trailers to each city to make appearances at high-profile locations like Starbucks (Charts, Fortune 500) and Whole Foods (Charts, Fortune 500). By the time the caravan stops rolling at the end of November, Penske expects 70,000 potential customers to have seen the cars.

When the time came a few weeks ago to place the first dealer orders with Mercedes, Penske tried something else new. Ordinarily dealers have to guess what combinations of trim level, colors, and options will appeal to customers. When they get it wrong, unsold cars can languish for months.

But Penske was able to go to the first 1,000 reservation owners, find out exactly what features they wanted, and then place a detailed order. "It is entirely different from having John Doe waiting on the showroom floor for the customer to walk in," Penske says. "Those days are over." If all dealers did business that way, it would eliminate inventories and big discounts on orphan cars.

In a characteristic Penske move, he located Smart's corporate headquarters in the back of its Detroit dealership. That way, he says, everybody who works for Smart will have to walk in through a sales floor and not into a glass building.

"That will keep people in the game," he says. Although Smart's sales will be only a fraction of the number rung up by Penske Auto Group this year, Penske expects Smart to contribute a higher profit margin than the 1.5% to 2% that the typical dealer makes on new car sales.

Not everything Penske drives gets the checkered flag. He took a $200 million beating on a chain of Kmart auto service centers in 2002 when the discounter went into bankruptcy and the number of outlets shrank from 1,400 to 800. He bought a Cadillac dealership in Manhattan a week before the stock market crash in 1987 and sold it a year later at a loss.

What bugs him most, though, was failing to qualify for the Indy 500 in 1995 after his team had won the previous year. "Talk about a shank," he says, using the term for a botched golf shot. "That was the biggest shank of my career."

Penske is currently spending 40 to 50 hours a week as CEO of his dealership group and serves as nonexecutive chairman of his other businesses. The auto retailer is certainly benefiting from his presence. Since Penske bought it in 1999, its annual sales have jumped from $4 billion to nearly $12 billion, and its stock price has risen from a low of $2 to a high of $24 this year.

At worst, Smart will give Penske something to do with his spare time. Following the Fortune interview, Penske was off to Nantucket for a Saturday morning round of golf with his wife. Then he flew down to Richmond to oversee a NASCAR race before returning to Nantucket and then jetting off to Europe to attend the Frankfurt motor show and try out the 1,001-horsepower Bugatti Veyron.

Perhaps it is time to update the definition of "industrialist." Top of page